Everyone knows that the great accountancy houses, ‘the Big Six’, as they used to be called, wield the most astonishing power in the business world and the economy. Not so many know how much power they wield over the Government. The story of Arthur Andersen, and its burgeoning power, is especially interesting.
Arthur Andersen is a proud survivor of the stampede of top accountancy firms to sue each other for alleged negligence in auditing and handling the accounts of clients who had gone bust in the recession of the early 1990s. Over the Barlow Clowes fiasco, the Government, represented by Ernst and Young, sued Touche Ross; over BCCI, Touche Ross sued Ernst and Young and Price Waterhouse. Over Atlantic Computers, Price Waterhouse sued Touche Ross. Over Wallace Smith, KPMG sued Coopers and Lybrand. Over London United Investments, Price Waterhouse sued KPMG. Over Polly Peck, Touche Ross sued Coopers and Lybrand. Poor Coopers and Lybrand was in the soup more than once over its not altogether distinguished accountancy of the Maxwell empire. It was sued on behalf of Maxwell companies and pensioners by a string of accountants, including the receivers for the fat man’s bust businesses, Arthur Andersen. Most of these cases were ‘settled’ in deals whose terms became increasingly inaccessible as the accountancy firms swallowed each other up. Price Waterhouse swallowed Coopers and Lybrand, Touche Ross became Deloitte and Touche, and so on. Though it still features in unhappy headlines, as in coverage of their audit of the exorbitant expenditure of company money by the former chief executive of the Tomkins conglomerate, Arthur Andersen did not take over any major accountancy firm, nor was it taken over. Its current annual fee revenue is more than seven billion dollars. It was assisted into the big time by its consulting arm Andersen Consulting, whose current annual revenue is more than eight billion dollars.
The precise relationship between Arthur Andersen and Andersen Consulting was for a long time a mystery. The closest I came to solving it was in March 1993, when the top press officer for Arthur Andersen told me that the consulting business was ‘completely separate’ from the audit section. ‘Arthur Andersen is a partnership,’ I was told. ‘Andersen Consulting is another partnership with different partners. They ultimately meet in a worldwide partnership which is called Arthur Andersen and Co. Every partner in AA and AA Consulting is a partner in that partnership, which binds the whole thing together, so that although they work independently of each other, and according to the law of the Medes and the Persians, around the world, whichever country they may be in, ultimately they do all belong to the same partnership. I hope that’s clear.’
Well of course it was clear. The companies were completely separate from each other but were bound together. This formula has been at the centre of a long legal action as a result of which the two component parts of Arthur Andersen and Co have this year been split asunder.
In 1993 the question was more than academic. It arose over a computer contract for the Wessex Regional Health Authority, the bungling of which cost the Health Service at least £20m. The Authority, which was heavily criticised by the House of Commons Public Accounts Committee, had been ‘advised’ by Andersen Consulting that though the firm’s tender was higher than others, the best possible candidate to provide the computer system was (wait for it) Andersen Consulting. ‘It is clearly wrong,’ the MPs said, ‘for somebody who is tendering for National Health Service business also to be advising the National Health Service as their consultant.’
The PAC report came out in November 1993, but the Wessex scandal had already been exposed by John Denham, the recently elected Labour MP for Southampton Itchen and former Friends of the Earth activist. In March 1993, Denham complained that the Health Secretary Tony Newton had disclosed a list of consultants paid by the Wessex Regional Health Authority between October 1984 and October 1985. The list did not include Andersen Consulting, which had worked for the Authority in 1983. Mr Denham questioned the narrow timeframe of Newton’s disclosure, and asked about the role played by the family of Mr Newton’s Junior Health Minister, Edwina Currie. At the time of the Wessex computer scandal, he said, Mrs Currie’s husband Ray and his brother Brian were senior executives at Arthur Andersen. Mrs Currie was incensed by this reference, and complained of misuse of Parliamentary privilege. When I asked her whether the Secretary of State had given a misleading reply very much to the advantage of Arthur Andersen, for which her husband and brother-in-law worked, she replied: ‘Your questions should be put to Tony Newton, not me. He answered the questions, not me. I had nothing to do with the computer contracts and know nothing about them.’ At the same time I asked Arthur Andersen about Mr Currie and his brother and was told that neither of them had anything to do with the consulting firm, Andersen Consulting, but were employed by Arthur Andersen. It was this distinction that led to the firm’s explanation about the relationship between the two companies and the Medes and Persians.
The plea that one company was different from the other and that neither could be responsible for the other served them well in another quite different area. Ever since the collapse of John De Lorean’s car empire in Northern Ireland the Government had been engaged in a legal argument with De Lorean’s auditor, Arthur Andersen. Ministers and civil servants claimed that the firm knew enough about De Lorean and its dubious subsidiaries to have warned the Government, which was underwriting the business with many millions of pounds of public money. Arthur Andersen replied that the Government had been so keen to get public money into Northern Ireland that it had not investigated De Lorean properly. Ministers grew increasingly irritated as Arthur Andersen’s lawyers got hold of Cabinet minutes and even a statement from Margaret Thatcher. Relations between the firm and the Government became ever more strained in spite of the fact that a former Tory Prime Minister, Edward Heath, was on Arthur Andersen and Co’s payroll. The legal action and the strain led to a decree banning Arthur Andersen from Government work. It was considered ‘highly inappropriate’ for a government – any government – to employ an accountancy firm which it was suing for alleged negligence. This responsible approach did not, however, extend to Arthur Andersen’s partner, Andersen Consulting. Though the firms were (in their own words) ‘bound together’, there seemed to be nothing wrong or illogical in banning Arthur Andersen from Government work and at the same time offering Andersen Consulting as much Government work as it could take on.
All through the early 1990s, Andersen Consulting lobbied the Government for the multi-billion pound contract to store all the information about national insurance benefits on computer. In 1995, the Government finally announced the winner – Andersen Consulting. No reference was made to the firm’s efforts on behalf of the Wessex Regional Health Authority or even to the real reason Andersen were able to enter a strikingly low bid for the contract – the Government had agreed that the firm should be able to profit for the foreseeable future from the ‘intellectual property rights’ in the software. The deal was that Andersen Consulting would build and instal the computer system at public expense, with the public paying for any mistakes made in the process. But the firm would be able to use the know-how and techniques developed in the process on subsequent computer projects elsewhere. The 1995 national insurance contract, a triumph for Andersen Consulting, was won under the new Private Finance Initiative – a system of ‘partnership’ between government and industry most eloquently urged on the Government by Arthur Andersen.
But the partners on both sides of the firm knew that things would not remain as they were. On the contrary, by 1995 senior Andersen executives were becoming more and more intrigued by the possibility of a change of government. New Labour looked promising not just because it might win the next election, but because it had dropped the Party’s fuddy-duddy suspicions of big City companies. Not long after the 1992 election – at around the time the Tories’ fate was sealed by Norman Lamont and Black Wednesday – Andersen Consulting offered its services free to the Labour Party’s Commission on Social Justice, set up by the Labour leader John Smith. The Commission was chaired by Sir Gordon Borrie, former Director General of Fair Trading, and a director of Mirror Group Newspapers, whose anti-trade union regime under David Montgomery was ushered in with the blessing of the Mirror’s new accountants, Arthur Andersen.
Borrie’s introduction to the Social Justice Commission report was full of praise and gratitude for the free help given by Andersen Consulting. The Commission’s surveys on tax and benefits, for instance, were carried out exclusively by the firm. When I wondered in Private Eye why such a strenuously commercial company was doing work free for a Labour Party commission, a devastating reply came from Keith Burgess, managing partner of Andersen Consulting. ‘We too,’ he explained, ‘are concerned with social justice.’
Proof of this concern came almost at once. On 12 May 1994, the day John Smith died, Andersen Consulting announced that its new director of research was to be Patricia Hewitt, Neil Kinnock’s former press officer and deputy chair of the Party’s Social Justice Commission. The ice-cool Hewitt rose to fame in the 1970s, when she replaced Martin Loney as general secretary of the National Council for Civil Liberties after he was ousted in a coup. She narrowly lost Leicester East for Labour in 1983, was a prominent member of the Institute for Public Policy Research, Labour’s think tank, and one of the most influential members of the Labour Party outside Parliament.
In the summer of 1996, Andersen Consulting organised its biggest effort for the Labour Party. The entire team of prospective Labour ministers – about a hundred MPs – were ferried to Templeton College in Oxford, where they were treated to extended seminars by Andersen executives. The theme of the seminars was ‘how to be an efficient minister’. No reference was made to efficient accountancy, nor did anyone explain why a group of unelected consultants whose partners had been banned from Government work by the Tory Administration were thought to be the best people to lecture Labour MPs on their responsibilities as elected ministers. Andersen Consulting have always insisted that these seminars were ‘commercial’: that is, that they were paid for – but no one has ever disclosed who paid, or how much.
No matter. Whoever at Andersen Consulting predicted a glorious future for Labour was vindicated by the electoral landslide of May 1997. Since then the company has prospered hugely. Patricia Hewitt, who had by this time left Andersen Consulting, was elected Labour MP for Leicester West and swiftly promoted to be Economic Secretary to the Treasury and then minister for e-business, in which capacity she has staunchly defended some of the Government’s most unpopular decisions. In February this year she spoke in favour of the Government’s support for the controversial Ilisu dam in Turkey. She was the only speaker in the debate to back the project. The accounts of Balfour Beatty, the British construction firm most closely involved in the dam project, and its parent BICC, had been prepared by Arthur Andersen. When Andersen Consulting wanted a ‘keynote speaker’ for a conference last July on e-business the choice was obvious: the minister for e-business.
‘Private Finance Initiatives’, regarded by many, if not most Labour MPs, as an insidious and expensive form of privatisation, are now widespread throughout the economy, to the rolling benefit of Arthur Andersen and Andersen Consulting. One glittering example is the Government’s support for ‘education enterprise zones’, a form of privatisation of public education, for which Andersen Consulting have been named as preferred bidders. ‘At last,’ said an excited spokesman, ‘we have a chance of putting something back into the community.’ Among those who were rejoicing was Graham Walker, a senior partner at Arthur Andersen who had been appointed to the New Labour ‘task force’ for ‘reducing the bureaucratic burden on teachers’. One novel way of reducing bureaucratic burdens was to add to that burden by imposing a government task force.
Not everyone in the new Government was happy, however. Geoffrey Robinson, the Paymaster General, was obliged to resign when it was revealed that Peter Mandelson had borrowed around £400,000 from him to buy a house in Notting Hill. Robinson stayed out in the cold while Mandelson, the man who borrowed the money, was reinstated a year later. Robinson’s special adviser, Chris Wales, was not required to resign. Wales had been taken on the Treasury staff in the summer of 1997, not long after the election during which he had headed a team of Arthur Andersen accountants who stumped the City drumming up support for New Labour. Mr Robinson was back in the news once again last January when it was revealed that Gordon Brown had bought a flat behind Westminster Abbey from a bankrupt Robinson company. The company selling the asset was Arthur Andersen. When Robinson’s main company, Transtec, went bust in 1999, receivers were swiftly appointed, from Arthur Andersen. One of them, John Talbot, had presided over the takeover of the Daily Mirror by David Montgomery. Mr Talbot is now well placed to examine the financial relationship between Geoffrey Robinson of Transtec and Robert Maxwell, formerly of the Mirror.
Both Arthur Andersen and Andersen Consulting have thrived under New Labour. One of their best moments came six months after the landslide when the long Government ban on Arthur Andersen was ended with a ‘negotiated settlement’. Under it, Arthur Andersen shelled out £18m, a mere bagatelle compared with the cost of the lawsuit from which the new Government obligingly withdrew. This would have set the company back about £200 million, as well as mountains of unpleasant publicity about its relationship with De Lorean.
Andersen Consulting, meanwhile, was thrilled with the outcome of a dispute with the Government about the national insurance computer system, the delivery of which had been subject to many cock-ups and delays. Earlier this year, Robinson’s successor as Paymaster General, Dawn Primarolo, told a Commons Public Accounts Committee that she and her ministry did not intend to demand any compensation from the company, despite their having accepted responsibility for the delays. It was hard work finding out how much the company had been let off – the Treasury would not say – until the journal Public Finance estimated the sum at £50m.
The Public Accounts Committee didn’t produce their final report on the national insurance computer contract until the summer recess. On the matter of ‘intellectual property rights’ and the fact that they’d been handed over to the company by the previous Government they had a few words of mild criticism. Evidence on this was heard by the Committee on 15 March. Five people faced the Committee’s questions, including senior officials from the Inland Revenue, who had taken over responsibility for the computer contract, and Lis Astall, a partner in Andersen Consulting. The most searching questions came from the mild-mannered Labour MP for Croydon Central, Geraint Davies. Ms Astall told Mr Davies flatly: ‘The intellectual property rights are with us and we run the service.’ The exchange continued:
Q. Could we keep on using your intellectual property rights for how long and at what cost?
A. If the negotiation is successful.
Q. How would the cost of the intellectual property be determined?
A. As I say, at the end of the life of the contract –
Q. Is there a formula?
A. At the end of the life of the contract there is a clause in the contract which allows people to negotiate who will take forward the intellectual property rights and it is those principles which will be used at that point, so the negotiation will be conducted on those at any point the department wants a break point.
Mr Davies’s reply to this classic example of Andersen-speak was forthright. ‘Clearly,’ he said, ‘Andersens have got us over a barrel on this.’
Try as he might Mr Davies could not extract from Ms Astall even an approximate estimate of how much the Government might have to pay if it wanted to deprive the company of the intellectual property rights conceded in the contract. In exasperation he turned to Nicholas Montagu of the Inland Revenue and asked point blank: ‘What I am banging on about, in future negotiations for big systems will you try and get rights to intellectual property?’ Mr Montagu replied: ‘I think it is very probable … in principle, yes.’
That was about as close as a senior civil servant could come to admitting that in its negotiations over the national insurance contract Andersen Consulting had indeed left the Government with no room for manoeuvre. Go to the websites of both Arthur Andersen and Andersen Consulting and you will swiftly be engulfed by glamorous prose about the wonderful work done by both in all sections of the community. Nowhere can you find listed the firms’ peculiar skill in getting – and keeping – the elected government over a barrel.