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Arthur Andersen had no expertise, but took over tasks done by central
and school staff, while remaining the school system’s chief auditor
No-Bid Contracts to Arthur Andersen and Other Insiders Increase by More
than 400% under Vallas
By Tom Sharp
 In his last year as
Chicago Public Schools (CPS) CEO, Paul Vallas managed to funnel more than
$10 million to Arthur Andersen for a wide range of consulting and subcontracting
work. From 1997 to January 2002 Andersen received more than $15 million
in no-bid contracts from the Chicago Board of Education. This relationship
echoes the double-dipping deal that Arthur Andersen had with Enron. The
contracts covered almost the entire spectrum of the schools operations
— from special educational programs, to health care, school meals
and auditing tasks. Andersen’s duties were so broad that Andersen
ended up auditing Andersen’s own work for the Chicago Board of Education.
The Andersen contracts for Chicago’s public schools amounted to more
than quadruple the contracts Andersen had with some of its largest corporate
clients. For example, before Merck & Co. — one of the world’s
largest pharmaceutical companies — cancelled its Andersen contracts
in early March, it was providing Andersen with approximately $6 million
in business each year.
The Andersen contracts
grew almost exponentially during the years after Paul Vallas became secure
in his position as undisputed head of Chicago’s public schools. On
February 10, 1997, 18 months after Vallas took office, the Board of Education,
at the urging of CEO Paul Vallas and Board President Gery Chico, passed
a Board Report granting Arthur Andersen LLP a $2,305,560 contract. The
contract was not competitively bid.
In brief, the contract
had Andersen:
- “Conduct an organization-wide audit of the financial statements
of the Chicago Public Schools and to review fixed assets and leases
at the school level."
- “To provide financial assistance at Roberto Clemente High School."
- “Provide assistance related to Alternative Schools program and
related to the feasibility of a Voluntary Health Care Network. "
- “...To perform special request audits...beyond the original audit
plan."
Substance asked several
current teachers and central office staff members about the range of jobs
assigned to Andersen via non-competitively bid contracts in the March
1997 contract. The respondents, as usual, asked to remain anonymous.
“I can’t believe Vallas and Chico put Andersen in charge
of an educational program,” a CPS high school teacher told Substance.
“I know more about auditing than they [Andersen] know about education;
especially that alternate high school program. I’ve never heard
anything good about it. In fact, I’ve heard rumors that they might
shut it down. If they do [shut it down] does the Board get its money
back from Andersen?”
Money and scope of work granted Andersen by Vallas increased throughout
the late 1990s
Once the initial contracts
were in place, the escalation began.
Ten months later, on
December 17, 1997, an amendment to the March 1997 Board Report was approved
granting Andersen an additional $1,080,000 — or a total of $3,585,560.
The new contract included the original duties, and added: the Healthy
Kids Healthy Minds Program Implementation [setting up medical services
for CPS children in need]; “Food Services Outsourcing” [privatizing
the board’s breakfast and lunch programs and putting many school
lunchroom workers out of work]; “School-Based Budget Management Assistance;”
“Property Advisor Subcontractor Payment;” “DataBase Assessment;”
and “Controller’s Office Accounting Process Assistance.”
Andersen’s duties
seemed to be expanding to cover many of the jobs that are routinely done
by administrators and managers in other school systems.
“I can see where
they [Andersen] might have some insight in the areas of budgets and accounting,”
a central office worker told Substance. “But food services? health
care? I just don’t see it. Also, I’d be surprised if you’d
find a lot of schools that prefer the privatized food services to the
old in-house one.”
By 1997, the Board of
Education had privatized most of its school lunchrooms in order to lower
the wages of lunchroom managers and lunchroom workers. Controversy over
the privatized services continues to this day, with some of the services
having been returned to the school board without private outside contractors
being involved.
The same [December 1997]
Andersen Board Report was extended no less than four times in a one-year
period from July 22, 1998 to July 28, 1999.
Each time, the dollar
amount increased. The rationale given on the last of these extensions
was: “This amendment is necessary to add funds, in the amount of
$2,762,500 to fully cover the level needed for the scope originally planned
by the CTO’s Office for the Oracle Financial/HRMS system and to make
address and department name changes.”
In layman’s terms,
Andersen was getting more money because the Oracle project that Andersen
was involved with was late and over budget for the fourth time in one
year.
Under Vallas, Andersen
extended its reach into virtually every area of the Chicago Public Schools,
from educational program implementation to printing to health care. As
a result, when Andersen performed its primary audit function, it was often
auditing its own employees.
Numerous public companies
who used consultants from Andersen or another major auditor (e.g., Price
Waterhouse) in the past have dropped the practice in the wake of the Enron
disclosures. Such companies as Lucent, Disney, and News Corporation have
stopped using consultant staff from the company that audits their books.
Many, such as Merck, have also dropped Andersen as their accountants.
Auditing the auditors
Its non-bid contracts
paid, in part, for Andersen to “provide special request audits over
and above the original audit plan” for the Board’s Internal
Audit Unit.
Andersen isn’t
the only one of the “Big Five” accounting and consulting firms
to see dramatic increases in contracts from the Chicago Board of Education
in recent years.
On June 27, 2001, The
Board added another layer of auditors to the mix by extending KPMG LLP
a $2.1 million contract essentially to make business recommendations based
on audit information collected from the Board’s Internal Audit Unit.
Specifically, the Board
report requires KPMG LLP to provide:
- “an annual risk assessment report, by business process, which
will identify and prioritize CPS’ risks based on management input
and Audit Services’ detailed analysis and judgement.
- Individual detailed audit reports for identified CPS business units
and programs, to include an executive summary and detailed findings,
recommendations and management action plans.
One central office
worker (who asked to remain anonymous) told Substance after reading the
Board Report:
“I’m no audit or business expert, but aren’t there
a lot of high paid auditors and administrators in the central office
who were hired to do exactly what Andersen and KPMG are doing? What
the hell are the Board people doing besides hiring other people to do
their work for them?”
Substance tried to
ask Board administrators the same question. Substance’s calls to
Internal Audit were not returned.
Vallas Turns on Andersen
If Andersen thought
that their close ties with Vallas meant that Vallas would stand by them
in a crisis, they were wrong. Candidate Vallas called on the Attorney
General to determine whether Enron and Arthur Andersen had “violated
Illinois anti-racketeering laws.” He also called on the state to
“push for licensure standards that maintain a separation between
an individual's role as a certified public accountant and as....a corporate
consultant.”
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