Huron Consulting: Go On, Take The Money And Run

“First and foremost, people have to believe that you’re trustworthy,” he says. “If people don’t believe they can trust your word and they don’t think that you care about them and that you’re only in it for the money, that’s really a slippery slope.”

Gary Holdren, Former CEO and Chairman of the Board of Huron Consulting, being interviewed about the economic downturn, layoffs, and managing through crisis this past May, How Gary Holdren prepared his people for hard times to keep Huron Consulting Group focused on success, Smart Business.

Make no mistake.
Gary Holdren was in it for the money.

Huron Consulting Group went public in the summer of 2004, barely two years after bailing from the sinking Arthur Andersen ship in May of 2002. They had a big advantage over other start-ups. They had a group of employees and clients that could be taken with them with no “non-compete” agreements to stand in the way.

May 2002: “Newly founded Huron Consulting Group said it had recruited the largest group of Andersen professionals yet, also landing senior executives from other top accounting firms as it opened a headquarters in Chicago and other offices in Boston, Houston, New York and San Francisco.

The firm said it was already working with more than 75 clients brought over from Andersen, providing litigation consulting and corporate advisory services. It said it plans to expand quickly both in the United States and internationally. The 25 former Andersen partners are a majority of its 34 directors. Chicago-based Andersen reached agreements for the formal release of the Andersen employees on May 10, Huron President Gary Holdren said. Huron opened for business three days late.”

I remember seeing the announcement of the IPO and thinking that it had all been set up quite nicely. The Andersen partners would be able to cash-out on the “risk” they had taken in setting up the new firm. They were now able to monetize the clients and engagements they had brought from AA in ways they had probably been anxious to do for a while. Venture capital funding was secured quickly based on the run rate of those existing billings. Huron’s key executives, no one more so than Gary Holdren, took a piece of equity. When the IPO was completed, they all got a big chunk of the money, rather than it going into the business. The IPO was designed to pay off investors/VCs and themselves. Nothing more.

From the London Times:

“FORMER Arthur Andersen consultants who escaped the blighted accountancy business as it collapsed under the Enron scandal are set for a multimillion-dollar windfall in a $100 million (£57 million) flotation of their new firm.

Gary Holdren, a former Arthur Andersen partner, is to float Huron Consulting on the Nasdaq in New York with a valuation of at least $100 million. Mr Holdren, Huron’s president, and eight colleagues on the board could be awarded stakes in the firm worth at least $5 million each, according to the flotation documents. The documents say Mr Holdren and his board colleagues could get stakes in the business worth 5 per cent of the total share capital….

Huron is 94 per cent owned by Lake Capital Partners, a Chicago-based private equity company, while Mr Holdren, the rest of the board and 30 individual investors own the remaining 6 per cent of the firm. But the proceeds from the flotation, which will all be directed back into the company and to the beneficial owners, would not be allocated based on the current ownership structure, a source said. “The company has a complex ownership structure and will be even more complex following the IPO,” the source said. But the current management would take a sizeable chunk of the new shares once they were made available on the market, the source added.”

Huron has grown quickly since the IPO. Their niche – expertise in litigation support, due diligence, troubled company turnaround, and accounting standards/GAAP consulting and regulatory compliance – has been hot. One of their legacy clients from Andersen, United Airlines, provided a windfall when it filed for Chapter 11. Huron also helped uncover accounting shortfalls at mortgage giant Fannie Mae, which eventually led the SEC to charge Fannie Mae with fraud. Huron was also a huge presence at Navistar during the height of its problems with investigations and lawsuits, even more so after it bought a smaller staffing firm, Calloway Partners which also had hundreds of people working at Navistar.

In 2007, Huron was named among BusinessWeek’s hot growth companies and last year was ranked on a Fortune list of 100 fastest-growing U.S. companies. Until the news got out about their accounting scandal and CEO, CFO, and Chief Accounting Officer resignations, they had performed well for their shareholders.

From The New York Times today:

“Huron shares lost more than two-thirds of their value on Monday…Gary Holdren, once a senior Andersen partner and a member of its executive committee, on Friday resigned as Huron’s chairman and CEO after Huron said it would restate more than three years of earnings because of misreported costs related to acquisitions.

The chief financial officer and chief accounting officer are also departing…

Attorney Hamilton Lindley of the Kendall Law Group, a Dallas-based law firm, said he expected a class-action complaint to be filed on behalf of shareholders this week.

‘It’s natural to look into whether the culture of Arthur Andersen bled over into the culture of Huron Consulting,” Lindley said. “That’s a question we will pursue in our investigation.’

Huron’s audit committee discovered shareholders of four businesses Huron bought redistributed portions of their payments among themselves and to certain Huron employees. Huron said payments were not “kickbacks” to Huron managers.”


Adrienne Gonzalez quipped:

“So the guys who were publicly commenting to the SEC on “auditor independence” and other critical facets of the industry are also fudging their numbers?”

I’ve written about Huron a few times as an independent alternative for GAAP/IFRS advice that companies should look to. Certainly they had many qualified professionals. And companies should not be asking their auditors, for sure, to give advice on accounting treatment for transactions then turn around and expect an independent opinion on those decisions when audit time comes around.

Unfortunately, the Arthur Andersen link is an easy and convenient one to use to characterize the culture of the firm. Like Protiviti, the risk advisory firm under the Robert Half umbrella that is also an AA-from-the-ashes story, senior management of both firms is Arthur Andersen through and through. And they tend towards aggressive. The “type” is well known here in Arthur Andersen’s hometown, Chicago.

The CFO, Gary Burge, may not be AA but he does have a Big 4 pedigree.  He bled green-dot Deloitte blood.  He was interviewed by the Chicago Tribune for its Career Path series –  an honor also bestowed on his infamous Deloitte colleague, accused inside trader Tom Flanagan.

Q: Did anyone mentor you?

A: Yes, but a bigger impact in my life has been my class from Deloitte. There’s a group of seven of us, peers of mine, who are still friends 30 years later, even though we live in different parts of the county.We get together several times a year to do fun things, talk about business issues. I bounce ideas off of them and trust what they say. I also met my wife, Mary, when she was an auditor at Deloitte…

The accusations are devastating for a firm that makes its money keeping others out of this kind of trouble.

Compliance Week today:

“…Huron said the purchase agreements for the four acquisitions now under scrutiny involved earn-outs, or payments made over time contingent upon achieving certain performance targets. In its restatement announcement, the company said its Audit Committee recently learned that “the selling shareholders had an agreement among themselves to reallocate a portion of the earn-out payments to an employee of the company who was not a selling shareholder.” Huron said the sellers have recently amended their agreements related to these payments and anticipates that the non-cash compensation charges causing the restatement will not continue past July 31.

Huron didn’t identify the employee who received payments, nor did it provide any cause for Holdren’s departure. Lynn Turner, managing director in forensic accounting at LECG, said Huron’s published statement suggests “there was some sort of kickback payments being made, which raises serious business and ethical questions.””

However…You can’t say the warning signs weren’t there. Huron Consulting had not yet been reviewed by Audit Integrity and so did not make it to their 300 Worst Companies for Corporate Governance Risk list that I blogged about back in March. Audit Integrity did put out a report in April that spelled out the situation very clearly. Can’t say you weren’t warned about those “aggressive” Arthur Andersen alumni. If only their “auditors”, PricewaterhouseCoopers LLP, had seen it coming.

20 replies
  1. Tenacious Truman
    Tenacious Truman says:

    What a shame.

    I know a few people at Huron and, by and large, they are smart and hard-working and operate at the highest level of integrity. I don’t know Gary Holdren, but I’ve read about him.

    Barbara Ley Toffler had this to say about Gary Holdren:

    “Gary, needless to say, was irked. So, being an intelligent guy, he eventually came up with a way around the problem. He somehow convinced the other Arthur Andersen partners to allow him to create a new midwest consulting group that would supersede the current billing system–conveniently allowing the fees to accrue to him, while in some cases stripping the partners in those offices of their income streams. ‘This was so fucked up, it was double Fee Fuck,’ said a former manager in the Chicago office. The rule was clear: ‘One Firm’ didn’t apply when it came to sharing fees.”

    Barbara then digresses in the next paragraph, using Gary’s story to make a couple of teaching points. Even though it’s a bit off topic, her points are too important not to post:

    “… In the end, it was all about the bucks. Yes, performance reviews included many factors, but no one paid attention to them. Either your brought in the money or you wouldn’t be around for too long. Every penney counted when you came up for promotion. … The four cornerstones of success at Arthur Andersen–People Management, Quality, Thought Leadership, and Financial Performance–were referred to colloquially as ‘three pebbles and a boulder’. The boulder was financial performance. The rest, it seemed, was a joke.”

    Final Accounting should be read by every single person in this profession.

    Best wishes to the rank’n’file at Huron. May your parachutes lead to you soft landings.

    — Tenacious T.

  2. Anonymous
    Anonymous says:

    I have no sympathy for Huron… nor for the Andersen people who opted to be bought by other B4s instead of going to Huron. My experience with them has lead me to distrust the integrity of anyone from Andersen.

  3. Chicago Accountant
    Chicago Accountant says:

    I’m still trying to piece together this fraud. It’s bad news for Huron, the people who work there, and Chicago. I hope the people responsible get what’s coming to them. I’d like to know how the AC was tipped off to this as well. Was it the IA function? Was it PwC (I almost have to laugh)? PwC will likely get slapped with a lawsuit too, whether they were at fault or not.

  4. Tony Rezko
    Tony Rezko says:

    Sorry to hear this, as I have friends who left D&T for Huron.

    As for your March post on the 300 worst companies for corporate governance – I recall some people scoffed and said, well, auditors don’t screw up most of the time, so no big deal. This is why it is a big deal. You might as well say, the receiver caught all his passes in training camp, so what if he dropped the ball in the 4th quarter of a playoff? Detecting these frauds, or hell, at least having the best chance of detecting them, that’s what we get paid for.

    This is where we’re needed the most, so I think it’s chicken(stuff) to be complacent with a given “success rate.” When auditors miss something, it might be human beings simply making mistakes. But it could also be engagement teams asleep at the multimillion dollar, fee-generating wheel.

  5. Anonymous
    Anonymous says:

    It sounds like this is the type of fraud that would be almost impossible for an auditor to detect. If there was documentation of the side agreements among the selling shareholders or Huron paid the other employee directly and the auditors overlooked it that’s one thing, but my bet is there wasn’t anything written and the payments from Huron went to the selling shareholders (and then were redirected to the employee). Everything the auditors would have seen (purchase agreement, wire transfers to the selling shareholders) would have indicated the payments were for the purchase and should go into the purchase price. Unfortunately if the selling shareholders were redirecting cash from their own accounts it’s almost impossible for the external auditor to detect, since they don’t have the power go through the private banking records of employees of a company their auditing.

    The only way something like that ever comes out is if someone realizes something’s off and reports it internally.

  6. fm
    fm says:


    SAS 99. Tone at the Top. This is an “aggressive” management team. And a sophisticated one. If the auditors or others in oversight roles had restricted access, non-cooperation, or gave too much of the benefit of the doubt (the Satyam excuse) then they were negligent if not complicit. Think backdating. How did that happen so often? Side agreements no one could see? Or certain folks looking the other way because “everyone was doing it” and it was in their best interests too?

  7. John Kiebel
    John Kiebel says:

    just when you think you have seen it all….and Barb’s language is a bit colorful…maybe we can make them #301…

  8. BBC
    BBC says:

    “Restricted Access?”

    Unless the auditors were somehow able to get access to the acquired shareholders personal bank accounts or Huron employees bank accounts, there’s no way that an auditor could know about this no matter what aggressiveness is seen at the top. I don’t even know how the board could have ever found out.

  9. Colin Thompson
    Colin Thompson says:

    Condolences to the employees and shareholders. Security Class Action Estimate Service has done an analysis of the odds for what will happen to the share price of Huron. Check it out at Security Class Action Estimate Service on Facebook. It’s free.

    For the accountants and auditors who wonder why it costs you a bundle for professional liability coverage…now you know.

  10. Tenacious Truman
    Tenacious Truman says:

    Chicago Accountant @ 3

    It may be too soon to float the “f” word on this one.

    Near as I can figure, ater reading the WSJ article on this, was that earn-out payments associated with acquisitions were partially redisitributed to non-owners. The non-owners who received the redistributions were employees of Huron, who had come on board with the acquired entities. WSJ characterizes the redistributions as being completely legal and not “kick-backs” in any sense of the term. I assume this is so because nobody in a position to determine the value of the earn-out payments received any part of the redistribution. It may be possible that Huron senior management was unaware of these redistributions. The article posits that the transactions were misrecorded and should have been recorded as “noncash operating expenses”. Not sure how they were recorded or even if they were recorded at all, since the CAO, CFO and CEO may have been unaware of them.

    I’m not here to defend Huron, just to try to keep this FUBAR into perspective. Just because the infamous name of Andersen is being bandied about is no reason to convict anybody before the facts are outed.

    Finally, let me offer this question. Why was this firm ever taken public? (Yes, I know, to pay off the VCs. But that’s not my real question.) How much would the costs of SOX compliance take away from the bottom line, wheras if Huron was a private business compliance costs would have been minimal. Certainly, the impact of this fiasco on the Huron brand would have been dramatically less, had the firm been private instead of publicy traded. Other companies have done the cost/benefit analysis and stayed private or have even gone from public to private (example: ARAMARK). Being public would seem to carry with it costs that would outweigh the benefits, at least in this outsider’s view of Huron.

    — Tenacious T.

  11. fm
    fm says:

    @Tenacious Truman

    re: The question of why go public…

    Unfortunately, many companies, and rather small ones at that, go public for only one reason – to raise money to pay off investors or legacy owners who want an exit strategy. I once took a look at the Crain’s Chicago Business List of Top Public Companies in the Chicago area. There are, of course, the big names like Boeing, Sara Lee, Kraft, Motorola, and CNA. But there are a bucketload of companies with revenues under $250 million. That’s just nuts. And they are the ones who complain about compliance costs and have yet to be put under requirements of Sarbanes-Oxley. Yet they are taking public investor money and acting like big muckety-mucks as “public” company CEOs and CFOs. Ridiculous. It’s an ego and greed trip that serves no one but a handful of insiders and the folks who make the deals happen. Most are not really ready for the big time and are wasting everyone’s time and money playing the game for ego’s sake.

    That being said, if they issue public debt or have a big line of credit from a bank, they need a good audit.. But that can be bought.

    Should Huron have gone public? Well, as a private professional services firm, partnership or not, they may have had capital restrictions and, of course, the inability to easily shift wealth to only a few unless they restricted the true equity partner ranks to only a few. Those poor former AA partners who are now wondering what they did to deserve this calamity twice should have maybe thought twice about equity in any form… But as you said and as we have seen with the audit firms, they should have known that a private partnership also can pretty well hide their dirty laundry from the public if needed.

  12. Tenacious Truman
    Tenacious Truman says:

    FM @ 12,

    Thanks for the thoughtful reply (when are you not thoughtful?). But I wasn’t really thinking about a private partnership. We know that’s not the way to go if the number of partners exceeds, say, 5.

    I’m not an expert in corporate structure but I would have thought two or three times before going public with this business. Maybe the VCs gave them no choice, I don’t know. We do know (because we follow your Twitter feed) that the original partners gave away a huge amount of their equity to the VCs, likely so as to generate sufficient working capital to get the business going. The VCs were almost certainly in the driver’s seat when it came to deciding whether or not to go public.

    — Tenacious T.

  13. anonymous
    anonymous says:

    @6 fm

    Conspiracy theories, while interesting and fun to read about, are very rarely true. Occam’s razor, the simplest explanation is most often true.

  14. Tony Rezko
    Tony Rezko says:

    Fine, but where does Occam’s Razor lead us? To the fact that we “can’t” detect or deter fraud? Then we’re collecting an awful lot of money to talk up services we can’t actually provide.

    Anon #5, suppose I’m an audit committee chair, and here’s my question – why the heck am I paying a B4 millions of dollars in fees for audit services which provide not so much as an attempt to uncover issues like those at Huron? Yes, I understand that few smoking guns are uncovered directly by auditors, and we love to talk about how a fraudster who really wants to put one over on the auditors can do so. But the point I’m making, and that I interpret from many of FM’s posts, is that we don’t see even the professional skepticism or basic fraud brainstorming put into practice. The basic questions that should be asked, and the red flags that should wave in front of us, go unnoticed.

    If you come back and say we still cannot detect any of these fraudulent activites, my response is that we shouldn’t propose fees to audit committees that imply we’re capable of doing so. (Of course, we also give going concernes to companies like GM three years too late, but I digress.)

  15. Too Bad For Them...
    Too Bad For Them... says:

    I am not surprised. These jackals are little better than ambulance chasers. I worked for them and everyone I met was either stupid, a douchebag or both. Congrats–now get real jobs where you don’t extort clients out of $180/hr for retarded advice.

Trackbacks & Pingbacks

  1. […] new auditor. They also hired a slew of consultants and other experts including Huron Consulting, Callaway Partners (now owned by Huron), PricewaterhouseCoopers, and Ernst & Young. Eventually Navistar spent more than $200 million […]

  2. […] is to cash out, there’s no better time. That’s what LinkedIn’s founder did and it’s a time-honored tradition. And that’s why Groupon and Facebook have held back. Their founders are sitting on enough money […]

  3. […] the warnings signs and red flags were there. Not only had there been independent analysts who sounded alarms, but their auditors, PwC are in there all the time, including providing due diligence for […]

  4. […] looks like old Arthur Andersen methods took hold over at Huron Consulting (HURN).  (re:  The Auditors, […]

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