The pariah accountants at the heart of Government

NEW Labour's reliance on tax guidance from accountants Arthur Andersen in the run up to the 1997 General Election has come back to haunt Tony Blair's Government with a vengeance.

As auditors to Enron in the US and Europe, the reputation of Andersen has been severely damaged and the firm's probity brought into doubt.

The Enron debacle has brought into sharp focus a scandal which could shake the Government to its foundations. The role of Andersen in framing Chancellor Gordon Brown's first Budget is no secret. It is outlined in graphic detail by former Paymaster General Geoffrey Robinson in his memoir, The Unconventional Minister.

This book outlines how Robinson and Brown's chief economic adviser Ed Balls cultivated Andersen and its Left-leaning partners prior to the election and persuaded them to carry out the most delicate tax work on their behalf.

What Robinson and the official histories fail to catalogue is the other side of this Faustian bargain. Andersen befriended the prospective Labour Treasury team because the accounting firm was wise enough to realise that this was the path back to Government contracts after 13 years in the wilderness.

THROUGHOUT the privatisation boom of the 1980s, Andersen was persona non grata in Government because of the catastrophic mess it made of looking after taxpayers' money at the De Lorean car plant in Northern Ireland. Not only was it on a Whitehall blacklist but Government legal officers were seeking to recover £200m of lost money from the accounting firm.

In forging a deal with Andersen, New Labour - which came to office with a pledge to banish Tory sleaze from public life - was sowing the seeds of a scandal which looks as if it will dwarf the brown envelopes filled with cash which haunted John Major's administration.

Even more seriously, it challenged the integrity of our civil service which over the decades has been more resistant to corruption than any Government administration in the Western world.

I first became aware of the deal struck between New Labour and Arthur Andersen at a private lunch in the spring of 1997 with Sir Peter Davis, the then chief executive of the mighty Prudential insurance company. Davis asked me if I was aware of the work which Chris Wales, a tax partner of Andersen, was doing free of charge - pro bono in legal terms - for the Labour Government-in-waiting.

As Financial Editor of The Guardian, at that time, I was in close touch with the Opposition Labour team on the future conduct of economic policy. But there had been no mention to me of the extensive work being done by Andersen.

Davis went further. He indicated to me that the view in the City was that Andersen was doing this mountain of work for the Labour Party so that, when and if it won power, the auditing firm could pick up some of the highly valuable contracts which were going to its rivals and which would enable it to escape the shadow of De Lorean. Andersen, in the City view, was engaged in an intense, clear-eyed campaign to remove itself from the Whitehall blacklist as soon as possible.

As Robinson outlines in his book, Labour and Andersen were looking at painless ways of raising revenues without breaching Blair's pre-election promise not to raise income tax, including the upper limit of 40%.

In fact, Labour and Andersen had settled on two measures. These were a tax on the power utilities, which were deeply unpopular in the country because of the 'fat cat' bonuses creamed off by directors post-privatisation. The second, and much more important measure in terms of revenues, was the removal of the tax refund which the big insurance companies and pension funds received on the dividends paid by Britain's largest companies.

LABOUR expected a huge public row when Brown introduced this measure in his first Budget. But such was the euphoria in many parts of the media surrounding Labour's victory this never materialised, even though it has done incalculable long-term damage to Britain's pensions industry.

When I learned, just a few days before the election, of this prospective double tax whammy being prepared for Labour's first Budget, I set about getting confirmation from my friends in the Opposition Treasury team.

All hell broke loose with denials from the highest level downwards. What was most remarkable, however, was that when I took a call from Chris Wales, the person leading the Andersen team, who was on holiday in Sweden, I was misled. Wales acknowledged he was a Labour supporter but refused to confirm any work he had done for New Labour's economic team.

Even more fascinating, I took a call soon afterwards from Andersen's senior partner in London who described the whole report as 'balderdash', issued some threatening legal noises and made it clear no pro bono work was being done for Labour, nor was there any De Lorean deal in the wind. The combination of supercharged spin from the top of the Labour Party together with Andersen's own remarkable denials - unsolicited but nevertheless forthcoming - led the Guardian to drop the story.

As Robinson recounts, 'we were fortunate that despite this incident, there was no leaking of the major elements of the reform package'. Brown duly delivered his first Budget incorporating Andersen's tax work.

The pariah accounting firm was back at the heart of government and the obstacles to future government work fell away.

Wales, the partner who denied he was doing any tax work for Labour, was given a job as Treasury tax adviser. The long-standing legal claim against Andersen over the De Lorean affair was settled for £ 21m, a tenth of the £200m originally sought.

A Commons answer was slipped out saying that Andersen was now allowed to bid for Government contracts, as long as the small group of auditors, involved with De Lorean kept their distance. Andersen and its sister firm Andersen Consulting (where Trade Secretary Patricia Hewitt worked for four years) were now becoming part of the very fabric of New Labour - and a very profitable part of it too.

A National Audit Office report last year disclosed that Accenture, formerly Andersen Consulting, had won £7.9m of Government work in 1999-2000 alone.

Post 1997, Andersen became involved in private-public partnerships ranging from the Belfast ports to the Millennium Dome. Andersen Consulting was hired to sort out the Passport Office and the Social Security information technology systems - both cases where its advice was disastrous.

THE Government eagerly quotes Arthur Andersen reports that have provided timely and welcome support for New Labour policies. One published in the run up to last year's General Election discovered that Britain was the best country in the world for entrepreneurs to do business.

Another report often quoted by ministers was a paper on the Private Finance Initiative, which concluded that the PFI offered average savings of 17% - a conclusion at variance with more sceptical reports by others.

In the private sector, meanwhile, Andersen's history of auditing disasters has been piling up. Every day brings new revelations about its shredding of documents in the Enron case, including the little noticed fact that it paid its clerks overtime for doing such dirty work.

In another strange and unrelated twist, Brown bought his £130,000 Westminster flat from Andersen. He acquired the property from the accountants when they sold off assets from a part of the collapsed empire of crooked tycoon Robert Maxwell in which Brown's friend, Robinson was a director.

This is the unscrupulous firm which Blair, who came to office pledged to be Mr Clean, has allowed so close to his Government. When the Commons Select Committee investigating the Government's relationship with Andersen lifts the rock, there is no telling what scale of scandal will crawl out.

Washington has Enrongate. Now we have our own Andersengate.