Donald Durant agreed with the choice. Like Lee Higginson, Ernst & Ernst had an unassailable reputation. The Ernst brothers audited Coca-Cola, Firestone, and Chrysler, and their firm was nearly as prestigious as Price Waterhouse. Like Durant and Ivar, the Ernsts were self-made men.16 Ernst & Ernst had a humbler beginning than other top firms. The Ernsts were from Cleveland, not Boston, and they hadn’t attended Harvard or Yale. Alwin Ernst was Ivar’s age, and had worked as a bookkeeper for four years after high school before founding the firm with his older brother Theodore in 1903.
But Ernst & Ernst was an innovative firm. The Ernsts were the first accountants to advertise, and they blazed the path of combining audit and consulting services. The Ernst brothers understood that financial information was valuable, not only to investors, but also to managers, who could use the data to improve their business decisions.
The Ernsts further saw the benefit of giving combined audit and tax advice. When the federal income tax was established in 1913, Ernst & Ernst immediately set up a tax department. If the Ernst brothers were concerned about potential conflicts of interest from simultaneously attesting to an audit and advising on taxes, strategy, and disclosure, they kept that to themselves. The Ernsts were visionaries, and had no time for prudish accounting old-timers. When the American Institute of Certified Public Accountants, a long-established accounting trade group, accused the Ernsts of violating its rules against soliciting and advertising, the brothers resigned their AICPA membership.17
The Ernsts hired only the sharpest graduates from top schools, men who were quick and careful with numbers. With their vision and a backbone of smart employees, they made nearly as much money as Lee Higginson’s bankers. Alwin Ernst ultimately would leave an estate of 12.6 million dollars (although, ironically, Alwin’s estate would lose more than 7 million dollars to taxes and costs due to poor financial planning).
When International Match hired Ernst & Ernst, the Ernsts assigned one of their most junior auditors to the new account. Although they knew Ivar’s European businesses were substantial, his American business would be a relatively small start-up company, at least at first. The American audit would cover International Match only, not Kreuger & Toll or Swedish Match. Such a limited audit wouldn’t require much expertise.
The given name of the junior auditor assigned to Ivar was Albert D. Berning, but the men of Ernst & Ernst didn’t know that. Albert didn’t like his first name and he hid it from people outside his immediate family. His colleagues knew him only as “A.D.”
Ivar met A.D. Berning and the men looked into each other’s eyes. Ivar couldn’t have been more pleased.
5
THE GREEN EYE SHADE
By the time Ivar formed International Match, A.D. Berning had worked at Ernst & Ernst for two uneventful years. Berning had graduated from the Cooper Union for the Advancement of Science and Art in Manhattan. He recently had passed his Certified Public Accountant examination, and had joined the national and state CPA institutes. Berning held the entry-level title of Assistant Manager at Ernst & Ernst, a junior role with limited responsibilities.
Berning was a quiet man, married and conservative. Unlike Ivar, he was not experienced in the world. Berning had not traveled extensively, and he certainly had not sailed luxury ships in first class or cavorted with movie stars. While Ivar was out with Douglas Fairbanks, Greta Garbo, and Mary Pickford in New York or with politicians and bankers at the finest restaurants in Europe, A.D. Berning dined at home with his wife.
Berning was the sort of person Ivar knew he could control. Like the other junior boffins at Ernst & Ernst, Berning saw every new client as an opportunity to advance, to prove to the Ernst brothers that he was partnership material. The International Match account was an exciting opportunity, Berning’s first major chance at a promotion from the firm’s lowest ranks. Although Berning had the qualities of a fine auditor, he was not a businessman. He was persistent, with a sharp eye for detail, but he was also cautious and careful. You could see Berning’s personality simply by looking at his small and precise handwriting. There was no chance of confusing a “2” with a “7,” which was always neatly crossed, like a “t.”
Berning’s job on the new International Match account was an odd admixture of simple and impossible. On one hand, Ernst & Ernst was to give only a qualified statement of opinion based on inputs from Ivar’s companies abroad. In this way, Berning’s primary job was straightforward, not so different from watching over the mechanized sorting and packaging of matches. Ivar’s Swedish accountants had done all the difficult work, determining the value of International Match’s share of the assets of Ivar’s other companies and calculating how much of those companies’ profits should be attributed to International Match.
Most of the details of Ivar’s assets, liabilities, and income were in the financial statements of those other companies, outside the United States. Berning’s job was simply to check the math, to be sure the individual numbers from Sweden added up to the sums from Sweden. Any decision requiring judgment already had been made. Viewed this way, International Match’s financial statements might be the tip of an iceberg, but Berning was responsible only for that tip.
On the other hand, performing a real audit of International Match was impossible. How could Berning know whether the Swedish numbers really were accurate? How could he protect American investors from inaccuracies in the financial statements? In this way, too, his job was like that of a sorter and packager of matches. How could anyone ensure that every match would be safe or free from defects? Without extraordinary effort, it simply could not be done. From his vantage point at Ernst & Ernst in New York, Berning could not even assess the size of the iceberg growing out from under International Match, much less its specific composition or the dangers it might pose.
Accordingly, Ivar and Berning understood that International Match would be a small account for Ernst & Ernst, an account that would not require much oversight. The financial statements would be brief and straightforward. Because the Swedish accountants already had performed an audit, Ernst & Ernst would play only a limited role. Essentially, the Americans would simply verify whether the Swedes had added and subtracted correctly, and would rely on the accuracy of those numbers in certifying International Match’s financial statements. If Berning wanted to generate additional fees from Ivar, they wouldn’t come from spending more time on the audit, but instead would have to come from tax or consulting advice.
From the beginning, Ivar personally took control of International Match’s relationship with Ernst & Ernst. He spoke directly to Berning, not his bosses, and made it clear that Berning should speak directly to him. Throughout 1923, the year of International Match’s gold debenture issue, Ivar and Berning communicated directly by letter and cable regarding a wide range of issues, including some of the most mundane particulars of International Match’s accounting. At first, no detail was too small for either man. On June 8, 1923, Ivar wrote to Berning to confirm a few fine points about minor working expenses, including stamp duties and registration fees.1 Berning must have been elated by all this attention. Assistant managers typically spoke to other assistant managers, not to famous international business leaders.
Ivar also made it clear to Donald Durant that any attempts to assess the particulars beneath International Match would be pointless. Ivar said International Match would act as a conduit for bringing American capital into his other businesses, particularly Swedish Match and Kreuger & Toll.2 International Match would not have any substantive business distinct from those other companies. Nor would it need many employees. Like Continental Investment Corporation, Ivar’s secret Liechtenstein subsidiary, International Match wouldn’t actually do anything.
Ivar told Durant and Berning his plan was to have profits from new government match concessions “about equally divided between International Match and Swedish Match.”3 However, no one signed an agreement requiring an equal division. Indeed, the documents for the twenty-year 6.5 percent gold
debentures did not even require that International Match receive any of the profits from Ivar’s other businesses. The allocation of profits to International Match was left entirely up to Ivar.
Berning was baffled by this arrangement. He couldn’t decipher the financial statements Ivar sent. Were the measures of International Match’s profits accurate? Did the company’s balance sheet entries include the assets and liabilities of Swedish Match’s subsidiaries? There was no way to tell. He had to rely entirely on Ivar’s numbers, which changed more frequently than a careful accountant would hope or expect. Berning sent Lee Higginson one set of financial statements in October 1923, just before the gold debenture issue was sold, based on information provided by Ivar. But soon after investors had purchased the debentures, Berning had to send a corrected version, which reflected revised numbers from Ivar.4 Fortunately, the only surprises were positive ones: the numbers had gone up.
Although Berning was frustrated by Ivar’s shifting lack of precision, he didn’t let Ivar know it. Instead, he tried to build a closer working relationship, even a friendship. He shared details from his personal life, and inquired about Ivar’s. Berning was particularly interested in Ivar’s travels. He asked about Ivar’s recent trip to Canada; he wished him a good time in Chicago.5 He had never visited either place, though he and his wife planned to do so, some day.
Berning also kept close tabs on International Match’s payments within the United States, so that he could help if there were any questionable transfers of money. When Berning confirmed that Eric Landgren, the renegade employee who had blown Ivar’s negotiations with Diamond Match, was taking advantage of Ivar and using firm money for personal purposes, Ivar fired Landgren and asked Berning for a full report.6
Ivar appreciated Berning’s diligence on the Landgren matter, but he wasn’t looking for a new friend. Although Ivar would focus intensely on the details of accounting issues, he barely knew who Berning was and didn’t seem to care. While Berning spent a good portion of each day thinking about Ivar and his companies, Ivar found it difficult even to keep track of Berning’s first name, and mistakenly called him A.L. instead of A.D. for nearly a year.7
When Berning approached Ivar with an inquiry from the securities division of Wisconsin’s Railroad Commission about International Match’s gold debentures, Ivar brushed Berning aside. Wisconsin? Railroad Commission? Berning couldn’t be serious.
But he was. During the 1920s, the states, rather than the federal government, played the most active role in securities regulation. Wisconsin was among the most aggressive state regulators.
Companies were required to comply with state “Blue Sky” laws, so named because of the concerns of a Kansas legislator that investors were buying securities backed by no more than the atmosphere. The railroad commissions of many states governed investments, a continuation of previous decades during which most securities sold to investors were backed by railroads. Ivar found this regulatory approach antiquated and annoying.
Because some residents of Wisconsin had purchased International Match’s gold debentures, Wisconsin securities examiners wanted to be sure those purchasers were getting something more than blue sky. Given Ivar’s experience with building permit officials and banking regulators in Sweden, an examiner from the Railroad Commission of Wisconsin must not have seemed much of a threat.
When Berning sent Ivar a list of questions from Commissioner O. Hibma of the securities division, Ivar ignored them. What could some bureaucrat from Wisconsin possibly do to Ivar? Besides, the questions were unreasonable. Hibma was asking for more information than Ivar had ever given anyone about his businesses.
But Commissioner Hibma didn’t like being ignored, and Berning soon notified Ivar that Hibma was requesting even more information:The latest request comes from Wisconsin, for detailed statement of expenses for 1921 and 1922 for all constituent Companies, together with their consolidated balance sheet at December 31, 1922. I am today writing them again, trying to appease them. They have already requested, and will undoubtedly do so again, a detailed statement of consolidated earnings, surplus and balance sheets of the constituent Companies for 1923. However, we can discuss this with you when you arrive here, and can then determine the best way to accommodate them.8
Ivar had no interest in discussing these details. Nor did he want to see Berning during his time in New York. Ernst & Ernst was supposed to play only a limited role in International Match’s life. It was Berning’s job to get rid of a minor nuisance such as a Wisconsin securities regulator.
Ivar tried dangling a carrot in front of his auditor. He invited the Bernings to sail with him from Canada to the Far East, all expenses paid. It had become obvious to Ivar that Berning was jealous of his international travels. Mrs Berning also coveted the trips her husband told her about, especially Ivar’s time in five-star hotels, restaurants, and luxury cruise cabins. She was delighted by Ivar’s invitation and the couple eagerly accepted. The next month, when Berning gently reminded Ivar that the Wisconsin regulators had not gone away, Ivar suggested that they simply send them updated versions of the financial statements with no additional detail. Berning agreed, even though it was obvious that Wisconsin wanted more.
Indeed, Commissioner Hibma responded immediately that “The statements do not give us the required information.”9 Ivar was surprised that Berning had been unable to appease the regulators. He could not understand why they needed so much detail. Ivar replied to Berning, “I note with regret that you are still being annoyed with demand for all sorts of information and figures and shall try to have some statements compiled for you within the near future.”10 It was already May, six months after the gold debenture deal, and Ivar still had given Berning nothing except the promise of an exotic vacation.
As Berning continued to ask Ivar for the details during June and July, Lee Higginson learned of the delays and began pressuring Ernst & Ernst to respond to Wisconsin. Durant wanted to know when International Match would be in compliance with state blue sky laws.11 Given this pressure, Berning’s requests to Ivar became more specific: “Wisconsin requests details costs of sales and expenses suggest statement showing half dozen major items under each classification with interest taxes separately.”12
When Ivar finally sent some additional information a few weeks later, it was obvious that the statements had been hastily and not very carefully prepared. For example, Ivar sent balance sheets for International Match for 1921 and 1922, showing that the company had 1 million shares outstanding. But International Match had not even existed during those years. Surely a securities regulator from Wisconsin would catch that mistake. Berning certainly did, and noted, “In view of the fact that this company was incorporated in July, 1923, we thought it advisable to cover the point in the letter accompanying the exhibits.”13
Berning also noted that the foreign exchange rate assumptions in International Match’s financial statements had changed. Because Ivar’s business was predominantly outside the United States, most of his cash flows were denominated in foreign currencies. The assumed basis for converting those currencies to US dollars affected the results for International Match.
For example, Ivar previously had used a rate of 26.80 Swedish kronor per US dollar. That meant International Match’s claims on 268 million Swedish kronor of assets were worth 10 million US dollars. But now, suddenly, Ivar reported a rate of 26.55. At the new rate, the same amount of assets suddenly appeared to be worth 1 percent more - about 100,000 US dollars of extra value.
Why the change, Berning wanted to know, given that the statements covered the same date? Ivar gave no explanation. One percent might not seem like a huge difference, but it would have mattered to an accountant trying to respond precisely to an inquiry from a state securities regulator.
Yet instead of asking why Ivar suddenly had increased International Match’s assets by 1 percent, Berning accommodated the change. He explained to Ivar that “The difference is quite small, and I hope that the statement made in this res
pect in the attached report meets with your approval. If not, it can be readily changed.”14 Hopefully, Commissioner Hibma would not notice the difference. In any event, Ernst & Ernst would continue to send investors only an abbreviated version of International Match’s financial statements, so they would never see any details about foreign exchange rates. Berning sent the revised documents to Wisconsin, and the Bernings began planning for their trip.
Ivar appreciated Berning’s reconciliation. The message from Ernst & Ernst was that if Ivar decided he didn’t like some numbers, they easily could be changed. As the old joke went, when an accountant interviewing for a job is asked, “What is two plus two?” the best answer is not “Four,” but “What do you want it to be?”
In his next telegram, Ivar advised, “Contemplate sailing Japan with Empress of Asia leaving Vancouver September twenty-fifth will this date be convenient for you and Mrs Berning.”15 The Bernings must have reread this cable a hundred times. Berning responded, ‘Suggested date entirely satisfactory.”16
But if Mr and Mrs Berning were elated by the prospect of largesse from Ernst & Ernst’s new client, they were soon to be disappointed. After dangling the trip in front of Berning, Ivar snatched it back. He seemed to be punishing Berning for the trouble with Wisconsin. On August 21, 1924, after International Match finally was in compliance with Wisconsin’s blue sky laws, Ivar cabled Berning that “On account very important and urgent business proposition which has come up unexpectedly it will be necessary for me to still further put off my trip to Japan.”17 The Bernings would have to wait.
The Match King Page 9
