Arthur Andersen LLP was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corporations and was one of the "Big Five" accounting firms (along with Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers). The firm collapsed by mid-2002, as details of its questionable accounting practices for energy company Enron and telecommunications company WorldCom were revealed amid the two high-profile bankruptcies. The scandals were a factor in the enactment of the Sarbanes–Oxley Act of 2002.
History
Founding
Born on May 30, 1885, in Plano, Illinois, and orphaned at the age of 16, Arthur E. Andersen began working as a mail boy by day and attended school at night, eventually being hired as the assistant to the comptroller of Allis-Chalmers in Chicago. In 1908, after attending courses at night while working full-time, he graduated from the Kellogg School of Management at Northwestern University with a bachelor's degree in business. That same year, at age 23, he became the youngest Certified Public Accountant in Illinois.[1]
In 1913, Andersen and Clarence DeLany founded an accounting firm as Andersen, DeLany & Co.[1] The firm changed its name to Arthur Andersen & Co. in 1918, as DeLany resigned from the firm. Arthur Andersen's first client was the Joseph Schlitz Brewing Company of Milwaukee, a company where Andersen had worked as a controller.[2] In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office.[1]
Andersen believed education was the basis upon which the new profession of accounting should be developed. He created the profession's first centralized training program and believed in training during normal working hours. In 1927, he was elected to the board of trustees of Northwestern University and served as its president from 1930 to 1932. He was also chairman of the board of CPA examiners of Illinois.[1]
Reputation
Andersen, who headed the firm until his death in 1947, was a zealous supporter of high standards in the accounting industry. A stickler for honesty, he argued that accountants' responsibility was to investors, not their clients' management. This gave rise to the uniform look of all the so-called "Arthur Androids", as employees referred to themselves, the intent being to provide the same service the same way to all customers in all locations. For many years, Andersen's motto was "Think straight, talk straight"—an axiom passed on from his mother.[3] During the early years, it is reputed that Andersen was approached by an executive from a local rail utility to sign off on accounts containing flawed accounting, or else face the loss of a major client. Andersen refused in no uncertain terms, replying that there was "not enough money in the city of Chicago" to make him do it. The railroad fired Andersen, only to go bankrupt a few months later.[4]
Arthur Andersen & Co. also led the way in a number of areas of accounting standards. Being among the first to identify a possible sub-prime bust, Arthur Andersen dissociated itself from a number of clients in the 1970s.[5]
Arthur Andersen & Co. struggled to balance the need to maintain its faithfulness to accounting standards with its clients' desire to maximize profits, particularly in the era of quarterly earnings reports. The firm has been alleged to have been involved in the fraudulent accounting and auditing of
Andersen Consulting and Accenture
The consulting wing of the firm became increasingly important during the 1970s and 1980s, growing at a much faster rate than the more established accounting, auditing, and tax practice. In a further effort to take advantage of economies of scale, Price Waterhouse and Arthur Andersen discussed a merger in 1989[9] but the negotiations failed, mainly because of conflicts of interest such as Andersen's strong commercial links with IBM and PW's audit of IBM, as well as the two firms' radically different cultures. It was said by those involved with the failed merger that at the end of the discussion, the partners at the table realized they had different views of business, and the potential merger was scrapped.[10]
In 1989, Arthur Andersen and Andersen Consulting became separate units of Andersen Worldwide Société Coopérative. The two businesses spent most of the 1990s in a bitter dispute. Andersen Consulting saw a huge surge in profits during the decade. The consultants, however, continued to resent transfer payments they were required to make to Arthur Andersen. In August 2000, at the conclusion of International Chamber of Commerce arbitration of the dispute, the arbitrators granted Andersen Consulting its independence from Arthur Andersen, but awarded $1.2 billion in past payments (held in escrow pending the ruling) to Arthur Andersen, and declared that Andersen Consulting could no longer use the Andersen name.
Enron scandal
Andersen's performance and alleged complicity as an auditor came under intense scrutiny during the 2001 scandal in which Houston-based energy giant Enron was found to have fraudulently reported $100 billion in revenue through institutional and systematic accounting fraud. On November 8th, the U.S. Securities and Exchange Commission (SEC) served Andersen with a subpoena, which was also the same day that Enron filed an 8-K restatement with the SEC that reduced its earnings by $1.2 billion. On December 2nd, Enron filed for Chapter 11 bankruptcy – the largest corporate bankruptcy in American history at the time.[17]
Andersen CEO Joseph Berardino testified to two subcommittees of the House Committee on Financial Services on December 12th. He said that with the larger of the two special-purpose entities with issues prompting the restatement (not named by Berardino, but Chewco, conceived by Enron CFO Andrew Fastow and Enron Global Finance executive Michael Kopper), which he said was responsible for 80%, important information had not been revealed to Andersen’s auditors (referring to a December 1997 side agreement between Chewco and JEDI that meant $6 million of the alleged independent equity from Barclays was no longer at risk) and that the audit committee had been notified of possible illegal acts at Enron. Berardino confessed that Andersen erred on the smaller of the two (also not named, but Swap Sub, part of Fastow's LJM1) but that Andersen did not cause Enron's collapse.
Collapse
The firm collapsed by mid-2002, as details of its questionable accounting practices for energy company Enron and telecommunications company Worldcom were revealed amid the two high-profile bankruptcies. The scandals were a factor in the enactment of the Sarbanes–Oxley Act of 2002 to increase oversight and protect whistleblowers.[32] After the collapse, some parts of the company continue to exist: the company's consulting services were split out before the collapse and continue today as Accenture and Protiviti, while some of the former partners formed a new firm in 2002 focused on tax services, now called Andersen Tax.[29]
Demise
The 2005 Supreme Court ruling theoretically left Andersen free to resume operations. However, CNN reported that by then, Andersen was "nearly defunct," with about 200 employees remaining from a high of 28,000 in 2002.[33] Following the ruling, William Mateja, a former counsel to the US Attorney General who had supervised the Andersen appeal, told NPR that he did not believe the government would seek a retrial because, "there's nothing left of Arthur Andersen, and to spend the taxpayers' money on another prosecution would be just—defy common sense." Echoing this, United States Chamber of Commerce vice president Stephen Bokat pronounced Andersen "dead," and said that "there is no putting the company back together."[34] Kurt Eichenwald, who covered the Enron scandal for the New York Times, argued in his post-mortem, Conspiracy of Fools, that even if Andersen had escaped the Enron scandal, it would have likely been brought down by the massive accounting fraud at WorldCom, which came to light just days after Andersen was convicted of wrongdoing at Enron and ultimately surpassed Enron as the largest corporate bankruptcy in American history at that point.[35]
As a result, Andersen in its original state has never returned as a viable business on even a limited scale.
Migration of partners and local offices to new firms
Many offices were acquired by other consulting firms as described above. Some partners formed new companies such as:
- Accuracy which was founded in 2004 by a team of seven former partners and is headquartered in Paris[40]
- Andersen Tax which acquired the rights to the company name and changed their name from WTAS in 2014[41]
- BearingPoint, formerly the US consulting unit spun off by KPMG, which purchased Andersen business consulting practices in various countries[42]
- Huron Consulting Group, which was formed by former employees of the Chicago office of Andersen[43]
See also
- Accounting scandals
- Conspiracy of Fools
- Corporate abuse
- David J. Lesar
- Timeline of the Enron scandal
External links
References
- Mary Virginia Moore, John Crampton. Arthur Andersen: Challenging the Status Quo The Journal of Business Leadership, American National Business Hall of Fame, 2000, retrieved May 5, 2008^
- Susan Squires. Inside Arthur Andersen: Shifting Values, Unexpected Consequences FT Press, 2003, retrieved July 8, 2014^
- Barbara Ley Toffler, Jennifer Reingold. Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen