Arthur Andersen was founded in 1913 and established a reputation for honesty and integrity under its founder. However, in the late 1990s/early 2000s, the firm struggled to balance audit independence with growing consultancy revenues. This culminated in its involvement in accounting fraud at Enron in 2001. Andersen was convicted of obstruction of justice for shredding Enron documents, destroying the firm, although this conviction was later overturned.

1. Arthur Andersen Consulting
A Reputation Gone Wrong
Group 1
Ermar Cabrera Ramon Fernandez
Mary Ann Guibani Snyder San Gabriel

2. Arthur E. Andersen (1885-1947) - In 1913, Arthur
Andersen and Clarence Delany, both from Price
Waterhouse, bought out The Audit Company of
California to form Andersen, Delany & Co which became
Arthur Andersen & Co. in 1918.
The Founder
• Born 30 May 1885 in Plano, Illinois and orphaned at the age of
16, Andersen began working as a mail boy by day and attended
school at night, eventually being hired as the assistant to the
controller of Allis-Chalmers in Chicago.
• In 1908, at age 23, he became the youngest CPA in Illinois.
History

3. • Arthur Andersen's first client was the Joseph Schlitz Brewing
Company of Milwaukee.
• In 1915, due to his many contacts there, the Milwaukee office
was opened as the firm's second office.
• In 1917, after attending courses at night while working full-time,
he graduated from the Kellogg School at Northwestern
University with a bachelor's degree in business.
• Andersen had an unwavering faith in education as 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. He was
generous in his commitment to aiding educational, civic and
charitable organizations.
• 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 certified public accountant
examiners of Illinois.

4. • 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.
• 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.
• Leonard Spacek, who succeeded Andersen at the founder's
death, continued this emphasis on honesty. For many years,
Andersen's motto was "Think straight, talk straight."
Corporate Values

5. • Arthur Andersen 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.
• Later, with the emergence of stock options as a form of
compensation, Arthur Andersen was the first of the major
accountancy firms to propose to the FASB (financial Accounting
Standards Board) that stock options should be included on
expense reports, thus impacting on net profit just as cash
compensation would.
• By the 1980s, standards throughout the industry fell as
accountancy firms struggled to balance their commitment to
audit independence against the desire to grow their burgeoning
consultancy practices. Having established a reputation for IT
consultancy in the 1980s, Arthur Andersen was no exception.
Reputation

6. • The firm rapidly expanded its consultancy practice to the point
where the bulk of its revenues were derived from such
engagements, while audit partners were continually encouraged
to seek out opportunities for consulting fees from existing audit
clients.
• By the late-1990s, Arthur Andersen had succeeded in tripling
the per-share revenues of its partners.
• Predictably, Arthur Andersen 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.
A Record of Growth

7. Revenue per year in million US dollars
Source : Andersen corporate press releases
A Record of Growth

8. • Arthur Andersen has been alleged to have been involved in the
fraudulent accounting and auditing of Sunbeam Products, Waste
Management, Inc, Asia Pulp & Paper, and the Baptist Foundation
of Arizona, WorldCom, as well as the infamous Enron case, among
others.
• Energy Giant Enron 2001 scandal ($100bn revenue) was found
guilty of institutional and systematic accounting fraud,
• Andersen's performance and alleged complicity as an auditor
came under intense scrutiny.
• The Powers Committee (appointed by Enron's board to look into
the firm's accounting in October 2001) came to the conclusion:
"The evidence available to us suggests that Andersen did not fulfill
its professional responsibilities in connection with its audits of
Enron's financial statements, or its obligation to bring to the
attention of Enron's Board concerns about Enron's internal
contracts over the related-party transactions"
Tarnished Reputation
THE ENRON SCANDAL

9. • On June 15, 2002, Andersen was convicted of obstruction of
justice for shredding documents related to its audit of Enron,
resulting in the Enron scandal.
• Although later reversed in a pyrrhic Supreme Court victory, the
impact of the scandal combined with the findings of criminal
complicity ultimately destroyed the firm.
• Nancy Temple (Andersen Legal Dept.) and David Duncan (Lead
Partner for the Enron account) were cited as the responsible
managers in this scandal as they had given the order to shred
relevant documents.
Tarnished Reputation

10. • Since the U.S. Securities and Exchange Commission cannot
accept audits from convicted felons, the firm agreed to
surrender its CPA licenses and its right to practice before the
SEC on August 31, 2002--effectively putting the firm out of
business.
• It had already started winding down its American operations
after the indictment, and many of its accountants joined other
firms. The firm sold most of its American operations to KPMG,
Deloitte & Touche, Ernst & Young and Grant Thornton LLP.
• The damage to Andersen's reputation also destroyed the
viability of the firm's international practices. Most of them were
taken over by the local firms of the other major international
accounting firms.
Tarnished Reputation

11. • On May 31, 2005, in the case Arthur Andersen LLP v. United
States, the Supreme Court of the United States unanimously
reversed Andersen's conviction due to what it saw as serious
flaws in the jury instructions.[6] In the court's view, the
instructions were far too vague to allow a jury to find
obstruction of justice had really occurred.
• The court found that the instructions were worded in such a
way that Andersen could have been convicted without any proof
that the firm knew it had broken the law or that there had been
a link to any official proceeding that prohibited the destruction
of documents.
• The opinion, written by Chief Justice William Rehnquist, was
also highly skeptical of the government's concept of "corrupt
persuasion"—persuading someone to engage in an act with an
improper purpose even without knowing an act is unlawful.
Tarnished Reputation

12. • Since the ruling vacated Andersen's felony conviction, it
theoretically left Andersen free to resume operations. However,
the damage to the Andersen name was so severe that it has not
returned as a viable business even on a limited scale.
• There are over 100 civil suits pending against the firm related to
its audits of Enron and other companies. In addition, its
reputation was so badly tarnished that no company wanted
Andersen's name on an audit.
• Even before voluntarily surrendering its right to practice before
the SEC, it had many of its state licenses revoked. A new verb,
"Enron-ed" was coined by John M. Cunningham, the former
Arthur Andersen Director in the Seattle Office, to describe the
demise of Arthur Andersen.
Corporate Demise

13. • From a high of 28,000 employees in the US and 85,000
worldwide, the firm is now down to around 200, based
primarily in Chicago. Most of their attention is on handling the
lawsuits and presiding over the orderly dissolution of the
company.
• As of 2011, Arthur Andersen LLP has not been formally
dissolved nor has it declared bankruptcy. Ownership of the
partnership has been ceded to four limited liability corporations
named Omega Management I through IV. As of 2011, Arthur
Andersen LLP still operates the Q Center conference center in
St. Charles, Illinois, nowadays mostly used for Accenture
trainings.
Corporate Demise

14. Corporate Values
- vs -
- Customer Satisfaction
What is the Ethical Dilemma?

15. 1. Would you ever destroy electronic or paper records to eliminate
evidence that might be used against you? Why or why not?
• No, we should not destroy evidence that might be against
yourself or anyone. We are a custodian of vital information and
thus it is wrongful to destroy vital records along the principle of
corporate stewardship.
Questions for Discussion

16. 2. What is the logic of indicting an entire company for ethical failures
rather than indicting only the responsible individuals? not?
• Michael Chertof, Assistant Attorney General, Justice Department
sought the indictment against the company rather than the
individuals “because the firm has shredded massive Enron-related
documents just as a government investigation” was ongoing.
• Arthur Levitt, former SEC Chairman also believes that Arthur
Andersen had similar earlier violation at the Waste Management
Corporation.
• However, the Group believes that not all the employees nor the
Board of Arthur Andersen were aware of the cover-up. Thus, it
should only be the individuals that should be punished for their
deliberate and unlawful acts.
Questions for Discussion

17. 3. Do you think the Appellate Court’s reversal of the District Court’s
decision was appropriate? Explain your answer.
• The Appellate Court upheld the District Court’s decision to indict
the whole firm instead of the persons responsible for obstruction of
justice.
• Arthur Andersen’s appealed with the Supreme Court. En banc the
Supreme Court on May 31, 2005 unanimously (9-0) reversed the
District and the Appellate Courts’ decisions and cleared the name
of the 28,000 innocent employees who lost their jobs.
• The Group shares the same position as that of the US Supreme
Court when it decided that the rest of the employees were innocent
and were only instructed to destroy the records without specific
knowledge on what needs to be covered-up.
Questions for Discussion

18. 4. Do you think the destruction of Andersen as a company was
justified? Why or why not?
• The Group brought to everyone’s attention the history of Arthur
Andersen as a firm and how it’s founder had set the values of the
company. The company was built on a reputation of honesty and
accountability and that the accountants' responsibility was to its
clients’ investors, and not their clients' management.
• Even after the death of Arthur Andersen in 1947, the succeeding
CEO continued to promote Andersen's motto: "Think straight,
talk straight.“
• The Group believes that the guilty parties committed fraud and
should be punished accordingly.
Questions for Discussion