Arthur Andersen LLP, based in Chicago, is a holding company and formerly one of the
"Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and
KPMG, providing auditing, tax, and consulting services to large corporations.
In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public
Accountants in the United States after being found guilty of criminal charges relating
to the firm's handling of the auditing of Enron, an energy corporation based in Texas,
which had filed for bankruptcy in 2001 and later failed.
The other national accounting and consulting firms bought most of the practices of Arthur
Andersen.
The verdict was subsequently overturned by the Supreme Court of the United States.
However, the damage to its reputation has prevented it from returning as a viable business,
though it still nominally exists.
One of the few revenue-generating assets that the Andersen firm still has is Q Center, a
conference and training facility outside of Chicago.
The former consultancy and outsourcing arm of the firm, now known as Accenture, which
had separated from the accountancy side in 1987 and renamed themselves after splitting
from Andersen Worldwide in 2000, continues to operate and has become one of the largest
multinational corporations in the world.
History Founding
Born 30 May 1885 in Plano, Illinois and orphaned at the age of 16, Andersen began working as
a mailboy 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.
The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany
as Andersen, DeLany & Co.
The firm changed its name to Arthur Andersen & Co. in 1918.
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.
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.
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.
For many years, Andersen's motto was "Think straight, talk straight."
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 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.
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.
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.
Two of the last three Comptrollers General of the US General Accounting Office were top
executives of Arthur Andersen.
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.
This disproportionate growth, and the consulting division partners' belief that they were not
garnering their fair share of firm profits, created increasing friction between the two
divisions.
In 1989, Arthur Andersen and Andersen Consulting became separate units of Andersen Worldwide
Société Coopérative.
Arthur Andersen increased its use of accounting services as a springboard to sign up clients
for Andersen Consulting's more lucrative business.
The two businesses spent most of the 1990s in a bitter dispute.
Andersen Consulting saw a huge surge in profits during the decade.
However, the consultants 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 US$1.2 billion in past payments to Arthur Andersen, and declared that Andersen
Consulting could no longer use the Andersen name.
As a result Andersen Consulting changed its name to Accenture on New Year's Day 2001 and
Arthur Andersen meanwhile now having the right to the Andersen Consulting name rebranded
itself as "Andersen".
Perhaps most telling about who won the decision was that four hours after the arbitrator made
his ruling, Arthur Andersen CEO Jim Wadia suddenly resigned.
Industry analysts and business school professors alike viewed the event as a complete victory
for Andersen Consulting.
Jim Wadia would provide insight on his resignation years later at a Harvard Business school case
activity about the split.
It turned out that the Arthur Andersen board passed a resolution saying he had to resign
if he didn't get at least an incremental US$4 billion for the consulting practice to split
off, hence his quick resignation once the decision was announced.
Accounts vary on why the split occurred — executives on both sides of the split cite greed and
arrogance on the part of the other side.
The executives on the Andersen Consulting side maintained breach of contract when Arthur
Andersen created a second consulting group, AABC which competed directly with Andersen
Consulting in the marketplace.
AABC grew quickly, most notably its healthcare and technology practices.
Many of the AABC firms were bought out by other consulting companies in 2002, most notably,
Deloitte, Hitachi Consulting, PwC Consulting, which was later acquired by IBM, and KPMG
Consulting, which later changed its name to BearingPoint.
Enron scandal
Following the 2001 scandal in which $100bn in revenue from energy giant Enron was found
to have sustained itself by means of institutional and systematic accounting fraud, Andersen's
performance and alleged complicity as an auditor came under intense scrutiny.
The Powers Committee came to the following assessment: "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".
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 the conviction was later reversed by the Supreme Court, the impact of the scandal
combined with the findings of criminal complicity ultimately destroyed the firm.
Nancy Temple and David Duncan were cited as the responsible managers in this scandal as
they had given the order to shred relevant documents.
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.
The Andersen indictment also put a spotlight on its faulty audits of other companies, most
notably Waste Management, Sunbeam, the Baptist Foundation of Arizona and WorldCom.
The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the then biggest
bankruptcy in history led to a domino effect of accounting and like corporate scandals
that continue to tarnish American business practices.
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.
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.
Demise 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.
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.
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.
Migration of partners and local offices to new firms
Many partners formed new companies or were acquired by other consulting firms.
Examples include: Huron Consulting
KPMG which absorbed the Computer Forensics division based in Cypress, CA and the Boise,
Kansas City, Philadelphia, Portland and Seattle offices, among others
Navigant Consulting which absorbed eleven partners in Chicago and Washington D.C.
Perot Systems which absorbed six partners in the East
Protiviti hired approximately 800 former workers SMART Business Advisory and Consulting which
absorbed some of the Philadelphia office West Monroe Partners
WTAS which was started in San Francisco, Los Angeles, New York, Boston, Washington D.C.
and West Palm Beach and later expanded to 8 other locations
Grant Thornton International which absorbed the North Carolina and South Carolina offices.
True Partners Consulting See also
Accenture Accounting scandals
Conspiracy of Fools Corporate abuse
David J. Lesar Timeline of the Enron scandal
References
External links U.S. official website
Indictment of U.S. v. Arthur Andersen, LLP.
Supreme Court Overturns Conviction in Arthur Andersen LLP, Petitioner v United States
Arthur Andersen and the Baptists The Legacy of Arthur Andersen
Inside Arthur Andersen: Shifting Values, Unexpected Consequences