Arthur Andersen Consulting

A Reputation Gone Wrong

Group 1

Ermar Cabrera Ramon Fernandez

Mary Ann Guibani Snyder San Gabriel

History

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.

• 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.

Corporate Values

• 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."

Reputation

• 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.

A Record of Growth

• 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

Revenue per year in million US dollars

Source : Andersen corporate press releases

Tarnished Reputation

• 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"

THE ENRON SCANDAL

Tarnished Reputation

• 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

• 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

• 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.

Corporate 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. 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

• 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.

What is the Ethical Dilemma?

Corporate Values

- vs -

- Customer Satisfaction

Questions for Discussion

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

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

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

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.