arthur anderson case_presented by group 4_20110730

8/6/2019 Arthur Anderson Case_Presented by Group 4_20110730

1/33


2/33

CONTENT Introduction to Arthur Anderson

Background

History

Core Values and Principles: Early years

Change in Company principles

Anderson in 1980s and 1990s

Split of Arthur Anderson audit and consulting

Signs of danger

Major scandals

Enron

Fall of Arthur Anderson post the Enron scandal

Impact on the Auditing industry

Conclusion


3/33

BACKGROUNDItem Description

Type Limited Liability PartnershipFounded 1913Headquarters Chicago, Illinois, USA

Industry Accounting and Professional services

Revenues US$9.3billion (in 2002)

Employees 85,000

Footprint 350 offices in 84 countries serving 100,000clientsStatus

Arthur Andersen was one of the big Five

accounting firms among PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG

providing auditing, tax and consulting servicesto large corporations.

License Possessed Licenses of certified publicaccountants (CPA)


4/33

BRIEF HISTORY 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 theJoseph Schlitz BrewingCompany of Milwaukee.

This firm always believed in investor protection ratherthan clients management

During the depression in late 1920s, many investors lostfaith in companies. Arthur Anderson was instrumental in

restoring the faith of US investors in companies based onits integrity and high professional values

In 1979, Arthur Anderson became the worlds largestprofessional services firm

In 1990, the firm established itself as a member of the elite


5/33


6/33

CORE VALUES ANDPRINCIPLES: EARLY YEARS

Focused on creating a firm with its own set of businessstandards

High importance to ethical values and insisted on honestaccounting. It also ensured that conflicts of interest did notexist while accounting of firms

Imparted rigorous training to all new recruits, imbibe the ArthurAnderson culture, popularly known as the Andersen way

All Arthur Anderson clients across the world received the same

quality of work, same kind of approach to work and samequality of talent to do the work

Leonard Spacek, who succeeded Andersen continued hisemphasis on honesty. For many years, Andersens motto wasThink straight and talk straight


7/33


Background

HistoryCore Values and Principles: Early years




Signs of danger

Major scandals

Enron



Conclusion


8/33

ARTHUR ANDERSON IN1980S AND 1990S

By the 1980s, standards throughout the accountancyindustry fell as firms struggled to balance theircommitment to auditing against the desire to growthe flourishing consultancy practices

It became a pioneer in IT consulting in 1980s

The bulk of the revenues was drawn from consulting

Looked out for opportunities of consulting fees fromexisting audit clients

By the late-1990s, Anderson had succeeded in tripling

the per share revenue of its partners Anderson struggled to balance the need to maintain

faithfulness to accounting standards with its clientsdesire to maximize profits, particularly in the era ofquarterly earnings reports


9/33

SPLIT OF AA AUDITING ANDCONSULTING AA was a pioneer in non-audit consulting

At first, all consultants were accountants and were requiredto be accountants for 2 years before they could startconsulting. This rule was rescinded in 1960

In 1970, the consultants became more profitable per partnerthan the auditors as auditing was a stagnating businesswhile consulting was a growing one

However, the audit side controlled the firms managementand the consultants were being told what to do by peoplewho were not a part of the group.


10/33

Harvey Kapnick was concerned about the possibleethical conflicts that can arise between theconsulting and audit sides and suggested a splitbetween the consulting and auditing sides.However, he failed to get the approval of thepartnership.

In 1997, the consulting partners voted unanimouslyfor the split. The split was not very cohesive. It waslike a bad marriage

Anderson Consulting changed its name to Accenture

This entire episode was very bitter on AA Auditing.They made up their mind to show Accenture thatthey could make money without them.

This meant that AA became more aggressive in

SPLIT OF AA AUDITING ANDCONSULTING..CONT


11/33


12/33

SIGNS OF DANGER

Three of the five largest US bankruptcies wereaudit & consulting clients

Paid over $500 million to settle claims (1997 2002)

Arthur Andersens Greatest Hits:

-- Waste Management -- Baptist Foundation of Arizona -- Sunbeam Corp.

-- Boston Chicken -- Global Crossing -- Worldcom -- Qwest Communications -- Enron


13/33


14/33


Background History





Signs of danger

Major scandals

Enron



Conclusion


15/33

ABOUT ENRON World's largest energy, commodities and services company

Formed in July 1985 by the merger of Houston Natural Gasand InterNorth of Omaha, Nebraska

In 1985-ENRON was a transporter of natural resourcesthrough the integrated pipeline network.

Enron rapidly evolved from delivering energy to brokeringenergy futures as energy markets were deregulated.

In 1999, Enron EnronOnline,an e-commerce company.

Revenues of $101 billion in 2000.

Employed approximately 22,000 staff

Fortune named Enron "America's Most Innovative Company"

for six consecutive years
http://en.wikipedia.org/wiki/Fortune_(magazine)http://en.wikipedia.org/wiki/Fortune_(magazine)


16/33

RELATIONSHIP-ANDERSON AND ENRON

Anderson began auditing Enron in 1985

Both got close as Enron regularly hired AndersonAuditors even for position like CFO & ChiefAccountant.

Anderson established permanent office space inEnrons head quarter.

Anderson took over internal audit function of Enron in1993 and hired 40 Enrons employee.

Enron became one of the Andersons largest clients

with fees over $ 52 million in 2001.


17/33

ANDERSON- AUDITOR ANDCONSULTANT FOR ENRON

Enron was the 2nd largest revenue producer forAnderson.

Half of the fees was earned from performance ofconsulting services.

This raised question about Andersons independencein auditing Enron.

During 2000 SEC attempted to force accounting firmsto separate their consulting and auditing practicesto eliminate possible conflicts of interest .

This was protested by all the Big five accountingfirms.


18/33

ANDERSONS ROLE INENRONS FALL

, - W a s p a id $ 5 2 m illio n in 2 0 0 0 th e m a jo rity fo r n o n a u d it re la te d.co n su ltin g se rvice s

Fa ile d to sp o t m a n y o f E n ro n s lo sse s

S h ou ld h a ve a sse sse d E n ron m a n a g e m e n t s in te rn al con trols on

d e riva tive s tra d in g e xp re ssed a p p ro v a l o f in te rn a lco n tro lsd u rin g 1 9 9 8 th rou g h 2 0 0 0

K e p t a w h o le flo o r o f a u d ito rs a ssig n e d a t E n ro n ye a r a ro u n d

E n ro n w a s A n d e rsen s seco n d la rg e st clie n t

Pro vid e d b o th e xte rn a l a n d in te rn a la u d its

C FO s a n d co n tro lle rs w e re fo rm e r A n d e rse n e xe cu tiv e s

A ccu se d o f d o cu m e n t d e stru ctio n w a s crim in a lly in d icte d


19/33


20/33

DAVID DUNCAN

David Duncan was the lead partner at Enron

As a partner at Andersen, the fees that hepersonally generated greatly influenced hiscompensation


21/33

DEVELOPMENT OF CRISISIN ANDERSON

2001 Annual retention meeting

Anderson was aware of serious risks involved in theaudit of Enron

An Anderson memo dated Feb 6th, 2001 outlined the

discussion of Anderson executives regarding theretention of Enron as a client

Enrons private partnerships involving related partytransactions allowed Enron to keep the partnershiplosses off of its books, due to the loop holes inaccounting standards

For the same reason, if the partnership incurred anydebt, it was not shown on Enrons balance sheet

Enron also had possible conflict of interest arisingfrom CFO, Andrew Fastows control of several ofthese partnerships and compensation he receivedfrom them


22/33

ENRON RESTATESEARNINGS In October 2001, Enron announced its third-quarter

results for 2001. The third-quarter results included aloss of $638 million, a $35 million write-down due tolosses on its partnerships, and a decrease inshareholder's equity by $1.2 billion.

This announcement led to a sharp decline in the stock

price of Enron (40%). Following this, suspectingEnron of financial misappropriations, the SEClaunched an investigation into Enron's financialdealings in late October. The investigation revealedserious accounting misappropriations by Enronbetween 1996 and 2001.

In November 2001, Enron restated its financialstatements for the years, 1997 to 2000 and for thefirst two quarters of 2001, and reported a loss of$586 million for that period. According to reports,

Enron had huge accumulated debts on account of itsdubious financial dealings with its partners and had


23/33

TIMELINE OF EVENTSLEADING TO DECLINE

October12, 2001: A day after SECannouncement, David Duncan called an urgentmeeting to organize the expedited effort todestroy Enron related documents.

January10, 2002: Anderson CEO admitted thatthe firm destroyed documents relating to theEnron audit.

January15, 2002: Anderson partner, DavidDuncan was fired by the firm and 3 otherpartners at the Houston office were placed on

leave. In March 2002, Arthur Andersen, was indicted

by the US Department of Justice on charges ofobstructing the course of justice in the Enroncase.

Despite the auditors attempts to salvage itsrelationshi with Enron Anderson was officiall


24/33

CRISIS AFTERMATH In August 2002, Andersen Worldwide, the parent

company of the US-based Andersen, agreed to payclaims worth $60 million to Enron shareholders andcreditors (against claims of over $25billion).

Andersen Worldwide stated that it was not responsiblefor Andersen(US) that operated as an independentdivision.

In October 2002, Andersen received the DOJ verdict:the firm was given the maximum court sentence (insuch cases) of five years probation on its USoperations and a $500,000 fine for altering evidenceof its Enron work...

Many partners formed new companies or wereacquired by other consulting firms. Examplesinclude:

MarketSphere Consulting

SMART Business Advisory and Consulting


25/33

WHAT REALLY WENTWRONG?

, -Le a d e rsh ip fa ilu re p o o r d e cisio n,m a kin g h u b ris

In a p p ro p ria te p a rtn e rsh ip stru ctu re/V a lu e s b e h a vio r d isco n n e ctV a lu e m u ta tio n

StructuralsecrecyC o n flicts o f in te re st.S a le s v o ve rsig h t

C u ltu re co n flicts

.C o n su ltin g v a u d itO ve rsig h t fa ilu re


26/33

ANDERSON- CURRENTSTATUS

Andersen has not returned as a viable business even ona limited scale.

There are over 100 civil suits pending against the firmrelated to its audits.

Its reputation was so badly tarnished that no company

wanted Andersen's name on an audit. It began winding down its American operations after the

indictment, and many of its accountants left to joinother firms.

The firms old most of its American operations to KPMG,Deloitte & Touch, Ernst & Young and Grant Thornton

LLP. From a high of 28,000 employees in the US and 85,000

worldwide, the firm is now down to around 200 basedprimarily in Chicago. Most of their attention is onhandling the law suits and presiding over the orderlydissolution of the company.

Arthur Andersen LLP has not been fomally dissolved norhas it declared bankru tc . Ownershi of the


27/33


Background History




Split of Arthur Anderson audit and consulting Signs of danger

Major scandals

Enron


Impact on the Auditing industry Conclusion


28/33

28

IMPACT ON AUDITINGINDUSTRY

High media/public profile

Cost of future audit failure

Protection from catastrophic events

Audit relationship shift

Effective and independent audit

Increased audit consultation with CEOs & auditcommittees

Increased legal consideration

Audit scope & fee increases


29/33

29

Auditor assurances to support CEOcertification

Low/no tolerance for restatements

Expanded quarterly reviews

Expanded internal controls assurance

Assurance on non-financial information in SECfilings

Increased consultation

Creation of appropriate tone at the top

Risk identification and risk managementprocesses

Systems and controls to manage risks

:IN D U S T R Y E X P E C TA T IO N S

O F C E O

:IM PA C T O N A U D IT IN G IN D U S T R Y


30/33

30

The Committee is the client; hires and fires the auditors

Real dialogue and tough questions

Consultations on business risks, audit risks & audit

scope required to reduce audit risk to a low level Frequent communications on interim audit findings &

interim changes to audit scope

Information/assurance on - Critical accounting policy choices Financial reporting quality Resolution of issues with management Senior management integrity and misconduct Completeness of information from management Internal controls

:IM PA C T O N A U D IT IN G IN D U S T R YE X P E C TA T IO N S O F A U D IT IN G

C O M M ITT E E


31/33

31

The regulations became stringent post Arthur Andersen

Accountants are being much more careful

SOX and many other acts came in existence

But:

There are always ways to work around the rules

and regulations

Example: Satyam and PWC

H A V E W E R E A LLY LE A R N T A N YLE S S O N S ?


32/33

References:

http://www.accountancyage.com/News/1129120

www.ncpers.org/PastConf/ html/an2002_14.html

http://college.hmco.com/business/phk/business/7e/st

http://www.opensecrets.org/news/accountants/index.

http://en.wikipedia.org/wiki/Arthur_Andersen

www.strangecosmos.com

Case material
http://www.accountancyage.com/News/1129120http://www.ncpers.org/PastConf/html/an2002_14.htmlhttp://college.hmco.com/business/phk/business/7e/students/andersen.htmlhttp://www.opensecrets.org/news/accountants/index.asphttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://www.strangecosmos.com/http://www.strangecosmos.com/http://www.strangecosmos.com/http://www.strangecosmos.com/http://en.wikipedia.org/wiki/Arthur_Andersenhttp://www.opensecrets.org/news/accountants/index.asphttp://college.hmco.com/business/phk/business/7e/students/andersen.htmlhttp://www.ncpers.org/PastConf/html/an2002_14.htmlhttp://www.accountancyage.com/News/1129120


33/33

arthur anderson case_presented by group 4_20110730

Documents