Arthur Andersen Consulting

A Reputation Gone Wrong

Group 1 Ermar Cabrera Mary Ann Guibani Ramon Fernandez Snyder San Gabriel

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

 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.

 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

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

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

A Record of Growth

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

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.

Tarnished Reputation

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.

Corporate Demise

Corporate Values
- vs - Customer Satisfaction

What is the Ethical Dilemma?

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 Courts reversal of the District Courts decision was appropriate? Explain your answer.

The Appellate Court upheld the District Courts decision to indict the whole firm instead of the persons responsible for obstruction of justice. Arthur Andersens 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 everyones attention the history of Arthur Andersen as a firm and how its 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