Arthur Andersen

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This article is about the corporation. For the U.S. Supreme Court case, see Arthur Andersen LLP v.
United States.

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Arthur Andersen

Type
Limited liability partnership
Industry
Accounting
Professional Services
Tax
Consulting
Licenses of Certified Public Accountants
surrendered in 2002
Founded
1913
Headquarters
Chicago, Illinois, United States
Products
Professional Services
Revenue
US$9.3 billion (in 2002)
Employees
approx. 200 as of 2007
85,000 (in 2002)
Website
Andersen.com
Arthur Andersen LLP, based in Chicago, is a holding company and formerly one of the "Big Five"
accounting firms amongPricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst &
Young andKPMG, providing auditing, tax, and consulting services to largecorporations. In 2002, the
firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United
States after beingfound guilty of criminal charges relating to the firm's handling of
theauditing of Enron, an energy corporation based in Texas, which had filedfor bankruptcy in 2001
and later failed.
[1]
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. The damage to its reputation, however, 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.
[2]

The former consultancy and outsourcing arm of the firm, now known asAccenture, 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.
Contents
[hide]
1 History
o 1.1 Founding
o 1.2 Reputation
o 1.3 Andersen Consulting and Accenture
2 Enron scandal
3 Demise
4 Migration of partners and local offices to new firms
5 See also
6 References
7 External links
History[edit]
Founding[edit]
Main article: Arthur E. Andersen

Arthur 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.

Revenue per year in million US dollars, source : corporate press releases
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
thecontroller 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.
[3]
The firm changed its name to Arthur Andersen & Co. in 1918. Arthur
Andersen's first client was the Joseph Schlitz Brewing Company of Milwaukee.
[4]
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 theKellogg
School at Northwestern University with a bachelor's degree in business.
[5]

Andersen had an unwavering faith in education as the basis upon which the new profession
ofaccounting 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[edit]
Andersen, who headed the firm until his death in 1947, was a zealous supporter of high standards in
theaccounting 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,
[6]
and the Baptist
Foundation of Arizona, WorldCom, as well as the infamous Enron case, among others.
[7][8]

Two of the last three Comptrollers General of the US General Accounting Office (now the
Government Accountability Office) were top executives of Arthur Andersen.
[9]

Andersen Consulting and Accenture[edit]
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
Socit Cooprative. 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. The consultants, however, 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 (held
in escrowpending the ruling) 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.
[10]
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 (either through negotiation or via the arbitrator
decision) for the consulting practice to split off, hence his quick resignation once the decision was
announced.
[11]

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 (Arthur
Andersen Business Consulting) 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 (especially in Europe), Hitachi Consulting, PwC Consulting, which was later
acquired by IBM, and KPMG Consulting, which later changed its name to BearingPoint.
Enron scandal[edit]
Main article: 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
(appointed by Enron's board to look into the firm's accounting in October 2001) 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 (or the Audit and Compliance Committee) concerns about Enron's
internal contracts over the related-party transactions".
[12]

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 (Andersen Legal Dept.) andDavid 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. 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, 2002effectively 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 (the record is now held by Lehman Brothers and Washington Mutual) 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.
[13]
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[edit]
Since the ruling vacated Andersen's felony conviction, it theoretically left Andersen free to resume
operations. The damage to the Andersen name was so severe, however, 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[edit]
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[edit]
Accenture
Accounting scandals
Conspiracy of Fools
Corporate abuse
David J. Lesar
Timeline of the Enron scandal
References[edit]
1. Jump up^ Ken Brown and Ianthe Jeanne Dugan (June 7,
2002). "Arthur Andersen's Fall From Grace Is a Sad Tale of Greed
and Miscues".Wall Street Journal.
2. Jump up^ Ameet Sachdev (22 May 2003). "Conference center
last resort for Andersen". Chicago Tribune. Archived from the
original on 8 June 2010. Retrieved 2010-06-16.
3. Jump up^ Moore, Mary Virginia; Crampton, John (2000). "Arthur
Andersen: Challenging the Status Quo" (.PDF). The Journal of
Business Leadership (American National Business Hall of
Fame) 11 (3): 7189. Retrieved 2008-05-05.
4. Jump up^ Squires, Susan (2003). Inside Arthur Andersen: Shifting
Values, Unexpected Consequences. FT Press.
p. 28.ISBN 9780131408968. Retrieved July 8, 2014.
5. Jump up^ Arthur Anderson: Challenging the Status Quo (Moore,
Mary Virginia and John Crampton)
6. Jump up^ Sara Webb (August 20, 2001). "APP and Arthur
Andersen Face Class-Action Lawsuits". Wall Street Journal.
7. Jump up^ Terry Greene Sterling (October 1, 2006). "Executives
Sentenced in Church Fraud". The Washington Post.
8. Jump up^ Dan Ackman (June 27, 2002). "WorldCom: Too Easy,
Too Late". Forbes.
9. Jump up^ gao.gov
10. Jump up^ Mitchell Martin (8 August 2000). "Arbitrator's Ruling
Goes Against Accounting Arm: Consultants Win Battle Of
Andersen".International Herald Tribune. Archived from the
original on 2008-03-08. Retrieved 2008-05-05.
11. Jump up^ Philip Aldrick (August 8, 2000). "Andersen chief quits as
$14bn claim fails". The Daily Telegraph.
12. Jump up^ Andrew Cornford: Internationally Agreed Principles For
Corporate Governance And The Enron Case, United Nations
Conference on Trade and Development, G-24 Discussion Paper
Series No. 30, New York, June 2004, p.30, unctad.org
13. Jump up^ Arthur Andersen LLP v. United States, 544 U.S.
696 (2005).
External links[edit]
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 (Salon.com)
The Legacy of Arthur Andersen (Book)
Inside Arthur Andersen: Shifting Values, Unexpected
Consequences (Book)
Categories:
Accounting scandals
Companies established in 1913
Corporate crime
Defunct financial services companies of the United States
Enron
Defunct companies based in Chicago, Illinois
Defunct accounting firms of the United States
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