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.
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 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.[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 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[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 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.[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 the Kellogg 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 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[edit]

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,[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 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. 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 escrow pending 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.) 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. 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 (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:

See also[edit]

References[edit]

  1. ^ 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. ^ 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. ^ 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): 71–89. Retrieved 2008-05-05. 
  4. ^ Squires, Susan (2003). Inside Arthur Andersen: Shifting Values, Unexpected Consequences. FT Press. p. 28. ISBN 9780131408968. Retrieved July 8, 2014. 
  5. ^ Arthur Anderson: Challenging the Status Quo (Moore, Mary Virginia and John Crampton)
  6. ^ Sara Webb (August 20, 2001). "APP and Arthur Andersen Face Class-Action Lawsuits". Wall Street Journal. 
  7. ^ Terry Greene Sterling (October 1, 2006). "Executives Sentenced in Church Fraud". The Washington Post. 
  8. ^ Dan Ackman (June 27, 2002). "WorldCom: Too Easy, Too Late". Forbes. 
  9. ^ gao.gov
  10. ^ 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. ^ Philip Aldrick (August 8, 2000). "Andersen chief quits as $14bn claim fails". The Daily Telegraph. 
  12. ^ 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. ^ Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).

External links[edit]