In 2002, just nine months after the scandal broke, the firm was found guilty of crimes in the auditing of Enron. By that time, Arthur Andersen had lost most of its business and two-thirds of its 28,000 employees, and was facing multi-million dollar lawsuits. On August 31, 2002, the company surrendered its licenses to practice as certified public accountants in the United States, effectively putting the company out of business. In 2005, the United States Supreme Court unanimously reversed Arthur Andersen's conviction due to errors in the trial judge's instructions to the jury that convicted the firm.[1] Despite this, the damage to Andersen's reputation was so great that it has never returned as a viable auditor even on a limited scale.
As of 2022[update], some parts of the company continue to exist: the company's consulting services have been split out and continue today as Accenture and Protiviti, while some of the former partners formed a new firm in 2002 focused on tax services, now called Andersen Tax.
In 1913, Andersen and Clarence DeLany founded an accounting firm as Andersen, DeLany & Co.[2] The firm changed its name to Arthur Andersen & Co. in 1918. Arthur Andersen's first client was the Joseph Schlitz Brewing Company of Milwaukee.[3] In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office.
Andersen believed education was 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 CPA examiners of Illinois.
Reputation
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. This gave rise to the uniform look of all the so-called "Arthur Androids", as employees referred to themselves, the intent being to provide the same service the same way to all customers in all locations. For many years, Andersen's motto was "Think straight, talk straight"—an axiom passed on from his mother.[4] 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. The railroad fired Andersen, only to go bankrupt a few months later.
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 Financial Accounting Standards Board that employee stock options should be treated as an expense, thus impacting 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 was 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.
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. The firm has been alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products, Waste Management, Asia Pulp & Paper,[5] the Baptist Foundation of Arizona, WorldCom, as well as Enron, among others.[6][7]
Andersen Consulting and Accenture
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 $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 January 1, 2001, and Arthur Andersen, having the right to the Andersen Consulting name, rebranded itself as "Andersen".
Four hours after the arbitrator made his ruling, Arthur Andersen CEO Jim Wadia resigned. Industry analysts and business school professors alike viewed the event as a complete victory for Andersen Consulting.[8] 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 did not get at least an incremental $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.[9]
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 it was a 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. In addition, several former Andersen partners formed new companies, notably Huron Consulting Group, West Monroe Partners, and Protiviti.
Following the 2001 scandal in which energy giant Enron was found to have fraudulently reported $100 billion in revenue through 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".[10]
On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the Supreme Courtreversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple (in the firm's legal department) and David Duncan (lead partner for the Enron account) were cited as the responsible managers in the scandal because they ordered subordinates to shred relevant documents.
Because the U.S. Securities and Exchange Commission will not 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 firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms.
On May 31, 2005, in Arthur Andersen LLP v. United States, the Supreme Court unanimously reversed Andersen's conviction because of errors in the trial judge's jury instructions.[1] The Supreme Court held that the instructions were too vague to allow a jury to find that obstruction of justice had 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, also expressed skepticism of the government's concept of "corrupt persuasion"—persuading someone to engage in an act with an improper purpose without knowing that the act is unlawful.
Demise
The 2005 Supreme Court ruling theoretically left Andersen free to resume operations. However, CNN reported that by then, Andersen was "nearly defunct," with about 200 employees remaining from a high of 28,000 in 2002.[11] Following the ruling, William Mateja, a former counsel to the US Attorney General who had supervised the Andersen appeal, told NPR that he did not believe the government would seek a retrial because, "there's nothing left of Arthur Andersen, and to spend the taxpayers' money on another prosecution would be just—defy common sense." Echoing this, United States Chamber of Commerce vice president Stephen Bokat pronounced Andersen "dead," and said that "there is no putting the company back together."[12] In his post-mortem of the Enron scandal, Conspiracy of Fools, journalist Kurt Eichenwald argued that even if Andersen had escaped the Enron scandal, it would have likely been brought down by the massive accounting fraud at WorldCom. The WorldCom fraud came to light just days after Andersen was convicted of wrongdoing at Enron.[13]
Indeed, Andersen has never returned as a viable business on even a limited scale. Ownership of the partnership has been ceded to four limited liability companies named Omega Management I through IV.
Arthur Andersen LLP operated the Q Center conference center in St. Charles, Illinois, until day-to-day management was turned over to Dolce Hotels and Resorts in 2014, but Andersen retains ownership.[14] In 2018, that relationship ended, and day-to-day management returned to the Q Center. The Q Center is currently used for training, primarily for internal Accenture personnel, and other large-scale companies.[15]
In 2014, Wealth Tax and Advisory Services (WTAS), a tax and consulting firm started by several former Andersen partners, changed its name to Andersen Tax after acquiring the rights to the Andersen name. It rebranded its year-old international arm, WTAS Global, as Andersen Global.[16] As of 2018, Andersen Global took over the andersen.com domain name from the Andersen accounting firm.
Migration of partners and local offices to new firms
Many partners formed new companies or were acquired by other consulting firms. Examples include:
60% of the total Andersen practices globally merged into Ernst & Young, with some going to Deloitte (notably UK, Spain and Portugal)[citation needed]
Accuracy which was founded in 2004 by a team of seven former partners and is headquartered in Paris
Andersen Tax which acquired the rights to the company name and changed their name from WTAS in 2014[17]
BearingPoint, formerly the US consulting unit spun off by KPMG, which purchased Andersen business consulting practices in France and Spain
West Monroe Partners which was founded in 2002 by four former consultants, based in Chicago
KPMG which absorbed the computer forensics division based in Cypress, California, and the Boise, Kansas City, Philadelphia, Portland, Salt Lake City and Seattle offices, among others
Navigant Consulting which absorbed eleven partners in Chicago and Washington D.C.
Protiviti was formed in 2002 by hiring more than 700 professionals who had been affiliated with the internal audit, business and technology risk consulting practice of Arthur Andersen
The Big Four are the four largest professional services networks in the world, the global accounting networks Deloitte, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers (PwC). The four are often grouped because they are comparable in size relative to the rest of the market, both in terms of revenue and workforce; they are considered equal in their ability to provide a wide scope of professional services to their clients; and, among those looking to start a career in professional services, particularly accounting, they are considered equally attractive networks to work in, because of the frequency with which these firms engage with Fortune 500 companies.
Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and PricewaterhouseCoopers (PwC), it is considered one of the Big Four accounting firms. It primarily provides assurance, tax, consulting and advisory services to its clients. Like many of the larger accounting firms in recent years, EY has expanded into markets adjacent to accounting, including strategy, operations, HR, technology, and financial services consulting.
KPMG International Limited is a multinational professional services network, and one of the Big Four accounting organizations.
PricewaterhouseCoopers is an international professional services brand of firms, operating as partnerships under the PwC brand. It is the second-largest professional services network in the world and is considered one of the Big Four accounting firms, along with Deloitte, EY and KPMG.
Management consulting is the practice of providing consulting services to organizations to improve their performance or in any way to assist in achieving organizational objectives. Organizations may draw upon the services of management consultants for a number of reasons, including gaining external advice and accessing consultants' specialized expertise regarding concerns that call for additional oversight.
Protiviti Inc. (Protiviti) is a global consulting firm headquartered in Menlo Park and San Ramon, California, that provides consulting in internal audit, risk and compliance, technology, business processes, data analytics and finance. It is a subsidiary under Robert Half. Protiviti and its independently and locally owned Member Firms serve clients through a network of more than 85 locations in over 27 countries.
Deloitte Touche Tohmatsu Limited, commonly referred to as Deloitte, is an international professional services network headquartered in London, England. Deloitte is the largest professional services network by revenue and number of professionals in the world and is considered one of the Big Four accounting firms along with EY, KPMG and PricewaterhouseCoopers (PWC).
Andersen Worldwide Société Coopérative (AWSC) was a Swiss-based entity which managed the global offices of accounting firm Arthur Andersen. It was also the parent corporation of Andersen Consulting before its split in 2000.
Arthur Andersen LLP v. United States, 544 U.S. 696 (2005), was a United States Supreme Court case in which the Court unanimously overturned accounting firm Arthur Andersen's conviction of obstruction of justice in the fraudulent activities and subsequent collapse of Enron. The Court found that the jury instructions did not properly portray the law Arthur Andersen was charged with breaking. Even after the conviction was overturned, the damage to Arthur Andersen's reputation was such that it did not return as a viable business.
Nancy Anne Temple is an attorney specializing in accounting liability. She was the in-house attorney for Arthur Andersen, who advised Michael Odom and David B. Duncan about Arthur Andersen policies regarding retention of documents from client engagements. Duncan oversaw the shredding of Arthur Andersen documents concerning their work for client Enron, between October 22 and November 9, 2001. A memo from Nancy Temple played a key role in the conviction of Arthur Andersen on charges of obstruction of justice. That conviction was later overturned.
Information Technology Auditing began as Electronic Data Process (EDP) Auditing and developed largely as a result of the rise in technology in accounting systems, the need for IT control, and the impact of computers on the ability to perform attestation services. The last few years have been an exciting time in the world of IT auditing as a result of the accounting scandals and increased regulation. IT auditing has had a relatively short yet rich history when compared to auditing as a whole and remains an ever-changing field.
Joseph (Joe) F. Berardino is an American businessman, Certified Public Accountant, and managing director at Alvarez and Marsal. Beradino was formerly managing partner and CEO of Arthur Andersen and chairman and CEO of Profectus Bioscience.
SMART Business Advisory and Consulting, LLC was a consulting company that served clients throughout the U.S. and globally. SMART was headquartered in Devon, Pennsylvania with locations in the metropolitan areas of Atlanta, Chicago, New York City, Philadelphia, and internationally in London. The merged entity of LECG/SMART was liquidated in March 2011 as the company was unable to service its debt obligations going forward.
SyCip Gorres Velayo & Company is a Philippine multidisciplinary professional services firm.
John Patrick Connolly is an English businessman. He is the chairman of Eisner Advisory Group LLC, Interpath Advisory, Stonehage Fleming and Metric Capital Partners. He was chairman of two FTSE-100 companies, G4S and Amec Foster Wheeler. Prior to that he was senior partner and chief executive of Deloitte in the UK, and global managing partner and global chairman of Deloitte until his retirement from the firm in June 2011.
An accounting network or accounting association is a professional services network whose principal purpose is to provide members resources to assist the clients around the world and hence reduce the uncertainty by bringing together a greater number of resources to work on a problem. The networks and associations operate independently of the independent members. The largest accounting networks are known as the Big Four.
Multidisciplinary professional services networks are organizations formed by law, accounting and other professional services firms to offer clients new multidisciplinary approaches solving increasingly complex issues. They are a type of professional services network which operates to provide services to their members. They operate in the same way as accounting firm networks and associations and law firm networks. They do not practice a profession such as law or accounting but provide services to members so they can serve clients needs. Their aim is to provide members involved in doing business internationally with access to experienced, tried and tested, reliable, and responsive professional advisers who know their local jurisdiction intimately as well as the intricacies of cross border business.
Robert Half, formally referred to as Robert Half International Inc., is a global human resource consulting firm based in Menlo Park and San Ramon, California, founded in 1948. It is a member of the S&P 500, and is credited as being the world's first and largest accounting and finance staffing firm, with over 345 locations worldwide.
BDO is an international network of public accounting, tax, consulting and business advisory firms that provide professional services under the name BDO. It is the fifth-largest accounting network in the world. Global fee income of the member firms in the network for the year ended 30 September 2021, including the members of their exclusive alliances, totaled US$11.8 billion.
1 2 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. Archived from the original(PDF) on August 13, 2010. Retrieved May 5, 2008.
↑ "True Partners Consulting sues Andersen Tax for poaching". Chicago Business. February 18, 2015. Retrieved May 3, 2021. A tax consultancy founded by Arthur Andersen alumni is suing another, larger offshoot of the storied Chicago accounting firm, accusing it of poaching a key partner and several of his clients.
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