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Arthur Andersen Consulting

A Reputation Gone Wrong

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

Delany & Co which became Arthur Andersen & Co. eventually being hired as the assistant to the controller of Allis-Chalmers in Chicago. at age 23. Arthur Andersen and Clarence Delany. History . The Founder • Born 30 May 1885 in Plano. Andersen began working as a mail boy by day and attended school at night. bought out The Audit Company of California to form Andersen. both from Price Waterhouse. Illinois and orphaned at the age of 16. Andersen (1885-1947) .In 1913. he became the youngest CPA in Illinois.Arthur E. • In 1908. in 1918.

civic and charitable organizations. the Milwaukee office was opened as the firm's second office. He was generous in his commitment to aiding educational. he graduated from the Kellogg School at Northwestern University with a bachelor's degree in business. • In 1917. due to his many contacts there. • He created the profession's first centralized training program and believed in training during normal working hours. • Andersen had an unwavering faith in education as the basis upon which the new profession of accounting should be developed. after attending courses at night while working full-time.• Arthur Andersen's first client was the Joseph Schlitz Brewing Company of Milwaukee. • In 1927. . • In 1915. 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.

he argued that accountants' responsibility was to investors. who succeeded Andersen at the founder's death. who headed the firm until his death in 1947. it is reputed that Andersen was approached by an executive from a local rail utility to sign off on accounts containing flawed accounting. • Andersen refused in no uncertain terms. replying that there was "not enough money in the city of Chicago" to make him do it. talk straight. For many years. not their clients' management. • A stickler for honesty." Corporate Values . continued this emphasis on honesty. was a zealous supporter of high standards in the accounting industry. • During the early years. or else face the loss of a major client. Andersen's motto was "Think straight.• Andersen. • Leonard Spacek.

• • • Arthur Andersen also led the way in a number of areas of accounting standards. with the emergence of stock options as a form of compensation. Arthur Andersen dissociated itself from a number of clients in the 1970s. Being among the first to identify a possible sub-prime bust. Arthur Andersen was no exception. 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. By the 1980s. Later. 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. Reputation . thus impacting on net profit just as cash compensation would.

Predictably. while audit partners were continually encouraged to seek out opportunities for consulting fees from existing audit clients. Arthur Andersen struggled to balance the need to maintain its faithfulness to accounting standards with its clients' desire to maximize profits. By the late-1990s. particularly in the era of quarterly earnings reports. Arthur Andersen had succeeded in tripling the per-share revenues of its partners.• • • The firm rapidly expanded its consultancy practice to the point where the bulk of its revenues were derived from such engagements. A Record of Growth .

Revenue per year in million US dollars Source : Andersen corporate press releases A Record of Growth .

Inc. 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 . as well as the infamous Enron case. Andersen's performance and alleged complicity as an auditor came under intense scrutiny.• • • • Arthur Andersen has been alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products. WorldCom. Asia Pulp & Paper. and the Baptist Foundation of Arizona. Waste Management. Energy Giant Enron 2001 scandal ($100bn revenue) was found guilty of institutional and systematic accounting fraud. 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. among others.

• • • On June 15. the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. 2002. Nancy Temple (Andersen Legal Dept. Tarnished Reputation . resulting in the Enron scandal.) 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. Although later reversed in a pyrrhic Supreme Court victory. Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron.

Deloitte & Touche. 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. The firm sold most of its American operations to KPMG.• • • Since the U. Most of them were taken over by the local firms of the other major international accounting firms. Tarnished Reputation . and many of its accountants joined other firms.S. Securities and Exchange Commission cannot accept audits from convicted felons. The damage to Andersen's reputation also destroyed the viability of the firm's international practices. Ernst & Young and Grant Thornton LLP.

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. Tarnished Reputation . United States.• • • On May 31. 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. in the case Arthur Andersen LLP v. 2005. written by Chief Justice William Rehnquist. 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. the instructions were far too vague to allow a jury to find obstruction of justice had really occurred.

Corporate Demise . "Enron-ed" was coined by John M. the former Arthur Andersen Director in the Seattle Office. the damage to the Andersen name was so severe that it has not returned as a viable business even on a limited scale. A new verb. Cunningham. However.• • • Since the ruling vacated Andersen's felony conviction. its reputation was so badly tarnished that no company wanted Andersen's name on an audit. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies. it theoretically left Andersen free to resume operations. In addition. it had many of its state licenses revoked. Even before voluntarily surrendering its right to practice before the SEC. to describe the demise of Arthur Andersen.

• From a high of 28. the firm is now down to around 200. • Corporate Demise . Ownership of the partnership has been ceded to four limited liability corporations named Omega Management I through IV. Arthur Andersen LLP still operates the Q Center conference center in St. As of 2011.000 employees in the US and 85. Illinois. Arthur Andersen LLP has not been formally dissolved nor has it declared bankruptcy.000 worldwide. nowadays mostly used for Accenture trainings. based primarily in Chicago. Charles. Most of their attention is on handling the lawsuits and presiding over the orderly dissolution of the company. As of 2011.

Customer Satisfaction What is the Ethical Dilemma? .Corporate Values .vs .

Questions for Discussion . We are a custodian of vital information and thus it is wrongful to destroy vital records along the principle of corporate stewardship. we should not destroy evidence that might be against yourself or anyone. • Would you ever destroy electronic or paper records to eliminate evidence that might be used against you? Why or why not? No.1.

it should only be the individuals that should be punished for their deliberate and unlawful acts. However. Arthur Levitt. Questions for Discussion . the Group believes that not all the employees nor the Board of Arthur Andersen were aware of the cover-up. Assistant Attorney General. What is the logic of indicting an entire company for ethical failures rather than indicting only the responsible individuals? not? • • • Michael Chertof. former SEC Chairman also believes that Arthur Andersen had similar earlier violation at the Waste Management Corporation.2. Thus. 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.

Do you think the Appellate Court’s reversal of the District Court’s decision was appropriate? Explain your answer. Arthur Andersen’s appealed with the Supreme Court. • • • The Appellate Court upheld the District Court’s decision to indict the whole firm instead of the persons responsible for obstruction of justice.000 innocent employees who lost their jobs. En banc the Supreme Court on May 31. Questions for Discussion . 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. 2005 unanimously (9-0) reversed the District and the Appellate Courts’ decisions and cleared the name of the 28.3.

talk straight.4. Questions for Discussion . the succeeding CEO continued to promote Andersen's motto: "Think straight. Even after the death of Arthur Andersen in 1947. Do you think the destruction of Andersen as a company was justified? Why or why not? • • • The Group brought to everyone’s attention the history of Arthur Andersen as a firm and how it’s founder had set the values of the company. and not their clients' management. The company was built on a reputation of honesty and accountability and that the accountants' responsibility was to its clients’ investors.“ The Group believes that the guilty parties committed fraud and should be punished accordingly.