THE COLLAPSE OF ARTHUR ANDERSEN

Dupan, Leah D.

Habito, Angela Faye P.

Macalindong, Chris John M.

Magno, Aida Mae P.

Palentinos, Ma. Elishah V.

SLSU-CBA 2017
Introduction

Arthur Andersen LLP is a well-known auditing firm for it had long set the industry standard for
professionalism in accounting and auditing. Andersen became an example of strong corporate culture,
committed to public service and independent integrity. The firm stood in unambiguous contrast to the
philosophy of combining auditing and consulting services, yet later adopted. Large clients like General
Electric and Schlitz Brewing made Andersen more profitable in the area of consulting. With this reason,
they prioritized their growth and emphasize recruiting that might expense their independence with regards
to their auditing services. Certain events made Securities of Exchange Commission (SEC) alarmed and
publicly voiced their concerns and recommended new rules that would restrict the combination of auditing
and non-auditing services which gave Andersen the idea of having auditing and consulting services
separately.

Meanwhile, during Joseph Berardinos leadership, firm had paid several companies for their
accounting irregularities. The company paid $110 million for Sunbeam shareholders and later paid $100
million to settle other misdeeds. The famous Enrons overstatement of earnings and many other mistakes
by the Andersen made the firm collapse. Enron was one of the biggest client of Andersen. The firm
completed the better reports by sending untrained auditors to the clients side and unethical methods. The
relationship between the companies was seen as cozy one which made it easy to maintain the improper
accounting parties by both parties.

Parties Involved

Arthur Andersen LLP

Joseph Berardino

Nancy Temple

Michael Odom

Enron Corporation
Kopper (former executive)
Securities and Exchange Commission

Facts

Arthur Andersen LLP, defendant, provided Enron Corporation with accounting services. In
October 2001, the Securities and Exchange Commission announced that it was launching an investigation
after having the article from The Wall Street Journal saying irregularities at Enron. November 8, 2001,
Enron was forced to restate five years worth of financial statements that Andersen had signed off on,
accounting for $586 million in losses. Within a month, Enron had filed for bankruptcy. The U.S. Justice
Department began a criminal investigation into Andersen in January 2002, prompting both Andersens
clients and its employees to jump ship, The defendant formed a crisis-response team, which included in-
house counsel Nancy Temple. A month later, Michael Odom, a partner in Andersen, held a general meeting
where he encouraged everyone to comply with the firms document retention policy. In the meeting, Odom
insisted that they are to have their own policy that will interest nobody and is permanent. One week later,
the SEC notified Enron that it had opened an investigation and requested certain information and
documents. On the same day, Temple sent an email to defendants team reminding them to follow the
document policy and attached a copy of it. There were several more meetings and all were followed by
extensive destruction of paper and electronics related to Enron. On December 2, 2001, Enron Corporation
filed for Chapter 11 bankruptcy, which is the largest bankruptcy petition in US history. It had cleared out
shareholder investment that had been valued $60 billion. As a result, Worldcom, Qwest Communications,
Global Crossing, Merck Baptist Foundation of Arizona announced themselves insolvent.

Solution

The auditing firm admitted to destroying a number of documents concerning its auditing of Enron,
which led to an indictment for obstruction of justice on March 14, 2002. CEO Bernardino stepped down by
the end of the month.

On 2002, Arthur Andersen was found guilty of obstruction-of-justice and former Enron executive
Kopper pleads guilty to conspiracy to commit wire fraud and money laundering conspiracy. As Andersens
obstruction-of-justice trial progressed, Nancy Temple, Andersens Chicago-based lawyer, demanded Fifth
Amendment protection and thus did not have to testify. Many others named her as the corrupt persuader
who led others astray. She allegedly instructed David Duncan, Andersens supervisor of the Enron account,
to remove her name from memos that could have incriminated her. On June 15, 2002, the first accounting
firm ever to be convicted of a felony. The company agreed to stop auditing public companies by August
31, 2002, essentially shutting down the business.