Arthur Andersen
Arthur Andersen LLP, based in
Chicago, Illinois, was once one of the
Big Five accounting firms, performing
auditing,
tax, and
consulting services for large
corporations. In 2002 the firm voluntarily surrendered its licenses to practice as
Certified Public Accountants in the
U.S. pending the result of prosecution by the U.S.
Department of Justice over the firm's handling of the
auditing of
Enron, the energy corporation. One of the few revenue-generating assets that the Andersen firm still has is
The Q Center, a conference and training facility outside of Chicago.
Founding
The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co. The firm changed its name to Arthur Andersen & Co. in 1918.
Arthur Andersen's first client was the
Schlitz beer company of
Milwaukee.
Arthur Andersen, the Founder
The son of a
Norwegian immigrant, Arthur Andersen was left on his own at the age of 16 after the death of his parents. He worked during the day as a mailboy and attended school at night.
Eventually he was hired as the assistant to the
controller of Allis-Chalmers in Chicago where he became intrigued with the work of independent public accountants. He received a degree as a
certified public accountant at the
University of Illinois in 1908; at age 23 he was the youngest CPA in Illinois. In 1917, after attending courses at night while working full time, he graduated from
Northwestern University with a bachelor's degree in business.
He worked for an accounting firm in Chicago and as a
controller for the
Schlitz Brewing Co. in Milwaukee. In 1913 at the age of 28, he entered into business for himself under the firm name of Arthur Andersen & Co. In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office. From 1912-22, he was a professor of accounting at
Northwestern University where he was the first to design courses that forced accounting students to deal with practical operating problems of business organizations.
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
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.
Leonard Spacek, who succeeded Andersen at the founder's death, continued this emphasis on honesty. For many years, Andersen's motto was "Think straight, talk straight."
By the 1980s, however, standards throughout the industry fell as accountants became unwilling to upset their clients. Andersen was no exception. Arthur Andersen has been alleged to have been involved in the fraudulent accounting and auditing of
Sunbeam Products,
Waste Management, Inc.,
Asia Pulp and Paper, and the
Baptist Foundation of Arizona, as well as the famous
Enron case, among others.
Recent Company History
The consulting wing of the company 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 factions.
In 1989, Arthur Andersen and Andersen Consulting became separate units of
Andersen Worldwide. 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. However, the consultants continued to resent transfer payments they were required to make to Arthur Andersen. In 2000 an international arbitrator granted Andersen Consulting its independence.
As a result of that split, Andersen Consulting changed its name to
Accenture on
New Year's Day 2001. Accenture agreed to pay $1.2 billion in past payments to the accounting firm. This payment was widely mis-reported as an "award" implying that Arthur Andersen had "won" the decision. In reality, this was simply the regular annual payments that Andersen Consulting was making to Arthur Andersen each year held in escrow until the decision was announced.
Perhaps most telling about who "won" the decision was that 4 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 total and complete victory for Andersen Consulting. 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 $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.
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, and executives on the Andersen Consulting side maintained breach of contract when Arthur Andersen created a second consulting group, AABC (Arthur Andersen Business Consulting) which began to compete directly with Andersen Consulting in the marketplace. Many of the AABC firms were bought out by other consulting companies in 2002, most notably,
Hitachi Consulting and KPMG Consulting, which later changed its name to
BearingPoint.
On
June 15,
2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of
Enron.
Nancy Temple (Andersen Legal Dept.) and
David Duncan (Managing Director for the Andersen
Houston Office) 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 does not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on
August 31.
On
May 31,
2005, the
Supreme Court of the United States unanimously overturned Andersen's conviction due to flaws in the jury instructions. In the court's view, the instructions allowed the jury to convict Andersen without proving 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 was also highly skeptical of the government's definition of "corrupt persuasion" â€" persuasion with an improper purpose even without knowing an act is unlawful.
Despite this ruling, it is highly unlikely Andersen will ever return as a viable business. The firm lost nearly all of its clients when it was indicted, and there are over 100 civil suits pending against the firm related to its audits of Enron and other companies. It began winding down its American operations after the indictment. 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.
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Accenture*
Accounting scandals*
Conspiracy of Fools*
Corporate abuse*
List of notable business failures*
Timeline of the Enron scandal*
Arthur Andersen LLP v. United States*
U.S. official site*
Indictment of U.S. v. Arthur Andersen, LLP.*
Copy of Andersen attorney Nancy Temple's e-mail*
Supreme Court Overturns Conviction in Arthur Andersen LLP, Petitioner v United StatesNews
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Arthur Andersen newsArticles
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Arthur Andersen and the Baptists (Salon.com)
