Arthur Andersen

 ( Accounting Scandals ) 

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. 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.

Arthur Andersen & Co. 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.

Arthur Andersen & Co. 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, the Baptist Foundation of Arizona, WorldCom, as well as Enron, among others.

In 1989, Arthur Andersen and Andersen Consulting became separate units of Andersen Worldwide Société Coopérative. 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 to "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. 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.

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.

The Powers Committee, appointed by Enron's board to look into the firm's accounting in October 2001 and named after and led by Enron's newest board member William Powers Jr., holder of the Hines H. Baker and Thelma Kelley Baker Chair at the University of Texas School of Law, came to the following assessment on Andersen: "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".

On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple, a lawyer in the firm's legal department, and David Duncan, Andersen's lead partner for the Enron account, were cited as the responsible managers in the scandal because they ordered subordinates to shred relevant physical documents and delete relevant Emails.

Because the U.S. Securities and Exchange Commission does 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 the majority of its American operations to other accounting firms such as KPMG, Ernst & Young, Deloitte & Touche and Grant Thornton International. At this time, Arthur Andersen had lost most of its business and two-thirds of its 28,000 employees.

The indictment also put a spotlight on the firm's faulty audits of other companies, most notably Waste Management, Sunbeam Products, the Baptist Foundation of Arizona and WorldCom.

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. 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.