Enron And Arthur Andersen Case Study

The U.S. Justice Department today announced the indictment of embattled accounting firm Arthur Andersen on one count of obstruction of justice relating to the collapse of former energy giant Enron Corp.

A federal grand jury actually filed the indictment on March 7, but it was unsealed today.

"The firm sought to undermine our justice system by destroying evidence," said Deputy Attorney General Larry Thompson at an afternoon news conference, saying the firm has intentionally disposed of "tons" of evidence after a government inquiry began last October.

He added: "At the time, Andersen knew full well that these documents were relevant."

Andersen, however, has made it clear it will not plead guilty to the charge, having already rejected a plea bargain deal with the government.

The company released a vigorous response to the announcement this afternoon, calling the Justice Department's actions "without precedent and an extraordinary abuse of prosecutorial discretion," and "a gross abuse of government power."

Charge Based on Shredding

The obstruction charge is based on claims that Andersen employees shredded important documents about Enron's finances, even though they knew the Securities and Exchange Commission was formally looking into Enron. The Justice Department also alleges Andersen employees deleted relevant computer files.

Andersen's basic line of defense is that the shredding was conducted in the company's Houston office under the supervision of David Duncan, the firm's lead partner in charge of Enron's audits, and was not ordered by executives at Andersen headquarters in Chicago.

An Andersen internal report, written by two law firms and obtained today by ABCNEWS, emphasizes this point.

At the time of the shredding in October, says the report, "Duncan and the other partners on the Enron engagement knew that the SEC had made an informal request to Enron for documents and information relating to partnerships involving Enron's former CFO, Andrew Fastow, and that private civil lawsuits had also been filed."

But the indictment charges the document destruction was widespread and involved employees at multiple locations, including Andersen's London office.

"The obstruction effort was not just confined to a few isolated individuals or documents," said Thompson. "This was a substantial undertaking over an extended period of time with a very wide scope."

Duncan's lawyers released a statement this afternoon saying that he "continues to cooperate with all of the ongoing investigations" and would not comment on Andersen's indictment.

On Jan. 10, Andersen acknowledged it had destroyed thousands of Enron-related documents and e-mails last fall, as investigations into the events that ultimately led to the company's bankruptcy were under way. Enron, after filing the largest-ever U.S. bankruptcy on Dec. 2, fired Andersen on Jan. 17.

The maximum potential punishment for the charge is a five-year probation term for Arthur Andersen and a $500,000 fine.

Multiple Reasons for Indictment

In another letter released Wednesday night by Andersen, the firm defends itself and strongly criticizes the Justice Department's line of inquiry into the Enron matter.

"The Department has refused to allow the firm to tell its story to the grand jury, in violation of both Department policy and the basic precepts of fundamental fairness," reads the letter from the Washington, D.C., law firm of Mayer, Brown, Rowe & Maw. "The Department proposes an action that could destroy the firm, taking the livelihoods of thousands of innocent Andersen employees and retirees."

However, sources close to the investigation have told ABCNEWS that Justice Department officials concluded that the entire company should be criminally charged for a number of reasons, including:

That a senior management official, Duncan, allegedly oversaw a large portion of the document destruction.

The sheer volume of the documents that were destroyed, estimated at 32 trunks worth of material by one Andersen employee. In addition, the destruction of the documents would have helped to mask Enron's financial difficulties and the financial advice given by Andersen.

Those actions could have conceivably helped Enron remain viable as a paying customer to Andersen.

Guilty Plea Could Wreck Company

The 89-year-old accounting firm with 85,000 employees faces a variety of threats to its survival. Experts say a guilty plea by Andersen in the case could bar the company from carrying out audits for companies filing with the SEC.

The New York Times reported today that the SEC has secretly begun talks with the rest of the "Big Five" accounting firms on how to handle a possible collapse of Andersen. On Wednesday, two firms — Deloitte Touche Tohmatsu and Ernst & Young — announced that they were not interested in buying Andersen.

With around 2,300 publicly traded companies in the United States using Arthur Andersen as their accountant — about one-fifth of the total — the collapse of Andersen could create large-scale problems in the U.S. capital markets.

"If all of these companies are combing the streets for another accountant, there would be chaos," said Arthur Bowman, editor of accounting industry newsletter Bowman's Accounting Report.

This evening, the SEC announced temporary measures concerning Andersen, including a potential 60-day extension for clients of the firm and guidelines for Andersen's ongoing audits.

"So long as Andersen continues to be in a position to provide those assurances, the Commission will continue to accept financial statements audited by Andersen in filings," stated an SEC press release.

Both the Justice Department and SEC have been investigating the Enron collapse since last fall, when Enron announced it was worth $1.2 billion less than it had previously acknowledged in its financial reports. As Enron's auditor, Andersen was responsible for approving Enron's financial statements.

ABCNEWS' Pierre Thomas, Linda Douglass and Betsy Stark contributed to this report.

This article is about the company. For its founder, see Arthur E. Andersen. For the U.S. Supreme Court case, see Arthur Andersen LLP v. United States. For the songwriter and composer, see Arthur Olaf Andersen.

Arthur Andersen LLP, based in Chicago, is an American holding company. Formerly one of the "Big Five" accounting firms (along with PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG), the firm had provided auditing, tax, and consulting services to large corporations. By 2001 it had become one of the world's largest multinational companies.

In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's auditing of Enron, an energy corporation based in Texas, which filed for bankruptcy in 2001.[1] In 2005, the Supreme Court of the United States unanimously reversed Arthur Andersen's conviction due to serious errors in the trial judge's instructions to the jury that convicted the firm.[2]

The former consultancy and outsourcing practice of the firm separated from the firm's accountancy practice in 1987, split from Andersen Worldwide in 2000, and renamed itself Accenture. It continues to operate.

History[edit]

Founding[edit]

Main article: Arthur E. Andersen

Born 30 May 1885 in Plano, Illinois, and orphaned at the age of 16, Arthur E. Andersen began working as a mail boy by day and attended school at night, eventually being hired as the assistant to the comptroller of Allis-Chalmers in Chicago. In 1908, after attending courses at night while working full-time, he graduated from the Kellogg School at Northwestern University with a bachelor's degree in business.[3] That same year, at age 23, he became the youngest CPA in Illinois.

The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co.[4] The firm changed its name to Arthur Andersen & Co. in 1918. Arthur Andersen's first client was the Joseph Schlitz Brewing Company of Milwaukee.[5] In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office.

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[edit]

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. 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. For many years, Andersen's motto was "Think straight, talk straight."

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 FASB that stock options should be included on expense reports, thus impacting on 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 were 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.

Predictably, 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. Arthur Andersen has been alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products, Waste Management, Inc, Asia Pulp & Paper,[6] the Baptist Foundation of Arizona, WorldCom, as well as the infamous Enron case, among others.[7][8]

Two of the last three Comptrollers General of the US General Accounting Office (now the Government Accountability Office) were top executives of Arthur Andersen.[9]

Andersen Consulting and Accenture[edit]

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 US$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 New Year's Day 2001 and Arthur Andersen meanwhile now 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 suddenly resigned. Industry analysts and business school professors alike viewed the event as a complete victory for Andersen Consulting.[10] 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 US$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.[11]

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 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.

Enron scandal[edit]

Main article: Enron scandal

Following the 2001 scandal in which energy giantEnron was found to have reported $100bn 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".[12]

On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron, resulting in the Enron scandal. 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 this 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.

The indictment also put a spotlight on the firm's faulty audits of other companies, most notably Waste Management, Sunbeam, the Baptist Foundation of Arizona and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the biggest bankruptcy in history (and has since been passed by the bankruptcies of Lehman Brothers and WaMu in the 2008 financial crisis) led to a domino effect of accounting and corporate scandals.

On May 31, 2005, in Arthur Andersen LLP v. United States, the Supreme Court of the United States unanimously reversed Andersen's conviction because of serious errors in the trial judge's jury instructions.[2] 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[edit]

Since the ruling vacated Andersen's felony conviction, it theoretically left Andersen free to resume operations. The damage to the Andersen name was so severe, however, that it has not returned as a viable business even on a limited scale. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies.[when?] Even before voluntarily surrendering its right to practice before the SEC, it had many of its state licences revoked. A new verb, "Enron-ed", was coined by John M. Cunningham, the former Arthur Andersen Director in the Seattle Office, to describe the demise of Arthur Andersen.

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.[citation needed]

As of 2011[update], Arthur Andersen LLP has not been formally dissolved nor has it declared bankruptcy. Ownership of the partnership has been ceded to four limited liability corporations named Omega Management I through IV. Arthur Andersen LLP operated the Q Center conference center in St. Charles, Illinois until it was sold to Dolce Hotels and Resorts in 2014.[13] The Q center is currently used for training, primarily for internal Accenture personnel, and other large scale companies.[14]

Migration of partners and local offices to new firms[edit]

Many partners formed new companies or were acquired by other consulting firms. Examples include:

  • Accuracy which was founded in 2004 by a team of seven former partners and is headquartered in Paris.
  • Andersen Tax LLC which acquired the rights and changed their name from WTAS in 2014.[15]
  • BearingPoint, formerly the US consulting unit spun off by KPMG, which purchased Andersen business consulting practices in France and Spain
  • Huron Consulting Group
  • West Monroe Partners which was founded in 2002 by four former consultants, and is based in Chicago.
  • KPMG which absorbed the Computer Forensics division based in Cypress, CA 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.
  • Perot Systems which absorbed six partners in the East
  • Protiviti hired approximately 800 former workers
  • SMART Business Advisory and Consulting which absorbed some of the Philadelphia office
  • jcba Limited which was founded by a partner from the aviation practice[16][17]
  • Grant Thornton International which absorbed the North Carolina, South Carolina, and Tulsa offices.
  • True Partners Consulting
  • Portions of Andersen Audit practice merged with Deloitte and Ernst & Young.

See also[edit]

References[edit]

External links[edit]

Revenue per year in million U.S. dollars.
Source: corporate press releases
  1. ^Brown, Ken; Dugan, Ianthe Jeanne (June 7, 2002). "Arthur Andersen's Fall from Grace Is a Sad Tale of Greed and Miscues". Wall Street Journal. 
  2. ^ abArthur Andersen LLP v. United States, 544 U.S. 696 (2005).
  3. ^Arthur Anderson: Challenging the Status Quo (Moore, Mary Virginia and John Crampton)
  4. ^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. Retrieved 2008-05-05. 
  5. ^Squires, Susan (2003). Inside Arthur Andersen: Shifting Values, Unexpected Consequences. FT Press. p. 28. ISBN 9780131408968. Retrieved July 8, 2014. 
  6. ^Sara Webb (August 20, 2001). "APP and Arthur Andersen Face Class-Action Lawsuits". Wall Street Journal. 
  7. ^Terry Greene Sterling (October 1, 2006). "Executives Sentenced in Church Fraud". The Washington Post. 
  8. ^Dan Ackman (June 27, 2002). "WorldCom: Too Easy, Too Late". Forbes. 
  9. ^"U.S. GAO – Video Gallery". Retrieved July 2, 2015. 
  10. ^Mitchell Martin (August 8, 2000). "Arbitrator's Ruling Goes Against Accounting Arm: Consultants Win Battle Of Andersen". International Herald Tribune. Archived from the original on March 8, 2008. Retrieved 2008-05-05. 
  11. ^Philip Aldrick (August 8, 2000). "Andersen chief quits as $14bn claim fails". The Daily Telegraph. 
  12. ^Cornford, Andrew (June 2004). "Internationally Agreed Principles for Corporate Governance and the Enron Case"(PDF). G-24 Discussion Paper Series No. 30. New York: United Nations Conference on Trade and Development. p. 30. Archived from the original(PDF) on October 18, 2010. 
  13. ^Menchaca, Charles (3 September 2014). "Dolce Hotels named manager of the Q Center in St. Charles". Kane County Chronicle. Retrieved 24 April 2017. 
  14. ^"Our History – Q Center – The Dolce Conference Collection". Q Center. Retrieved 24 April 2017. 
  15. ^Rapoport, Michael. "Revive Arthur Andersen Name". Wall Street Journal. ISSN 0099-9660. Retrieved 2015-12-15. 
  16. ^"ADA Millennium " About". Retrieved July 2, 2015. 
  17. ^"The jcba team " jcba – jcba". Archived from the original on July 3, 2015. Retrieved July 2, 2015. 

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