CONTENT

Introduction to Arthur Anderson Background History

Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

BACKGROUND
Item Type Founded Headquarters Industry Revenues Employees Footprint Status Description Limited Liability Partnership 1913 Chicago, Illinois, USA Accounting and Professional services
US$9.3billion (in 2002)

License

85,000 350 offices in 84 countries serving 100,000 clients Andersen was one of the big Five Arthur accounting firms among Pricewaterhouse Coopers, Deloitte, Ernst & Young and KPMG providing auditing, tax and consulting services Possessed Licenses of certified public to large corporations. accountants (CPA)

BRIEF HISTORY
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 Joseph Schlitz Brewing Company of Milwaukee. This firm always believed in investor protection rather than clients management During the depression in late 1920s, many investors lost faith in companies. Arthur Anderson was instrumental in restoring the faith of US investors in companies based on its integrity and high professional values In 1979, Arthur Anderson became the worlds largest professional services firm In 1990, the firm established itself as a member of the elite

CONTENT
Introduction to Arthur Anderson Background History

Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

CORE VALUES AND PRINCIPLES: EARLY YEARS

Focused on creating a firm with its own set of business standards High importance to ethical values and insisted on honest accounting. It also ensured that conflicts of interest did not exist while accounting of firms Imparted rigorous training to all new recruits, imbibe the Arthur Anderson culture, popularly known as the Andersen way

All Arthur Anderson clients across the world received the same quality of work, same kind of approach to work and same quality of talent to do the work Leonard Spacek, who succeeded Andersen continued his emphasis on honesty. For many years, Andersens motto was Think straight and talk straight

CONTENT
Introduction to Arthur Anderson Background History Core Values and Principles: Early years

Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

ARTHUR ANDERSON IN 1980S AND 1990S

By the 1980s, standards throughout the accountancy industry fell as firms struggled to balance their commitment to auditing against the desire to grow the flourishing consultancy practices It became a pioneer in IT consulting in 1980s The bulk of the revenues was drawn from consulting Looked out for opportunities of consulting fees from existing audit clients By the late-1990s, Anderson had succeeded in tripling the per share revenue of its partners Anderson struggled to balance the need to maintain faithfulness to accounting standards with its clients desire to maximize profits, particularly in the era of quarterly earnings reports

SPLIT OF AA AUDITING AND CONSULTING

AA was a pioneer in non-audit consulting At first, all consultants were accountants and were required to be accountants for 2 years before they could start consulting. This rule was rescinded in 1960 In 1970, the consultants became more profitable per partner than the auditors as auditing was a stagnating business while consulting was a growing one However, the audit side controlled the firms management and the consultants were being told what to do by people who were not a part of the group.

SPLIT OF AA AUDITING AND CONSULTING..CONT

Harvey Kapnick was concerned about the possible ethical conflicts that can arise between the consulting and audit sides and suggested a split between the consulting and auditing sides. However, he failed to get the approval of the partnership.

In 1997, the consulting partners voted unanimously for the split. The split was not very cohesive. It was like a bad marriage

Anderson Consulting changed its name to Accenture

This entire episode was very bitter on AA Auditing. They made up their mind to show Accenture that they could make money without them.

This meant that AA became more aggressive in

CONTENT
Introduction to Arthur Anderson Background History Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Need for immediate attention

Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

SIGNS OF DANGER
Three of the five largest US bankruptcies were audit & consulting clients

Paid over $500 million to settle claims (1997 2002) Arthur Andersens Greatest Hits:

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Waste Management Baptist Foundation of Arizona Sunbeam Corp. Boston Chicken Global Crossing Worldcom Qwest Communications Enron

ANDERSENS RESPONSE
Deny accountability, wrongdoing Blame regulators and bad clients Retain partners implicated in cases Minimize importance of litigation costs Lukewarm internal follow-up Continue pressure to increase revenue

CONTENT
Introduction to Arthur Anderson Background History Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

ABOUT ENRON

World's largest energy, commodities and services company Formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska In 1985-ENRON was a transporter of natural resources through the integrated pipeline network. Enron rapidly evolved from delivering energy to brokering energy futures as energy markets were deregulated. In 1999, Enron EnronOnline,an e-commerce company. Revenues of $101 billion in 2000. Employed approximately 22,000 staff Fortune named Enron "America's Most Innovative Company" for six consecutive years

RELATIONSHIPANDERSON AND ENRON

Anderson began auditing Enron in 1985 Both got close as Enron regularly hired Anderson Auditors even for position like CFO & Chief Accountant. Anderson established permanent office space in Enrons head quarter. Anderson took over internal audit function of Enron in 1993 and hired 40 Enrons employee. Enron became one of the Andersons largest clients with fees over $ 52 million in 2001.

ANDERSON- AUDITOR AND CONSULTANT FOR ENRON

Enron was the 2nd largest revenue producer for Anderson. Half of the fees was earned from performance of consulting services. This raised question about Andersons independence in auditing Enron. During 2000 SEC attempted to force accounting firms to separate their consulting and auditing practices to eliminate possible conflicts of interest . This was protested by all the Big five accounting firms.

ANDERSONS ROLE IN ENRONS FALL

W a s p a i $ 5 2 m i l o n i 2 0 0 0 , th e m a j ri fo r n o n -a u d i re l te d d li n o ty t a co n su l n g se rvi s. ti ce Fa i e d to sp o t m a n y o f E n ro n s l sse s l o S h o u l h a ve a sse sse d E n ro n m a n a g e m e n t s i te rn a lco n tro l o n d n s d e ri ti s tra d i g exp re sse d a p p ro va lo f i te rn a lco n tro l va ve n n s d u ri g 1 9 9 8 th ro u g h 2 0 0 0 n K e p t a w h o l fl o r o f a u d i rs a ssi n e d a t E n ro n ye a r a ro u n d e o to g E n ro n w a s A n d e rse n s se co n d l rg e st cl e n t a i Pro vi e d b o th exte rn a la n d i te rn a la u d i d n ts C FO s a n d co n tro l e rs w e re fo rm e r A n d e rse n exe cu ti s l ve A ccu se d o f d o cu m e n t d e stru cti n w a s cri i a l y i d i d o m n l n cte

CONTENT
Introduction to Arthur Anderson Background History Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

DAVID DUNCAN
David Duncan was the lead partner at Enron As a partner at Andersen, the fees that he personally generated greatly influenced his compensation

DEVELOPMENT OF CRISIS IN ANDERSON

2001 Annual retention meeting Anderson was aware of serious risks involved in the audit of Enron An Anderson memo dated Feb 6th , 2001 outlined the discussion of Anderson executives regarding the retention of Enron as a client Enrons private partnerships involving related party transactions allowed Enron to keep the partnership losses off of its books, due to the loop holes in accounting standards For the same reason, if the partnership incurred any debt, it was not shown on Enrons balance sheet Enron also had possible conflict of interest arising from CFO, Andrew Fastows control of several of these partnerships and compensation he received from them

ENRON RESTATES EARNINGS announced its third-quarter In October 2001, Enron

results for 2001. The third-quarter results included a loss of $638 million, a $35 million write-down due to losses on its partnerships, and a decrease in shareholder's equity by $1.2 billion. This announcement led to a sharp decline in the stock price of Enron (40%). Following this, suspecting Enron of financial misappropriations, the SEC launched an investigation into Enron's financial dealings in late October. The investigation revealed serious accounting misappropriations by Enron between 1996 and 2001. In November 2001, Enron restated its financial statements for the years, 1997 to 2000 and for the first two quarters of 2001, and reported a loss of $586 million for that period. According to reports, Enron had huge accumulated debts on account of its dubious financial dealings with its partners and had

TIMELINE OF EVENTS LEADING TO DECLINE

October12, 2001: A day after SEC announcement, David Duncan called an urgent meeting to organize the expedited effort to destroy Enron related documents. January10, 2002: Anderson CEO admitted that the firm destroyed documents relating to the Enron audit. January15, 2002: Anderson partner, David Duncan was fired by the firm and 3 other partners at the Houston office were placed on leave. In March 2002, Arthur Andersen, was indicted by the US Department of Justice on charges of obstructing the course of justice in the Enron case. Despite the auditors attempts to salvage its relationship with Enron, Anderson was officially

CRISIS AFTERMATH
In August 2002, Andersen Worldwide, the parent company of the US-based Andersen, agreed to pay claims worth $60 million to Enron shareholders and creditors (against claims of over $25billion). Andersen Worldwide stated that it was not responsible for Andersen(US) that operated as an independent division. In October 2002, Andersen received the DOJ verdict: the firm was given the maximum court sentence (in such cases) of five years probation on its US operations and a $500,000 fine for altering evidence of its Enron work...

Many partners formed new companies or were acquired by other consulting firms. Examples include: MarketSphere Consulting SMART Business Advisory and Consulting

Le a d e rsh i fa i u re , p o o r d e ci o n p l si m a ki g , h u b ri n s I a p p ro p ri te p a rtn e rsh i stru ctu re n a p V a l e s/ b e h a vi r d i n n e ct u o sco V a l e m u ta ti n u o S tru ctu ra l se cre cy C o n fl cts o f i te re st i n S a l s v. o ve rsi h t e g C u l re co n fl cts tu i C o n su l n g v. a u d i ti t O ve rsi h t fa i u re g l

WHAT REALLY WENT WRONG?

ANDERSON- CURRENT STATUS

Andersen 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. Its reputation was so badly tarnished that no company wanted Andersen's name on an audit. It began winding down its American operations after the indictment, and many of its accountants left to join other firms. The firms old most of its American operations to KPMG, Deloitte & Touch, Ernst & Young and Grant Thornton LLP. 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 law suits and presiding over the orderly dissolution of the company. Arthur Andersen LLP has not been fomally dissolved nor has it declared bankruptcy. Ownership of the

CONTENT
Introduction to Arthur Anderson Background History Core Values and Principles: Early years Change in Company principles Anderson in 1980s and 1990s Split of Arthur Anderson audit and consulting Signs of danger Major scandals Enron Fall of Arthur Anderson post the Enron scandal Impact on the Auditing industry Conclusion

IMPACT ON AUDITING INDUSTRY

High media/public profile Cost of future audit failure Protection from catastrophic events Audit relationship shift Effective and independent audit Increased audit consultation with CEOs & audit committees Increased legal consideration Audit scope & fee increases
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I PA C T O N A U D I I G M T N I D U S T R Y: E X P E C TA T I N S N O O F C EO
Auditor assurances to support CEO certification
Low/no tolerance for restatements Expanded quarterly reviews Expanded internal controls assurance Assurance on non-financial information in SEC filings

Increased consultation
Creation of appropriate tone at the top Risk identification and risk management processes Systems and controls to manage risks
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I PA C T O N A U D I I G I D U S T R Y: M T N N E X P E C TA T I N S O F A U D I I G O T N C O M M I EE TT
The Committee is the client; hires and fires the auditors Real dialogue and tough questions Consultations on business risks, audit risks & audit scope required to reduce audit risk to a low level Frequent communications on interim audit findings & interim changes to audit scope Information/assurance on Critical accounting policy choices Financial reporting quality Resolution of issues with management Senior management integrity and misconduct Completeness of information from management Internal controls

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H A V E W E R E A LLY LE A R N T A N Y LE S S O N S ?
The regulations became stringent post Arthur Andersen

Accountants are being much more careful

SOX and many other acts came in existence

But:

There are always ways to work around the rules and regulations

Example:

Satyam and PWC

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References:
http://www.accountancyage.com/News/1129120 www.ncpers.org/PastConf/ html/an2002_14.html

http://college.hmco.com/business/phk/business/7e/stu http://www.opensecrets.org/news/accountants/index.a http://en.wikipedia.org/wiki/Arthur_Andersen www.strangecosmos.com Case material