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Arthur Andersen was an American accounting firm based in
Chicago (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = List of sovereign states, Count ...
that provided
auditing An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
, tax advising, consulting and other
professional services Professional services are occupations in the service sector requiring special training in the arts or sciences. Some professional services, such as architects, accountants, engineers, doctors, and lawyers require the practitioner to hold prof ...
to large corporations. By 2001, it had become one of the world's largest multinational corporations and was one of the "Big Five" accounting firms (along with Deloitte & Touche,
Ernst & Young Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewat ...
,
KPMG KPMG International Limited (or simply KPMG) is a multinational professional services network, and one of the Big Four accounting organizations. Headquartered in Amstelveen, Netherlands, although incorporated in London, England, KPMG is a net ...
and
PricewaterhouseCoopers PricewaterhouseCoopers is an international professional services brand of firms, operating as partnerships under the PwC brand. It is the second-largest professional services network in the world and is considered one of the Big Four accounti ...
). The firm collapsed by mid-2002, as details of its questionable accounting practices for energy company
Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
and telecommunications company Worldcom were revealed amid the two high-profile bankruptcies. The scandals were a factor in the enactment of the Sarbanes-Oxley Act of 2002. In 2002, just nine months after the scandal broke, the firm was found guilty of crimes in the auditing of Enron. By that time, Arthur Andersen had lost most of its business and two-thirds of its 28,000 employees, and was facing multi-million dollar lawsuits. On August 31, 2002, the company surrendered its licenses to practice as
certified public accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
s in the United States, effectively putting the company out of business. In 2005, the United States Supreme Court unanimously reversed Arthur Andersen's conviction due to errors in the trial judge's instructions to the jury that convicted the firm. Despite this, the damage to Andersen's reputation was so great that it has never returned as a viable auditor even on a limited scale. , some parts of the company continue to exist: the company's consulting services had been split out in 2000 and continue today as
Accenture Accenture plc is an Irish-American professional services company based in Dublin, specializing in information technology (IT) services and consulting. A ''Fortune'' Global 500 company, it reported revenues of $61.6 billion in 2022. Accentu ...
, while some of the former partners formed a new firm in 2002 focused on tax services, now called
Andersen Tax Andersen Tax LLC is a tax firm headquartered in San Francisco, California, United States. It provides tax, valuation, financial advisory and consulting services to individuals and corporate clients. It has offices in Chicago, Baltimore, Boston, ...
.


History


Founding

Born May 30, 1885, in Plano, Illinois, and orphaned at the age of 16,
Arthur E. Andersen Arthur Edward Andersen (May 30, 1885 – January 10, 1947) was a Scandinavian-American accountant who was the founder of the accounting firm Arthur Andersen LLP (now Accenture). Biography Arthur Edward Andersen was born in Plano, Illinois, to ...
began working as a mail boy by day and attended school at night, eventually being hired as the assistant to the
comptroller A comptroller (pronounced either the same as ''controller'' or as ) is a management-level position responsible for supervising the quality of accounting and financial reporting of an organization. A financial comptroller is a senior-level execut ...
of
Allis-Chalmers Allis-Chalmers was a U.S. manufacturer of machinery for various industries. Its business lines included agricultural equipment, construction equipment, power generation and power transmission equipment, and machinery for use in industrial s ...
in Chicago. In 1908, after attending courses at night while working full-time, he graduated from the
Kellogg School of Management The Kellogg School of Management at Northwestern University (also known as Kellogg) is the business school of Northwestern University, a private research university in Evanston, Illinois. Founded in 1908, Kellogg is one of the oldest and most p ...
at
Northwestern University Northwestern University is a private research university in Evanston, Illinois. Founded in 1851, Northwestern is the oldest chartered university in Illinois and is ranked among the most prestigious academic institutions in the world. Charte ...
with a bachelor's degree in business. That same year, at age 23, he became the youngest
Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
in Illinois. In 1913, Andersen and Clarence DeLany founded an accounting firm 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 Milwaukee ( ), officially the City of Milwaukee, is both the most populous and most densely populated city in the U.S. state of Wisconsin and the county seat of Milwaukee County. With a population of 577,222 at the 2020 census, Milwaukee i ...
. In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office. Andersen believed education was the basis upon which the new profession of
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
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 CPA 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' management. This gave rise to the uniform look of all the so-called "Arthur Androids", as employees referred to themselves, the intent being to provide the same service the same way to all customers in all locations. For many years, Andersen's motto was "Think straight, talk straight"—an axiom passed on from his mother. 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. The railroad fired Andersen, only to go bankrupt a few months later. 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
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
that employee stock options should be treated as an expense, thus impacting 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 was 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. 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. The firm has been alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products,
Waste Management Waste management or waste disposal includes the processes and actions required to manage waste from its inception to its final disposal. This includes the collection, transport, treatment and disposal of waste, together with monitorin ...
,
Asia Pulp & Paper Asia Pulp & Paper (APP) is an Indonesian pulp and paper company based in Jakarta, Indonesia. One of the largest pulp and paper companies in the world, it was founded as Tjiwi Kimia by Eka Tjipta Widjaja in 1972. Asia Pulp & Paper is a subsidi ...
, the Baptist Foundation of Arizona, WorldCom, as well as
Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
, among others.


Andersen Consulting and Accenture

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 The International Chamber of Commerce (ICC; French: ''Chambre de commerce internationale'') is the largest, most representative business organization in the world. Its over 45 million members in over 100 countries have interests spanning every sec ...
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 An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
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 Accenture plc is an Irish-American professional services company based in Dublin, specializing in information technology (IT) services and consulting. A ''Fortune'' Global 500 company, it reported revenues of $61.6 billion in 2022. Accentu ...
on January 1, 2001, and Arthur Andersen, 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 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 Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other part ...
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 Deloitte Touche Tohmatsu Limited (), commonly referred to as Deloitte, is an international professional services network headquartered in London, England. Deloitte is the largest professional services network by revenue and number of professio ...
(especially in Europe), Hitachi Consulting, PwC Consulting, which was later acquired by IBM, and KPMG Consulting, which later changed its name to
BearingPoint BearingPoint (parent company: BearingPoint Europe Holdings B.V.) is an independent multinational management and technology consulting firm with 41 offices across 23 countries and around 4,300 employees. In 2021, the firm delivered 1,298 projects ...
. In addition, several former Andersen partners formed new companies, notably
Huron Consulting Group Huron Consulting Group, commonly known as Huron, is a management consulting firm offering services to the Healthcare, Life Sciences, Commercial, and Higher Education industries. History Huron (etymologically from Lake Huron) was founded in M ...
, West Monroe Partners, and
Protiviti Protiviti Inc. (Protiviti) is a global consulting firm headquartered in Menlo Park and San Ramon, California, that provides consulting in internal audit, risk and compliance, technology, business processes, data analytics and finance. It ...
.


Enron scandal

Following the 2001 scandal in which energy giant
Enron Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
was found to have fraudulently reported $100 billion 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". On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the
Supreme Court A supreme court is the highest court within the hierarchy of courts in most legal jurisdictions. Other descriptions for such courts include court of last resort, apex court, and high (or final) court of appeal. Broadly speaking, the decisions of ...
reversed 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 the 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 KPMG International Limited (or simply KPMG) is a multinational professional services network, and one of the Big Four accounting organizations. Headquartered in Amstelveen, Netherlands, although incorporated in London, England, KPMG is a net ...
, Deloitte & Touche,
Ernst & Young Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewat ...
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 Waste management or waste disposal includes the processes and actions required to manage waste from its inception to its final disposal. This includes the collection, transport, treatment and disposal of waste, together with monitorin ...
, Sunbeam Products, 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 Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, ...
and Washington Mutual in the
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
) led to a domino effect of accounting and corporate scandals. On May 31, 2005, in ''
Arthur Andersen LLP v. United States ''Arthur Andersen LLP v. United States'', 544 U.S. 696 (2005), was a United States Supreme Court case in which the Court unanimously overturned accounting firm Arthur Andersen's conviction of obstruction of justice in the fraudulent activities and ...
'', 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 William Hubbs Rehnquist ( ; October 1, 1924 – September 3, 2005) was an American attorney and jurist who served on the U.S. Supreme Court for 33 years, first as an associate justice from 1972 to 1986 and then as the 16th chief justice from ...
, 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

The 2005 Supreme Court ruling theoretically left Andersen free to resume operations. However, CNN reported that by then, Andersen was "nearly defunct," with about 200 employees remaining from a high of 28,000 in 2002. Following the ruling, William Mateja, a former counsel to the US Attorney General who had supervised the Andersen appeal, told NPR that he did not believe the government would seek a retrial because, "there's nothing left of Arthur Andersen, and to spend the taxpayers' money on another prosecution would be just—defy common sense." Echoing this,
United States Chamber of Commerce The United States Chamber of Commerce (USCC) is the largest lobbying group in the United States, representing over three million businesses and organizations. The group was founded in April 1912 out of local chambers of commerce at the urgin ...
vice president Stephen Bokat pronounced Andersen "dead," and said that "there is no putting the company back together." In his post-mortem of the Enron scandal, '' Conspiracy of Fools,'' journalist
Kurt Eichenwald Kurt Alexander Eichenwald (born June 28, 1961) is an American journalist and a ''New York Times'' bestselling author of five books, one of which, '' The Informant'' (2000), was made into a motion picture in 2009. Formerly he was a senior writer ...
argued that even if Andersen had escaped the Enron scandal, it would have likely been brought down by the massive accounting fraud at WorldCom. The WorldCom fraud came to light just days after Andersen was convicted of wrongdoing at Enron. Indeed, Andersen has never returned as a viable business on even a limited scale. Ownership of the partnership has been ceded to four limited liability companies named Omega Management I through IV. Arthur Andersen LLP operated the Q Center conference center in
St. Charles, Illinois St. Charles is a city in DuPage and Kane counties in the U.S. state of Illinois. It lies roughly west of Chicago on Illinois Route 64. Per the 2020 census, the population was 33,081. The official city slogan is "Pride of the Fox", after the ...
, until day-to-day management was turned over to Dolce Hotels and Resorts in 2014, but Andersen retains ownership. In 2018, that relationship ended, and day-to-day management returned to the Q Center. The Q Center is currently used for training, primarily for internal Accenture personnel, and other large-scale companies. In 2014, Wealth Tax and Advisory Services (WTAS), a tax and consulting firm started by several former Andersen partners, changed its name to
Andersen Tax Andersen Tax LLC is a tax firm headquartered in San Francisco, California, United States. It provides tax, valuation, financial advisory and consulting services to individuals and corporate clients. It has offices in Chicago, Baltimore, Boston, ...
after acquiring the rights to the Andersen name. It rebranded its year-old international arm, WTAS Global, as Andersen Global. As of 2018, Andersen Global took over the andersen.com
domain name A domain name is a string that identifies a realm of administrative autonomy, authority or control within the Internet. Domain names are often used to identify services provided through the Internet, such as websites, email services and more. As ...
from the Andersen accounting firm.


Migration of partners and local offices to new firms

Many partners formed new companies or were acquired by other consulting firms. Examples include: * 60% of the total Andersen practices globally merged into Ernst & Young, with some going to Deloitte (notably UK, Spain and Portugal) *
Accuracy Accuracy and precision are two measures of '' observational error''. ''Accuracy'' is how close a given set of measurements ( observations or readings) are to their '' true value'', while ''precision'' is how close the measurements are to each o ...
which was founded in 2004 by a team of seven former partners and is headquartered in Paris *
Andersen Tax Andersen Tax LLC is a tax firm headquartered in San Francisco, California, United States. It provides tax, valuation, financial advisory and consulting services to individuals and corporate clients. It has offices in Chicago, Baltimore, Boston, ...
which acquired the rights to the company name and changed their name from WTAS in 2014 *
BearingPoint BearingPoint (parent company: BearingPoint Europe Holdings B.V.) is an independent multinational management and technology consulting firm with 41 offices across 23 countries and around 4,300 employees. In 2021, the firm delivered 1,298 projects ...
, formerly the US consulting unit spun off by KPMG, which purchased Andersen business consulting practices in France and Spain *
Huron Consulting Group Huron Consulting Group, commonly known as Huron, is a management consulting firm offering services to the Healthcare, Life Sciences, Commercial, and Higher Education industries. History Huron (etymologically from Lake Huron) was founded in M ...
* West Monroe Partners which was founded in 2002 by four former consultants, based in Chicago *
KPMG KPMG International Limited (or simply KPMG) is a multinational professional services network, and one of the Big Four accounting organizations. Headquartered in Amstelveen, Netherlands, although incorporated in London, England, KPMG is a net ...
which absorbed the computer forensics division based in Cypress, California, and the Boise, Kansas City, Philadelphia, Portland, Salt Lake City and Seattle offices, among others *
Navigant Consulting Navigant Consulting, Inc. was an American management consultancy firm. It had offices in Asia, Europe and North America; the head office was in Chicago, Illinois. The stock was a component of the S&P 600 index. Navigant was acquired by Guidehous ...
which absorbed eleven partners in Chicago and Washington D.C. *
Perot Systems Perot Systems was an information technology services provider founded in 1988 by a group of investors led by Ross Perot and based in Plano, Texas, United States. Perot Systems provided information technology services in the industries of healt ...
which absorbed six partners *
Protiviti Protiviti Inc. (Protiviti) is a global consulting firm headquartered in Menlo Park and San Ramon, California, that provides consulting in internal audit, risk and compliance, technology, business processes, data analytics and finance. It ...
was formed in 2002 by hiring more than 700 professionals who had been affiliated with the internal audit, business and technology risk consulting practice of Arthur Andersen * SMART Business Advisory and Consulting which absorbed some of the Philadelphia office * jcba Limited which was founded by a partner from the aviation practice *
Grant Thornton International Grant Thornton is the world's seventh-largest by revenue and sixth-largest by number of employees professional services network of independent accounting and consulting member firms which provide assurance, tax and advisory services to privat ...
which absorbed the North Carolina, South Carolina, Albuquerque, and Tulsa offices * True Partners Consulting


See also

* Accounting scandals * '' Conspiracy of Fools'' *
Corporate abuse A corporate collapse typically involves the insolvency or bankruptcy of a major business enterprise. A corporate scandal involves alleged or actual unethical behavior by people acting within or on behalf of a corporation. Many recent corporate col ...
*
David J. Lesar David John Lesar (born May 30, 1953) is an American businessman who is the former chair of Halliburton, Halliburton Energy Services. He was the CEO of Halliburton for 17 years from 2000 to 2017. Trained as a Certified Public Accountant, Lesar sp ...
*
Timeline of the Enron scandal The Enron scandal was an accounting scandal involving Enron Corporation, an American energy company based in Houston, Texas. Upon being publicized in October 2001, the company declared bankruptcy and its accounting firm, Arthur Andersen then o ...


References


External links

* {{Authority control Accounting scandals Consulting firms established in 1913 Financial services companies established in 1913 Financial services companies disestablished in 2002 Corporate crime Defunct financial services companies of the United States Enron Defunct companies based in Chicago Defunct accounting firms of the United States 1913 establishments in Illinois