1/25/13

The rise and fall of Arthur Andersen

Arthur Andersen

Arthur Andersen was born in Plano, Illinois in 1885. He graduated the University of Illinois in 1908 with a degree in accounting. At the age of 23, he was the youngest Certified Public Accountant in the state of Illinois. From 1907 to 1911 he served as the Senior Consultant for Price Waterhouse in Chicago. In 1913, Andersen decided to establish his own accounting firm. At the age of 28, he founded the public accounting firm of Andersen, DeLany & Company in Chicago.
Licensed as accountants and auditors in many states across the country, the company grew rapidly during the 1920s. The firm opened six offices nationwide, the most important of which were located in New York (1921), Kansas City (1923), and Los Angeles (1926). During World War II Andersen himself reached the pinnacle of his success. After World War II, Andersen began training his associate, Leonard Spacek, for the company's leadership position. Spacek joined the company in 1928 and was named a partner in 1940, becoming one of Andersen's closest and most trusted confidants. Upon Andersen's death in January 1947, Spacek took over the company, remaining committed to the regimented management style of the founder. During Spacek's tenure, the firm grew from a regional operation located in Chicago with satellite offices across the United States into an international organization with one-stop, total service offices located around the world.
Spacek began to focus on Andersen's idea that the company serve as the public role of the industry police. In the 1950s, the accounting profession was generally regarded as a club, with its own principles, methods, and procedures that had developed over the years without any standardization. Spacek began a campaign to improve accounting methods and practice by emphasizing the importance of implementing uniform accounting principles that would ensure "fairness." Spacek argued that accounting principles should be fair to the consumer, to labor, to the investor, to management, and to the public. Spacek hoped that his concept of fairness would serve as a foundation for accounting principles that the whole profession would ultimately find acceptable. That seemed to be the heart of the Arthur Andersen firm was the honest reputation and well known attributes that lead the firm to become one of the top five accounting firms in the world. But eventually all that would come to a halt due to increasing competition and of course greed. In 1985 Arthur Andersen Corporation joined the Enron Company as their sole firm for all of their accounting practices. The company soared and reached record numbers and by 1992 Enron was the largest seller of natural gas in North America. Enron's stock increased from the start of the 1990s until year-end 1998 by 311% percent, only modestly higher than the average rate of growth in the Standard & Poor 500 index. Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. Enron hired numerous Certified Public Accountants (CPAs) as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board (FASB). The accountants searched for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles (GAAP), the accounting industry's standards. Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as its credit risks became known. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting Enron's earnings expectations, Enron would occasionally allow accounting companies Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new company to replace Andersen. Revelations concerning Andersen's overall performance caused the end of the company, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001). After news of U.S. Securities and Exchange Commission (SEC) investigations of Enron were made public, Andersen would later shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, causing accusations of a cover-up.

On November 28, 2001, Enron's two worst-possible outcomes came true. The Enron Company had filed for Bankruptcy. Enron's European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection two days later on December 2. It was the largest bankruptcy in U.S. history. On January 17, 2002 Enron dismissed Arthur Andersen as its auditor, citing its accounting advice and the destruction of documents. Andersen countered that it had already ended its relationship with the company when Enron became bankrupt. Enron went on trial for their scandals on May 25, 2006. Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the company to its audit of Enron. Although only a small number of Arthur Andersen's employees were involved with the scandal, the company was effectively put out of business; the SEC is not allowed to accept audits from convicted felons. The conviction was later overturned by the U.S. Supreme Court due to the jury not being properly instructed on the charge against Andersen. The Supreme Court ruling theoretically left Andersen free to resume operations. However, the damage to the Andersen name has been so great that it has not returned as a reputable business. Therefore that led to the end of the Arthur Andersen Firm.