Arthur Andersen

AA A former member of the *Big Five accounting firms. Arthur Andersen collapsed in 2002 following the *Enron corporate scandal. Founded in Chicago in 1913 as Andersen, DeLany & Company, the firm adopted the name Arthur Andersen in 1928. It enjoyed incredible growth, success, and prestige in the twentieth century. Ironically, given the circumstances of its demise, AA was initially noted for its principled stand on the correctness of accounting methodology, even at the risk of losing clients. The firm was also famous for the sophistication of its *consulting and *management advisory services. Amid the rather faceless world of the large accounting firms, the AA culture was perceived as uniquely differentiated. The culture was reinforced by a strong internal training program that inculcated intense organizational loyalty and conformity. Skeptical or jealous outsiders were known, tongue-in-cheek, to refer to the stereotyped image of the clean-cut, white-shirted, earnest Arthur Andersen employee as an "Android." Following decades of phenomenal growth, the last few years of the firm were troubled ones, and its once-proud image became increasingly tarnished. First, a power struggle that led to a bitter divorce between the firm’s profitable consulting division and the auditing-driven remainder of the business was played out in full media glare: The result was the independence in 2000 of Andersen Consulting, later to become *Accenture. More seriously, and fatally, one insider identified a corrosion of values at the heart of the firm. From its status as "a great and venerable American institution" and "a global symbol of strength and solidity" with over 80,000 employees worldwide, AA allegedly became an organization that placed fee maximization ahead of professional integrity, to the extent that some of its auditing employees "forgot that the true purpose of their job was to protect the investing public" (Toffler and Reingold, 2003, 7). To an extent, the questions raised over AA’s approach to auditing reflect a more general malaise in the external auditing profession in the early twenty-first century. However, a series of accounting scandals that engulfed AA clients seemed to point to particular problems at the firm: Severe problems at the operations of the Baptist Foundation of Arizona, Sunbeam, Delorean, and Waste Management were forerunners to the massive accounting scams at Enron and *WorldCom. The Enron affair led to a criminal indictment for AA, and in June 2002 a federal grand jury found the firm guilty of obstructing justice in official investigations of Enron. The shredding of thousands of Enron-related documents played a major part in the jury’s decision-making process. The firm’s reputation was seriously undermined: Even the U.S. President is reported to have joked (in relation to weapons inspections prior to the second Gulf War of 2003): "The good news is that Saddam Hussein is willing to have his nuclear, biological, and chemical weapons counted. The bad news is he wants Arthur Andersen to do it" (quoted in Fox, 2003, 294). Amid allegations of *conflicts of interest between auditing and the supply of management advisory services (not to mention accusations of poor auditing and the large-scale destruction of auditing records) Arthur Andersen collapsed in 2002. The Enron and AA scandals prompted U.S. legislators to pass the *Sarbanes-Oxley Act in 2002, in an attempt to reform *corporate governance and thereby restore investor confidence. Further reading: Jeter (2003); 207-212; Schwartz and Watkins (2003); Spacek (1989); Toffler and Reingold (2003)