Arthur Andersen – Accounting for Its Big Success and Shame

Arthur Andersen and Clarence Delany founded Arthur Andersen in 1913 in Chicago, Illinois . Initially, the firm provided tax preparation and consulting services to small businesses and individuals. However, its services grew to include audit and accounting services. By the 1920s, it had become one of the largest accounting firms in the United States.

Early Reputation for Ethics

Throughout the 20th century, Arthur Andersen continued to grow and expand its services. Its innovative accounting practices and emphasis on integrity and ethical conduct won many converts. In the 1950s and 1960s, the firm became a leader in the field of management consulting. It provided advice to businesses. This included topics such as corporate strategy, financial management, and information technology.

Warning Signs

In the 1970s, Arthur Andersen faced several legal and ethical challenges. In 1974, the firm faced a guilty verdict for obstructing justice. This was a case involving the auditing of a savings and loan company. So, the firm established a code of conduct and ethics program to promote ethical behavior among its employees. As we shall see, trouble again reared its head later.

Still Attracting Big Clients

In the 1980s and 1990s, Arthur Andersen grew further. It now was one of the largest accounting and consulting firms in the world. It provided services to many high-profile clients, including Enron and WorldCom.

It had many high-profile clients in a variety of industries, including:

General Electric: They hired Arthur Andersen to provide auditing, tax, and consulting services to General Electric. GE was of the world’s largest companies for many years.

Merrill Lynch: The investment banking firm was another major client of Arthur Andersen. AA provided a range of services including auditing, tax, and consulting.

Coca-Cola: The beverage giant relied on Arthur Andersen for a variety of accounting and consulting services. These included tax planning and financial reporting.

Delta Air Lines: AA provided auditing and consulting services to Delta Air Lines for many years.

Waste Management Inc.: Arthur Andersen provided auditing services to this large waste management company. WMI was embroiled in an accounting scandal in the late 1990s.

Sunbeam: AA provided auditing and consulting services to Sunbeam, a consumer products company. Sunbeam also later became embroiled in an accounting scandal.

Enron

In the early 2000s, Arthur Andersen faced its biggest challenge yet. In 2001, it was discovered that the firm had engaged in improper accounting practices while auditing Enron. Enron was later revealed to be involved in massive accounting fraud. The firm had illegally shredded voluminous Enron-related documents. This is not like selling the public radioactive cocktails, but bad enough. Enron collapsed from the scandal. Several Arthur Andersen executives faced indictments as well .

In 2002, the U.S. Department of Justice indicted the entire Arthur Andersen firm. The indictment cited obstruction of justice related to the Enron audit. The indictment effectively ended the firm’s operations. Clients began to leave in droves, and the firm had to lay off thousands of employees. In 2005, the U.S. Supreme Court overturned the conviction on a procedural matter. However, by then the damage was done.