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Case Study 1

This document provides background information on Arthur Andersen LLP, one of the largest accounting firms in the US. It discusses the firm's founding and growth, its expansion into consulting services in the 1980s, and several infamous cases it was involved in, including Enron, Worldcom, and Waste Management, where it failed to catch accounting fraud. This led to its conviction for obstructing justice related to Enron and the loss of clients and licenses. Ultimately, the firm's downfall resulted in the passage of the Sarbanes-Oxley Act in 2002 to reform accounting practices and regulate the industry.

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77 views

Case Study 1

This document provides background information on Arthur Andersen LLP, one of the largest accounting firms in the US. It discusses the firm's founding and growth, its expansion into consulting services in the 1980s, and several infamous cases it was involved in, including Enron, Worldcom, and Waste Management, where it failed to catch accounting fraud. This led to its conviction for obstructing justice related to Enron and the loss of clients and licenses. Ultimately, the firm's downfall resulted in the passage of the Sarbanes-Oxley Act in 2002 to reform accounting practices and regulate the industry.

Uploaded by

ananya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 13

ARTHUR

ANDERSEN
CASE STUDY

Group 2
Ishita Joshi 126/2020
Abhijit Jain 127/2020
BECG Group Presentation Nikhil Handuja 128/2020
Sparsh Mehra 129/2020
Shubham Singh 130/2020
Flow of Presentation
01 About Arthur Andersen LLP

02 Life of Arthur Andersen

03 Boom in Consultancy services in 1980s

04 Rise of Andersen Consultancy

05 Infamous Cases

06 Closure of the company

07 Birth of SOX Act


Arthur Andersen LLP
About the company

Arthur Anderson LLP was one of the ‘Big Five’ accounting and
auditing firms in US along with PWC, Deloitte, E&Y, and KPMG.
Arthur E. Andersen and Clarence DeLany were its founder. It was
started as Andersen Delany Co. in 1913. In 1918, the firm was
renamed as Arthur Andersen & Co. Andersen was the head of the
firm until his death in 1947. The firm was known for its integrity,
commitment transparency, and ethical standards all over the
world. For many years, the motto of Andersen was ‘Think straight
and talk straight.’ The firm was operating in about 84 countries
with a human resource base of 28,000 employees in US and
85,000 worldwide. By 2001, it had become one of the world’s
largest multinational companies with a net revenue of $9336
million.
Born on May 30,1885 in Plano, Illinois.

he was employed as an assistant to comptroller of


Allis-Chalmers in Chicago.
Life of he completed his CPA at the age of 23 and became

Arthur the youngest CPA in Illinois.

Andersen was a zealous supporter of high standards


Andersen in the accounting industry.

He argued that ‘accountant’s responsibility was to


investors and not their clients.’
Boom in Consultancy services in 1980s
 In late 1970s and early 1980s, there was a decline in the standard of accounting and
auditing professions in US and other developed countries.
 Accounting firms struggled to balance their commitment of auditor’s independence and
profitability.
 Amidst this consultancy business became a lucrative service in terms of consultancy fees
and profit.
 Arthur Andersen also entered into the consultancy business area, and sought out
opportunities for consultancy businesses from existing audit clients.
 With the reputation and ethical standards , Andersen attained top position in the
consultancy services
 They also succeeded in magnifying the pershare revenue to its partners.
Rise of Andersen Consultancy
Andersen consultancy had used The disparity in revenue and profit from
Soon, Arthur Andersen across the world
accounting services as a spring board to consultancy business and auditing
was split into two separate units, Arthur
sign up clients for its consultancy business created disputes and frictions in
Andersen and Andersen consultancy.
business. the two business units.

Soon, the dispute between the


By 2000, International Chamber of
consultancy division and auditing
commerce had asked Andersen Then, Andersen consultancy had
division reached to a level where the
Consultancy not to use the name of changed its name to Accenture at the
consultancy business partners refused to
Arthur Anderson for its consultancy beginning of 2001. In 2001.
transfer payments to Arthur Andersen
business.
which they were bound to pay.
Infamous Cases

Waste
Worldcom
Management Enron Incident
Incident
Inc. Incident.
Waste Management Inc. Incident
 Waste Management, Inc. was a comprehensive waste company founded in 1894
 The company was generating about $82 million in revenue and had made 133 acquisitions
 Waste Management, Inc. experienced many white collar crimes within its company between 1992 and 1997
 Waste Management, Inc., engaged in unethical activities involving the company’s accounting books, such as
avoiding depreciation expense by assigning inflated salvage values
 Waste Management, Inc. also increased environmental reserves to avoid irrelevant operating expenses, helping
them to save about $490 million in expenses.
 In 1998, Waste Management, Inc. restated its 1992–1997 earnings by $1.7 billion, which was the largest
restatement in the history
 This created the Waste Management, Inc. 1998 forgery a well-known incident today
Worldcom Incident
 Worldcom was started as a long-distance telecommunication company in Mississippi
 Within a short span, it became the second largest telecommunication company in the world with $39 billion
revenue in 2001.
 It was ranked at 42nd position in the Fortune 500 companies
 Arthur Andersen firm was the auditor of this company
 It overstated the earning of 2001 by more than $3.8 million
 Supposedly it is also said to have manipulated the reserve by $3 billion and around $9 billion false and
unsupported accounting entries made to magnify the annual financial result
 All these were unnoticed by the auditor
 And in 2002, the company collapsed in 2002.
Enron Incident

 Enron was one of the biggest clients of Andersen since 1986.


 Andersen in the mid-1990s hired Enron's entire team of 40 internal auditors, added its own people and
opened an office in Enron's Houston headquarters.
 They paid fees to Andersen for provision of better auditing consequences.
 Arthur Andersen disregarded the fraud and manipulation Enron did in its Financial statements, Mark to
market accounting, SPEs, and off-balance sheet practices, and signed their papers.
 When Enron came under investigation of federal authorities, Andersen had a huge “shred” campaign.
 On December 2, 2001 Enron Corporation filed for chapter 11 bankruptcy, which was the largest
bankruptcy petition in U.S. history.
 Andersen’s document retention policy was to destroy client
documents if the client was under investigation.

Closure of  The SEC began a formal investigation of Enron and requested


Andersen’s accounting documents. However, they destroyed

the two tons of paper by shredding.


 The destruction of documents continued until the SEC had a

company subpoena sent to Andersen advising it to stop shredding


documents.
 On 15th June 2002, Andersen LLP was convicted for
obstructing justice and shredding documents related to the
audit of Enron.
 As a result, the firm ended up loosing its clients and license as
well.
SOX Act, 2002

SOX Act stands for Key Highlights


Sarbanes-Oxley Act
Independent regulation
of accountants
Independent directors
Securities analysts and
conflicts of interests
Auditor rotation
Thank You

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