Fall of Arthur Andersen

            
 
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Case Details:

Case Code : BECG027
Case Length : 15 Pages
Period : 1997 - 2002
Pub. Date : 2002
Teaching Note :Not Available
Organization : Arthur Anderson, US DOJ
Industry : Financial Services
Countries : USA

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"They [Andersen] can never clear their name. In the court of public opinion, they have been tried, convicted and hanged. After WorldCom, there was just nothing you could say." 1

- Lynn Turner, Former Chief Accountant, Securities and Exchange Commission (US), in June 2002.

Grace to Disgrace

In March 2002, Andersen (previously Arthur Andersen), one of the world's leading audit firms, was indicted by the US Department of Justice (DOJ) on charges of obstructing the course of justice in the Enron (one of Andersen's clients) case. DOJ claimed that Andersen shredded many Enron-related documents, while Enron was being probed by the Securities and Exchange Commission (SEC).1

Enron, which had filed for bankruptcy in December 2001, was being investigated for illegal accounting practices. DOJ had begun a criminal investigation into Andersen in January 2002 in connection with the Enron case. All along, the media and Andersen employees had expected the firm to reach out of court settlement with DOJ. However, such a settlement did not materialize. DOJ's investigation revealed that Andersen had deliberately destroyed crucial documents relating to Enron during October-November 2001. This revelation and the fact that the firm had been embroiled in many controversies during the late 1990s destroyed all chances of an outside court settlement and led to the indictment.

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Through the late-1990s, Andersen's name had figured prominently in various instances of business fraud by its clients, namely, Sunbeam, Waste Management Inc., Quest Communication, Global Crossing, and Baptist Foundation of Arizona.2 The firm faced civil charges for its supposed misrepresentation of accounts in most of these cases. The audit partners, who were involved in the audit of these companies were indicted and penalized by the SEC.

In many of these cases, Andersen had settled investor claims, without acknowledging any fraud on its part (Refer Exhibit I for the settlements). Following the indictment by the DOJ, many of Andersen's clients as well as employees left; the remaining employees took to the streets, protesting the DOJ's decision. They said that punishing the whole firm and its thousands of employees for the wrongdoings of a handful of corrupt partners was not justified. As negative publicity for Andersen mounted, it seemed certain that the firm would never be able to do business the way it had for over eight decades. Industry observers remarked that it was indeed painful watching the accounting firm that had set the standard for honest and law-abiding accounting in the US fall from grace.

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1] SEC is the primary regulatory body of the US securities market. It works in close association with many other institutions such as the Congress; federal agencies and departments; state securities regulators; self-regulatory organizations such as stock exchanges; and other private regulatory bodies. The primary mission of the SEC is to protect and maintain the integrity of the securities market and to ensure that public companies disclose comprehensive financial and other information to the public.

2] Even in the 1980s, Andersen had been criticized for its failure to locate fraudulent practices at De Lorean, a leading car manufacturer in the US. In 1985, the firm also got involved in a dispute with the US government over this issue, following which the government barred it from auditing government firms for 15 years. However, in 1997, a special committee assessed the De Lorean case again and lifted the ban.

 

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