Case Summary

This case is about Arthur Andersen LLP a Chicago based accounting firm which was built on strong values
system had to shut down its business after a period of 90 years for choosing revenues and growth at the
cost of ethical accounting practices.

Arthur Andersen LLP

Founded in Chicago, 1913

Founders: Arthur Andersen and partner Clarence DeLany
Services:
Auditing (To check whether the financial statements of a company are free of misstatements and
ambiguities)
Consulting

Organization Culture

Initial Stage

It benchmarked accounting practices with strong focus towards trust, integrity and ethics.
For Ex: Many Companies used 10 Year Depreciation period for Computer Hardware to follow a
conservative approach, but Andersen insisted on 5-year depreciation period and public corporations
failing to adopt this practice would result in an adverse(Negative) opinion from Andersen’s auditors.

Later Stage

Growth became the primary focus by comprising on quality and independent audit (Independent
Auditor is someone who is an outsider to the client, who gives an honest and unbiased opinion on the
financial statements of the client).

For Ex:

Individuals who bought big business were often promoted before those who were concerned with
conducting quality Audits.

Andersen started offering consulting services to clients whose financial statements were offered.

When SEC (Securities and Exchange Commission - The SEC's primary function is to oversee organizations
and individuals in the securities markets, including securities exchanges, brokerage firms, dealers,
investment advisors and various investment funds) restricted non-audit services(consulting) that
accounting firms could provide to audit clients. Andersen split into 2 separate units Accounting and
Consulting. Units started competing against each other which hampered the team spirit, fostered
secrecy and self-interestedness.
Andersen’s Downfall

1. Baptist Foundation of Arizona (BFA)

Founded in 1948 and one of the few foundations which offered investments to individuals. BFA invested
heavily in Real Estate and profits from Investments were used to fund church ministries and other
charitable causes.

Due to downturn in real estate market in Arizona, BFA was forced to show profit to investors by
concealing losses from investors.

Investor lawsuit firm accused Andersen of issuing false and misleading approval of firm’s BFA Financial
Statements.

Andersen blamed BFA management for collapse by arguing it was given misleading information on
which to conduct the audits

During 2 years Investigation, Andersen was warned of the fraudulent activity and the firm eventually
agreed to pay 217 Million Dollar to settle the Share Holder Lawsuit.

2. Sunbeam

Sunbeam was accused of inflating earnings through fraudulent accounting strategies such as “cookie jar-
Cookie jar accounting or cookie jar reserves is an accounting practice in which a company takes a
quantity of large reserves from an economically successful year and incurs them against losses from less
successful years” and “bill and hold-A bill and hold transaction is one in which the seller does not ship
goods to the buyer, but still records the related revenue”

Philip Harlow partner at Arthur Andersen authorized for clean opinion despite knowing about the
accounting practices in Sunbeam.

Andersen paid 110 Million Dollar to resolve the claims without admitting fault or liability.
Sunbeam shareholders incurred a loss of 141 Million Dollar.

3. Waste Management

Assisted Waste Management in fraud by manipulating financial statements and also by providing clean
or unqualified opinion.

Andersen paid 220 Million Dollar to Waste Management Shareholders and 7 Million to SEC.
Andersen was sanctioned not to sign off on spurious financial statements in future or it wold face
disbarment from practicing.
4. Enron

Enron was forced to restate (A financial statement restatement is the result of a change in accounting
principles or an error. A restatement often involves a completely new audit and could affect future )
financial statements in the coming year.
Five years’ worth of financial statements that Andersen had signed off on, accounting for $586 million in
losses.
Andersen admitted to destroying a number of documents concerning its auditing of Enron, which led to
an indictment for obstruction of justice.
On June 15, 2002, the jury found Andersen guilty of obstruction of justice, the first accounting firm ever
to be convicted of a felony. The company agreed to stop auditing public companies by August 31, 2002,
essentially shutting down the business.

5. Telecoms

Andersen’s biggest client WorldCom was accused of improper accounting of nearly 3.9 Billion Dollar.
WorldCom’s fraudulent activities amounted to over 75 Billion Dollar.
Andersen blamed WorldCom for failing to disclose its expense irregularities

Causes for Downfall

1. Sending Inexperienced Business Consultants and untrained Auditors to client sites.

2. Partners Limited involvement in process of issuing opinions
3. Lack of monitoring on Auditors
4. Change in culture focus from integrity to growth and revenues.
5. Ethical (Sunbeam, Waste Management)
6. Legal(Enron)

After Effects of Andersen Debacle

1. Emergence of Business Ethics.

2. Sarbanes Oxley Act