Andersen

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Andersen

33 West Monroe Street
Chicago, Illinois 60603
U.S.A.
Telephone: (312) 580-0033
Fax: (312) 507-6748
Web site: http://www.andersen.com

Private Partnership
Incorporated: 1918 as Arthur Andersen & Company
Sales: $2.20 billion (2003)
NAIC: 541211 Offices of Certified Public Accountants

Andersen is the name encompassing Arthur Andersen LLP and other international entities that were members of Andersen Worldwide SC, once the massive umbrella organization overseeing Arthur Andersen & Co. and Andersen Consulting. After being convicted in 2002 of obstructing justice in relation to the Securities and Exchange Commission's investigation of Enron Corporation, Arthur Andersen is barred from offering auditing services to publicly traded companies. The company remains in existence to resolve legal problems related to its collapse, a process that is expected to take until the late 2000s to complete.

Early History

The founder and guiding force behind the early years of the accounting firm was Arthur Edward Andersen. Born in Plano, Illinois, in 1885, Andersen was the son of a Norwegian couple who had immigrated to the United States four years earlier. At a young age, Andersen displayed a propensity for mathematics. Upon graduating from high school, he worked in the office of the comptroller at Allis-Chalmers Company in Chicago, while attending classes at the University of Illinois. In 1908, he received a degree in accounting from the university and at 23 years old became the youngest certified public accountant in Illinois.

From 1907 to 1911, Andersen served as senior accountant for Price Waterhouse in Chicago. Following a one-year term as comptroller for the Uihlein business interests in Milwaukee, primarily Schlitz Brewing Company, Andersen was appointed chairperson of Northwestern University's accounting department. Soon thereafter, however, in 1913, Andersen decided to establish his own accounting firm. At the age of 28, he founded the public accounting firm of Andersen, DeLany & Company in Chicago.

Andersen's small company began to grow rapidly, as demand for auditing and accounting services increased dramatically following Congress's establishment of federal income tax and the Federal Reserve in 1913. One of Arthur Andersen's first clients was Schlitz Brewing, and the company's client list soon expanded to include International Telephone & Telegraph, Colgate-Palmolive, Parker Pen, and Briggs & Stratton. The company's primary business, however, consisted of numerous utility companies throughout the Midwest, including Cincinnati Gas & Electric Company, Detroit Natural Gas Company, Milwaukee Gas Light Company, and Kansas City Power & Light Company. Into the 1920s, work for utility companies comprised about 50 percent of Andersen's total revenues, and the company became known as a "utility firm," a dubious distinction in accounting circles. In 1917, Andersen was awarded the degree of B.B.A. from Northwestern University, and, the following year, when DeLany left the partnership, his firm became known as Arthur Andersen & Company.

Licensed as accountants and auditors in many states across the country, the company grew rapidly during the 1920s. The firm opened six offices nationwide, the most important of which were located in New York (1921), Kansas City (1923), and Los Angeles (1926). Serving as auditor for many large industrial corporations, Arthur Andersen also began providing financial and industrial investigation services during this time. In 1927, company representatives testified as expert witnesses in the Ford Motor Company tax case. The company's most important investigation, however, a milestone in the history of Arthur Andersen & Company, involved Samuel Insull's financial empire.

Managing the Insull Empire in the 1930s

Samuel Insull emigrated from England to the United States in 1892. Hired as a secretary by Thomas Edison, Insull would soon prove to be an adept entrepreneur. During this time, the use of Edison's incandescent lights was provided only to licensed utility companies, which became known as "Edison Companies." As many of Chicago's utilities approached bankruptcy early in the 20th century, Edison sought someone to organize them and keep them solvent. Insull volunteered for the job and immediately began to acquire and manage his own utility companies. In a few years, Insull had built an empire of utility companies, including the first utility to construct a generator with a capacity more than 12,000 kilowatts. In 1907, Insull created Commonwealth Edison, which was formed by the merger of two Insull holdings, Commonwealth Electric and Chicago Edison.

By the early 1930s, Insull's utilities, many of which had suffered during the Great Depression, represented a complicated network of holdings nearly $40 million in debt and badly in need of reorganization. When the Chicago banking community—on which Insull had always relied exclusively—was unable to provide the required cash, Insull was forced to turn to the East Coast banks for help. The East Coast banks refused to extend financial assistance, but, rather than forcing Insull into bankruptcy, they chose Arthur Andersen to act as their representative and manage the reorganization and refinancing of Insull's business holdings.

In 1932, the firm was placed in charge of supervising all the Insull utility companies' income and expenditures and also was involved in the subsequent financial reorganization of all the Edison companies within Insull's empire. To Arthur Andersen's credit, none of the utility companies went bankrupt; the firm maintained a firm control on all the assets during the period of refinancing. Moreover, Arthur Andersen not only increased its gross revenues by 20 percent through the Insull account but also garnered a reputation for honesty and independence that heightened its stature in the business community across the country. Thereafter, the company had no difficulty attracting large corporate clients. The incident also gave rise to the company's self-proclaimed role as watchdog of the accounting industry's methods and procedures.

Andersen not only provided direction for his company and personally approved of all the firm's clients, he remained involved in nearly every aspect and detail of company business. Until the day he died, he paid himself 50 percent of the firm's profits, while the other 50 percent was distributed among the rest of the partners. As he grew older, and as the company grew increasingly successful, Andersen became less tolerant of those within the firm who disagreed with him or began to eclipse his leadership, and he tended to fire or drive out those with whom he was not compatible. Nevertheless, he had an uncanny sense of hiring particularly talented accountants, and many of the individuals hired during the 1920s and 1930s would play prominent roles in the company's development years later.

Under the watchful eye of its founder, Arthur Andersen and Company brought in many new accounts during the 1930s, including Montgomery Ward, one of the most sought-after clients during the decade. By 1928, the company employed approximately 400 people and, by 1940, that figure had increased to 700. To provide greater accessibility to its clients, the firm opened new offices in Boston and Houston (1937) and in Atlanta and Minneapolis (1940).

During World War II Andersen himself reached the pinnacle of his success. His numerous writings on accounting—including "Duties and Responsibilities of the Comptroller" and "Present Day Problems Affecting the Presentation and Interpretation of Financial Statements"—prompted a growing admiration and respect for him in financial, industrial, and academic circles. Andersen served as president of the board of Trustees at Northwestern University and as a faculty member in accounting at the school. In recognition of his contribution to the field of accounting, and also for his devotion to preserving Norwegian history, he was awarded honorary degrees by Luther College, St. Olaf College, and Northwestern.

Key Dates:

1913:: Arthur Andersen starts his own accounting firm, Andersen, DeLany & Company.
1918:: After the departure of DeLany, Andersen's firm changes its name to Arthur Andersen & Company.
1932:: Arthur Andersen & Co. is selected to represent Commonwealth Edison, the corporate entity controlled by Samuel Insull.
1947:: Arthur Andersen's death passes leadership to Leonard Spacek, who shapes the firm into a genuine international company during his 26-year term as company leader.
1970s:: Arthur Andersen & Co. becomes increasingly involved in providing consulting services.
1988:: Arthur Andersen & Co. becomes the largest consulting firm in the world, deriving 40 percent of its revenues from the consulting side of its business.
1989:: After years of internal discord, the firm is split into two companies, Arthur Andersen & Company (accounting services) and Andersen Consulting (consulting services); these two separate financial entities are governed by Switzerland-based Arthur Andersen Société Cooperative, later named Andersen Worldwide SC, the ruling body of the worldwide Andersen organization.
1994:: Arthur Andersen & Co. begins to develop its own consulting business.
1997:: The retirement of managing partner and Chief Executive Officer Lawrence Weinbach renews hostilities between the accounting and consulting factions.
2000:: The International Court of Arbitration in Paris rules that Andersen Consulting can separate itself completely from Arthur Andersen & Co. and Andersen Worldwide.
2001:: Andersen Consulting changes its name to Accenture Ltd.
2002:: After becoming embroiled in controversy surrounding the collapse of Enron Corp., Arthur Andersen LLP is convicted of obstructing justice, a ruling that bars the company from offering auditing services to publicly traded companies.
2004:: A federal appellate court rules that the 2002 conviction will remain intact.

New Leadership After World War II

During this time, Andersen began grooming his associate, Leonard Spacek, for the company's leadership position. Spacek joined the company in 1928 and was named a partner in 1940, becoming one of Andersen's closest and most trusted confidants. Upon Andersen's death in January 1947, Spacek took over the company, remaining committed to the regimented management style of the founder. During Spacek's tenure, the firm grew from a regional operation located in Chicago with satellite offices across the United States into an international organization with one-stop, total service offices located around the world. Most important, however, Spacek began to focus on Andersen's idea that the company serve the public role of industry policeman.

Until the 1950s, the accounting profession was generally regarded as a club, with its own principles, methods, and procedures that had developed over the years without any standardization. Spacek began a campaign to improve accounting methods and practice by emphasizing the importance of implementing uniform accounting principles that would ensure "fairness." Spacek argued that accounting principles should be fair to the consumer, to labor, to the investor, to management, and to the public. Spacek hoped that his concept of fairness would serve as a foundation for accounting principles that the whole profession would ultimately find acceptable.

Most business historians agree that Spacek did the profession a service by initiating the standardization movement within the industry and by bringing public attention to the fact that existing auditing practices varied with each company. Like Andersen before him, however, Spacek drew considerable criticism from the profession. Unable to change the prevailing attitudes of those within the industry, Spacek focused on his own company, creating Andersen University, with its Center for Professional Education. A training center located in St. Charles, Illinois, the university provided company employees with the opportunity to attend courses in a variety of accounting subjects.

Growing Consulting Services in the 1970s and 1980s

By the time Spacek retired from the company in 1973, Arthur Andersen & Company had opened 18 new offices in the United States and more than 25 offices in countries throughout the world. With a staff of more than 12,000 and an increase of revenues from $6.5 million to more than $51 million during the period from 1947 to 1973, Andersen had grown into one of the world's preeminent accounting firms. The company also featured a profitable consulting service, helping large corporations install and use their first computer systems in the 1950s and branching out into production control, cost accounting, and operations research in the 1960s. Moreover, with audit and accounting revenues reaching a plateau due to the maturity of the industry, the company's consulting services began to represent an increasing share of Andersen's income. In the 1970s, Arthur Andersen became involved in a host of consulting activities, including systems integration services, strategic services, development of software application products, and a variety of additional technological services.

Under the aggressive leadership of Spacek's successor, Harvey Kapnick, the consulting services developed rapidly, and by 1979, its fees represented more than 20 percent of Andersen's total revenues. Anticipating the importance of the burgeoning market for consulting services, Kapnick proposed to split the company into two separate firms, one to oversee auditing and another to focus on consulting as a comprehensive service business. When he presented this proposal to the company's partners, however, he met with protest. The auditors summarily rejected Kapnick's strategy, demanding proprietary control over all aspects of the company's managerial and financial affairs.

Kapnick resigned in October 1979 and was replaced by Duane Kullberg, who had joined the company in 1954 as an auditor. Reassuring the auditors that he would not take any action to split the company along operational lines, Kullberg nevertheless gave more operating control to the consulting side of the business, where employees were becoming increasingly irritated with the centralized control of the auditors. Kullberg's strategy seemed to work; internal discord subsided and both the auditing partners and the consulting principals (who were not called partners until later) devoted themselves to their respective businesses.

Other problems arose for Arthur Andersen, however. In the mid-1980s, the company was the subject of several lawsuits filed by creditors and shareholders of bankrupt companies the firm had audited. These companies—including DeLorean Motors Company, Financial Corporation of American (American Savings & Loan), Drysdale Government Securities, and others—claimed that Arthur Andersen had failed to realize the extent of their financial struggles and, moreover, had failed to inform the public of their findings. In 1984, Arthur Andersen was forced to pay settlements amounting to $65 million within a two-month period.

Nevertheless, Arthur Andersen's business continued to thrive, particularly in the field of consulting services. By 1988, 40 percent of the company's total revenues was generated from consulting fees, making Arthur Andersen the largest consulting firm in the world. During this time, conflict between the auditors and the consultants flared up again, centering on discrepancies in the pay scale and disagreement over the control of consulting operations. Specifically, consultants questioned why they should earn less than auditors, when typical auditing projects brought in $4 million in fees in 1988, and consulting jobs garnered as much as $25 million. Furthermore, consultants took issue with the company's practice of allowing accounting partners to manage the consulting business.

Restructuring in the Late 1980s

Tensions continued to increase; when the firm's disgruntled consulting partners resigned, management filed lawsuits and infiltrated meetings held by the consultants. Finally, in an effort to end the chaos, Kullberg agreed to restructure the company. Under Kullberg's plan, Arthur Andersen was divided into two entities, an auditing and tax firm known as Arthur Andersen & Company and a consulting firm dubbed Andersen Consulting. Each of these firms then became separate financial entities under the Swiss-based Arthur Andersen Société Cooperative, the ruling body of the company's worldwide organization, which would coordinate the activities of the entire firm's operations. In addition, the traditional management hierarchy, in which consultants reported to auditors, was altered, allowing consultants to report to managers in their field all the way up through the level of consulting partner.

In 1989, Lawrence A. Weinbach replaced Kullberg as chief executive officer. Upon graduating from the Wharton Business School, Weinbach had joined Arthur Andersen and had become a partner after nine years. Known for his diplomacy, Weinbach helped smooth over the harsh feelings among auditing and consulting partners, encouraging everyone to concentrate on increasing business. Under his leadership, Arthur Andersen's revenues skyrocketed. Between 1988 and 1992, Andersen's revenues increased from slightly less than $3 billion to almost $5.6 billion, an increase of nearly 50 percent brought on mostly by the company's burgeoning consulting activities. During these years, revenue from Andersen Consulting grew by 89 percent while revenue from Arthur Andersen & Company's accounting and tax services grew by 38 percent. Clearly, Weinbach recognized the importance of the company's position as the largest management consultant firm in the world.

In the early 1990s, Arthur Andersen was beset with lawsuits from creditors of thrifts that had collapsed during the 1980s. Furthermore, in 1992, the company was sued by the government's watchdog Resolution Trust Corporation for negligence in its auditing of the failed Ben Franklin Savings & Trust. Nevertheless, the company weathered these difficulties, renewing its commitment to high-quality, irreproachable auditing services and focusing on improving and developing both its auditing and consulting services. With a settlement in 1993 Arthur Andersen resolved the lawsuits relating to the failed savings and loans and was released from any further liability.

The firm grew more cautious after this debacle, turning down more clients and even dropping several existing ones. Outstanding lawsuits continued to plague the Big Six accounting firms, however, making insurance coverage more difficult for these firms to acquire. The cost of insurance and settlements for the Big Six was estimated at 12 percent of local fee income in the United States and 8 percent in Britain. Arthur Andersen considered incorporation as a shield for the personal assets of partners not found directly negligent. The Big Six firms also pursued legislative changes that would limit their liability.

Increasing Income in the 1990s

Arthur Andersen's fee income rose steadily in the mid-1990s, as did that of the other Big Six accounting firms. The general accounting prosperity had several causes: an economic boom in the United States, the growth of the accounting firms in Asia and Eastern Europe, and especially an increase in management consulting fees. Total revenues for Arthur Andersen surpassed the $6 billion mark in 1993, rose to $6.7 billion in 1994, and jumped to $8.1 billion in 1995. Half of the firm's $9.5 billion in fees in 1996 came from consulting. Arthur Andersen led the industry in fee income per partner in the mid-1990s.

With the consulting branch enjoying the greatest rise in profits, the accounting branch began offering its own consulting services in the early 1990s to companies with less than $175 million in annual sales. Placing themselves in competition with the consulting partners did nothing to heal the animosity that had led to the division of the company in the first place. Consulting partners argued for total independence from the parent company in the late 1990s, citing the vast disparity in fee contributions between the two subsidiaries. The accounting partners alleged that the consulting business would never have taken off without their initial support, referrals, and subsidies.

Managing partner and Chief Executive Officer Lawrence Weinbach retired in 1997, throwing the divided firm into chaos as a search for a successor led to heated disagreements. One nominee came from consulting, and another came from accounting. Both were rejected in a vote by all company partners. An acting CEO was named by the board: W. Robert Grafton, an accounting partner. Soon thereafter, Andersen Consulting, as the result of a unanimous vote by its partners, sought an arbitrator to gain their firm's complete independence from Andersen Worldwide.

In 1999 Andersen Worldwide continued to oversee its two squabbling operating units and continued to lead the world in providing business consulting services. Its revenues reached almost $14 billion in 1998, and the firm boasted 382 offices in 81 countries around the world.

An Ignoble Exit in the Early 21st Century

The rancor between the consultants and accountants, festering for decades, reached a dramatic climax as Andersen Worldwide entered the 21st century. Andersen Consulting's management wanted to sever completely its ties to the accounting and auditing side of Andersen Worldwide and divorce itself from Andersen Worldwide as well. In August 2000, the war between the consultants and the accountants reached its conclusion when the International Court of Arbitration in Paris separated the two factions. Joe Forehand, chief executive officer of the consulting business, hailed the arbitrator's ruling in an August 8, 2000 interview with the Chicago Tribune, exclaiming, "This is a total win for Andersen Consulting. We won. It's over." Jim Wadia, Forehand's counterpart at Arthur Andersen, sounded less enthusiastic. "I think the arbitrator has tried to keep both sides relatively happy, which he has done," Wadia remarked in the same Chicago Tribune article. "And he has tried to keep both sides relatively [angry], which he has done as well."

Andersen Consulting went its own way following the ruling. The company was spared having to pay as much as $14 billion to complete the breakup, but it was ordered to drop the Andersen name from its corporate title. In January 2001, the company changed its name to Accenture Ltd. and began to build brand name recognition from scratch. At the time of the ruling, Arthur Andersen's exclusive right to the respected and widely known Andersen brand name was considered an invaluable asset. Within two years of the ruling, the Andersen name was worth nothing.

The scandal that ultimately led to the collapse of the Andersen accounting business erupted in October 2001. Enron, one of Arthur Andersen's biggest clients, disclosed that the Securities and Exchange Commission (SEC) was launching an investigation into the company; the scope of the inquiry included the actions of the company's auditor, Arthur Andersen. Enron filed for Chapter 11 bankruptcy protection in December 2001, the same month Joseph Berardino, chief executive officer of Andersen Worldwide, defended his company's financial accounting practices before the U.S. Congress. The following month, Arthur Andersen LLP, the U.S. arm of Andersen Worldwide, conceded its employees destroyed a substantial number of Enron-related documents, which led to the company's indictment for obstruction of justice. In April 2004, Arthur Andersen LLP split from its global parent, Andersen Worldwide, two months before a jury deliberated whether or not Arthur Andersen LLP had obstructed justice. The announcement of the jury's guilty verdict in June 2002 spelled the end for Arthur Andersen, forbidding the company from operating as an accountant and an auditor. After nearly a century of existence, the Arthur Andersen name was forever defiled, effectively ending the corporate life of one of the largest and respected names in U.S. business.

In the wake of the 2002 conviction, Arthur Andersen LLP began the long and arduous process of shutting down completely. The company hired a new general counsel—likely the last general counsel the company would employ—in July 2003 to resolve the litigation mess created by the company's downfall and to appeal its conviction. In August 2004, a federal appellate court ruled against the company's appeal, insisting that the conviction remain intact. The court's ruling left Arthur Andersen LLP solely focused on attending to its legal problems, which were expected to be resolved by the late 2000s. After the company's litigation issues were resolved, the Arthur Andersen name was to disappear, finally concluding one of the most spectacular downfalls in U.S. business history.