Arthur Andersen LLP

founded: 1913 variant name: andersen worldwide

Contact Information:

headquarters: 33 w. monroe st.
chicago, il 60603 phone: (312)931-1826 email: [email protected] url: http://www.arthurandersen.com

OVERVIEW

Until June 2002, Arthur Andersen was a global firm providing economic and financial consulting services; business consulting services; tax and business advisory services; and audit and business advisory services. Unless its court conviction is overturned on appeal, its audit practice was almost certainly slated to be dissolved in 2002. Almost all divisions of the company experienced mass client defections. The company's audit business was effectively ended in June 2002 as a result of a guilty verdict in a jury trial that found the company had obstructed justice in another case, according to the Andersen Web site. Arthur Andersen serves the market through a fully integrated organization comprising separate practice entities organized under the laws of the country in which they are based.

COMPANY FINANCES

Global revenues for Arthur Andersen looked so bright at the start of 2001, and the company's 11.2 percent growth and $1.4 billion consulting profits were the stuff of corporate dreams. Total revenues in 2000 were $8.4 million from all sources. But the fat dream turned into the darkest of nightmares as Anderson failed to distance itself from unethical attempts to hide losses in annual reports at fast-failing Enron and, worse, shredded important documents related to its Enron consultancy.

HISTORY

Arthur Edward Andersen, the founder and guiding force behind Andersen Worldwide, was born in Plano, Illinois. Young Andersen displayed a propensity for mathematics, and upon graduation from high school he worked in the office of a comptroller while attending classes at the University of Illinois. In 1908 he received a degree as a certified public accountant (CPA) becoming the youngest CPA in Illinois at 23.

Andersen served as senior accountant for Price Waterhouse from 1907 to 1911. Afterwards, Andersen worked as comptroller for a year before being appointed chairperson of Northwestern University's accounting department. In 1913, Andersen decided to establish his own accounting firm, and at 28 he founded the public accounting firm of Andersen DeLany and Company in Chicago.

Following Congress' establishment of Federal Income Tax and the Federal Reserve in 1913, the demand for accounting services increased dramatically. This resulted in rapid growth for Andersen's small firm. One of Andersen's first clients was Schlitz Brewing. The list expanded rapidly to include International Telephone and Telegraph, Colgate-Palmolive, Parker Pen, and Briggs and Stratton, among many others. The company's primary business, however, consisted of numerous utility companies throughout the Midwest, including Cincinnati Gas and Electric Company, Detroit Natural Gas Company, Milwaukee Gas Light Company, and Kansas City Power and Light Company.

Fifty percent of Andersen's revenues during the 1920s were derived from work generated by utility companies. Andersen's firm was becoming labeled as a "utility firm" in accounting circles. In 1917 Andersen was awarded an honorary B.B.A from Northwestern University. In 1918, when DeLany left the partnership, the firm became known as Arthur Andersen and Company.

The company grew rapidly with many employees becoming licensed as accountants and auditors in many states. Six offices were opened nationwide. Those in New York (1921), Kansas City (1923), and Los Angeles (1926) were the company's main offices. Already serving as an auditor for many industrial corporations, Arthur Andersen began providing financial and industrial investigation services. About 400 people were employed with the company in 1928, and by 1940 that figure had increased to 700. The firm opened more offices in Boston and Houston in 1937 and Atlanta and Minneapolis in 1940.

During World War II, Andersen reached the pinnacle of his success. His numerous writings on accounting related subjects 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. During this time Andersen groomed his associate, Leonard Spacek, for the company's leadership position. Spacek joined Arthur Andersen and Company in 1928 and was named partner in 1940. After Arthur Andersen died in 1947, Spacek took over the company, remaining committed to the regimented management style of the founder.

By the time Spacek retired in 1973, Arthur Andersen and Company had opened 18 new offices in the United States and more than 25 offices in countries throughout the world. The company had a staff of more than 12,000, and revenues increased from $6.5 to more than $51 million between 1947 and 1973. Arthur Andersen had grown into one of the world's preeminent accounting firms, featuring a profitable consulting service that helped large corporations install and use computer systems in the 1950s, and it branched out into production control, cost accounting, and operations research during the 1960s. In the 1970s, the company became involved in a host of consulting activities, including systems integration services, strategic services, developing software application products, and providing a variety of other technological services.

FAST FACTS: About Arthur Andersen

Ownership: Arthur Andersen is a privately owned company.

Officers: Aldo Cardoso, Acting CEO, Andersen Worldwide

Employees: 59,000

Principal Subsidiary Companies: Arthur Andersen, along with Arthur Andersen Knowledge Enterprises and Andersen Consulting (a vision threatened with extinction in June 2002, according to published reports quoting Andersen executives), is a division of Andersen Worldwide. Arthur Andersen Franchise Services and Cross Roads Savings and Loan Association are two other subsidiaries.

Chief Competitors: Arthur Andersen is part of one of the largest financial services and consulting companies in the world. As such, its primary competitors are: Ernst and Young, KPMG, PricewaterhouseCoopers, and Booz Allen and Hamilton.

Harvey Kapnick succeeded Spacek, and under him the consulting division expanded and developed rapidly. By 1979, the consulting division's fees represented 20 percent of Andersen's total revenues. Kapnick was succeeded by Duane Kullberg (who originally joined the company in 1954 as an auditor), whose first years at Andersen were wrought with problems. Nevertheless, the company on the surface continued to thrive, but the audit business was under pressure to accede to client wishes that the company founders never would have tolerated. By 1988, 40 percent of the company's total revenues were generated from consulting fees, making Arthur Andersen the largest consulting firm in the world. Around this time, tension between the auditors of the firm and the consultants was brewing, centering on discrepancies in payscale (auditors were paid more than the consultants) and disagreement over the control of consulting operations. Tensions increased, consultants left the company, and lawsuits were filed. The company was in one of its most confused stages.

In an effort to end the internal discord, Arthur Anderson was restructured into an auditing and tax firm known as Arthur Andersen, and a subsidiary consulting firm was formed called Andersen Consulting. Each became a separate entity with its own management structure responsible only to the parent company, Andersen Worldwide.

CHRONOLOGY: Key Dates for Arthur Andersen

1913:

Arthur Andersen establishes his own accounting firm at the age of 28 called Andersen DeLany and Company

1918:

DeLany leaves the partnership and the firm becomes Arthur Andersen and Company

1938:

Arthur Andersen is offered the presidency of the New York Stock Exchange, which he declined

1947:

Andersen dies and Leonard Spacek takes over the company

1950:

Begins a consulting service, which helped corporations install and use their first computer systems

1960:

Adds production control, cost accounting, and operations research services

1970:

Begins involvement in technological services such as systems integration and software application

1984:

Arthur Andersen & Co. is forced to pay settlements totaling $65 million within two months

1988:

More than 40 percent of revenues come from consulting fees, making the company the largest consulting firm in the world

1989:

Lawrence Weinbach becomes president and revenues nearly double within four years

1992:

The firm is sued by the government's Resolution Trust Corporation for negligence in its audit of a failed financial institution

1998:

Andersen considers scuttling Enron Corp. as client after discovering how Enron hid debt through complex partnerships to improve bottom line; Andersen keeps Enron to avoid losing a potential $100 million annual fee-paying client

2001:

In Houston offices, document shredding takes place with regard to Enron and similar documents, and it is done without knowledge of many key Andersen employees; Arthur Andersen announced that it was planning a name change in coming months to "Andersen" for simplicity's sake

2002:

The company's future was damaged, perhaps beyond repair, after the U.S. Justice Department indicted Andersen in March; another client of Arthur Andersen, Worldcom, was caught overstating profits, hiding losses, and omitting line cost information in annual reports; Andersen auditors deny involvement or impropriety in their work for Worldcom in a company statement; Arthur Andersen appealed its conviction, claiming the jury was given flawed instructions; the guilty verdict brought back by a jury against Arthur Andersen means the end of the company's audit practice—the company conceded even before a judicial motion of conviction was filed

Lawrence Weinbach, a graduate of the Wharton Business School, replaced Kullberg in 1989. Known for his diplomacy, Weinbach tried to smooth out the hard feelings between the two divisions of Arthur Andersen. Under his leadership the company's revenues skyrocketed from under $3.0 billion in 1988 to $5.6 billion in 1992. This increase, nearly 50 percent, was generated by the company's increase in consulting activities. During the years 1988-1992, Andersen Consulting's revenues grew by 89 percent while Arthur Andersen's revenues grew by 38 percent. In 1997, Weinback retired from Andersen Worldwide, and W. Robert Grafton was named acting CEO. Andersen Consulting, though still a part of parent company Andersen Worldwide, was in negotiation to break off from the firm.

Over the years, too cozy relationships formed between Andersen and its consulting clients, in some cases leading to laxness on the part of the company's auditing arm, according to the Bloomberg News. Andersen clearly was gravitating toward the Enron scandal for many years, and company management needed to more carefully train its partners to make ethical judgments when dealing with difficult, high-pressure clients. According to media reports, no Andersen cash-cow client was bigger than Enron, paying $52 million a year for audit and consulting fees. Nonetheless, Andersen should have been forewarned since Enron had enduring previous accounting scandals going back to an oil trading the late 1980s, according to the Bloomberg News. By 2001, some Andersen executives clearly had become over-wrought by some of the dealings their company had experienced with Enron. According to the Bloomberg News, Enron auditors were concerned about indications that Enron was hiding losses from Enron shareholders, but instead of disconnecting from Enron, the accounting firm, foolishly in retrospect, continued its auditing and consulting work in expectation of even higher payments—more than $100 million annually perhaps—to come in future years.

Later that year, Andersen received correspondence from a highly placed Enron employee indicating that highly questionable practices—later called fraudulent by a U.S. congressional inquiry—were being tolerated by key Andersen officials. (Andersen continues to defend itself in June 2002.) Instead of taking hard internal action, the U.S. Justice Department maintained that some Andersen employees actually shredded and documents and tried, unsuccessfully, to destroy electronic mail documents. In March 2002, the Justice Department indicted Anderson for obstructing attempts by the Justice Department looking into earnings restatements by Enron, according to Bloomberg News. Some important Andersen officials were then fired, but it was too late to stop judicial proceedings, and these officials fingered higher-ups at Andersen for allegedly ordering or encouraging the destruction of documents. Andersen top officials argued that the company itself should not be found to blame for the actions of a few and argued that if all facts were known, the company should not be held responsible for Enron wrongdoings. The Justice Department indictment, unparalleled in the history of auditing, made it clear that the shredding and accounting improprieties were part of a bigger picture of malfeasance, a big picture that Andersen officials continued to emphatically deny in statements posted on the company Web site in June of 2002. (The conviction was in appeal at this writing, and there was no way of knowing by this writer whether the appeal would be denied or sustained.) Andersen officials maintained that Enron officials withheld key information from Andersen auditors.

In 2002, high-profile corporate clients by the hundreds—some who had been with Andersen for 20 years or more—severed relations with Arthur Andersen for such reasons as fear of being tainted by association, repugnance over the company's admissions, and, most often cited, a sense that its past association with Enron and considerable downsizing mean that it cannot pay attention to the present pressing needs of its once-vast clientele. Many of the companies such as Stagecoach, a transportation company in the United Kingdom, switched their business to PricewaterhouseCoopers. According to Hoover's Online, "Andersen's demise as a major force in accounting is all but certain; the firm had already been hemorrhaging clients and will cease auditing publicly owned companies after being found guilty of obstructing justice in relation to former auditing client Enron."

In the 2000s, the Enron (see Enron listing in this volume for particulars) and Andersen scandal was reminiscent of Teapot Dome and other business scandals that rocked the United States in the early twentieth century. If any good can come out of the scandal, it is that the entire global accounting industry heard the loudest possible wakeup call. One pervasive practice practiced by Andersen and other prominent accounting firms that has led to ethical breeches is that of selling audit services for an unprofessional lowered fee in expectation of earning millions in consulting fees. Doing so often gives the client the upper hand dealing with accounting firms doing the auditing and may allow unethical client practices to go unchecked and unreported to the Securities and Exchange Commission. In effect, in some situations, the client gets the accounting firm into a compromised position. Wayne Shaw, an accounting professor at Southern Methodist University in Dallas, told Bloomberg News that a compromised accounting firm lacks the integrity to hold a high-paying client accountable. "The standards aren't demanding enough to provide sufficient information to investors," Shaw informed the Bloomberg News. "We've set up a system where creativity is rewarded. I'm not sure you want an auditor to be creative."

STRATEGY

In June 2002, the company's strategy to save the once-respected accounting giant came down to a legal appeal on one hand and attempts to save whatever portions of the company that had not yet been tainted by the court's jury conviction in 2002.

GLOBAL PRESENCE

Arthur Andersen had been a highly respected and successful global organization, with 390 worldwide offices in the early 2000s. In 2002, it remained to be seen if the company could maintain any sort of global presence, though as employees jumped ship to competitors and clients left by the dozens, it was eminently clear that Andersen's international reputation was in tatters unless it could show, by winning an appeal, that its conviction was the result of improper instructions to a jury. Andersen also maintained that its attorneys had not been able to offer all evidence in defense of its practices. If it is successful with its appeal, no doubt the company will slowly, painfully attempt to pick up its pieces and go on, or it will sell what remains of value to rival firms. In June of 2002, at this writing, the company's global future is quite unclear, as is evident by the large number of Andersen employees finding employment at rival accounting firms, and by the large number of once-loyal Andersen accounting clients that have fired the company and taken their business elsewhere in spite of vociferous denunciations of the judicial verdict by Andersen executives.

EMPLOYMENT

The 7,000 employees let go by Andersen were the tip of the iceberg, and most of these were guiltless of any company wrongdoing. Thousands more opted to accept similar positions at rival companies such as Ernst & Young and PricewaterhouseCoopers.

SOURCES OF INFORMATION

Bibliography

andersen home page, june 2002. available at http://www.arthurandersen.com.

"arthur andersen announces new accounting reference series." arthur andersen news releases, 21 may 1998.

ward, david. "andersen's enron lapses followed faulty audits of other firms." bloomberg news, 24 april 2002.

wayne, rich. "arthur andersen loses clients." bloomberg news, 15 june 2002.

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. arthur andersen's primary sics are:

8721 accounting auditing and book keeping services

8742 management consulting services

also investigate companies by their north american industry classification system codes, also known as naics codes. arthur andersen's primary naics codes are:

541211 offices of certified public accountants

541611 administrative management and general managementconsulting services