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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.
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.
Background Note
Arthur Andersen (Arthur) and Clarence Delaney founded Andersen in Chicago, in 1913. The firm was initially
named Andersen, Delaney & Co., and was engaged in offering accounting services to companies. Andersen was
essentially a partnership firm, with all the chief auditors having a share in the firm. The firm changed its name to
Arthur Andersen (Andersen) in 1918. Arthur gave a lot of importance to ethical values and insisted on honest
accounting and the elimination of conflicts of interest in accounting the firms. During the late 1920s, because of the
depression in the US economy, many investors lost faith in companies. Reportedly, Andersen, under the leadership
and guidance of Arthur, was instrumental in restoring the faith of US investors in companies based on its integrity
and high professional values. Arthur also focused on creating a firm with its own set of business standards. His
emphasis on 'Arthur Andersen specific' business standards evolved into the concept of 'One Firm' over the years.
This concept ensured that all Arthur Andersen clients across the world received the same quality of work, the same
kind of approach to work, and the same caliber people trained in the same way.
Such consistency in offering services and quality was achieved by imparting rigorous training to all new recruits.
The training sought to help new recruits imbibe the Arthur Andersen culture, popularly known as the 'Andersen
Way.' After Arthur's death in 1947, Leonard Spacek (Spacek), a partner in the firm, became the CEO. By the early
1950s, the culture of ethics and honesty was so deeply ingrained in the firm that the firm was elected to the
Accounting Hall of Fame of Ohio State University in 1953. In the early 1950s, realizing the potential of technology,
especially computer technology, Andersen began investing in the same. By the mid-1950s, Andersen was offering
consultation and installation services through its new Administrative Services Division...
Discussion Questions:
a) Using the principles of ethics describe Andersens role in accounting fraud at Enron, one of its
major clients and the unethical practices of audit firms in the 1990s
b) Discuss the importance of ethics, integrity and professional standards in the audit business. The
need to balance economic and social benefits in corporate decision making
c) Describe the various initiatives taken by the government and other regulatory authorities, such as
SEC and AICPA, to restore the trust of investors in corporate firms and audit firms in the US. Give
specific examples from Kenyan industry