What was Arthur Andersen?

Arthur Andersen LLP was founded in 1913 by Arthur E. Andersen and Clarence DeLany in Chicago, Illinois. The firm began with a focus on providing quality auditing and accounting services. Arthur Andersen, the firm’s namesake, was known for his ethical stance on accounting, famously resigning from a client engagement rather than approving falsified financial information. This strong emphasis on integrity and excellence became the cornerstone of the firm’s reputation. Over the years, Arthur Andersen grew to become one of the largest and most prestigious accounting firms in the world, operating in more than 80 countries at its peak.

Expansion and Global Reach

By the latter half of the 20th century, Arthur Andersen expanded beyond auditing and accounting services into consulting and tax services. This move diversified the firm's portfolio, allowing it to provide clients with a wider array of financial solutions. In the 1980s, Arthur Andersen’s consulting wing became particularly successful, driving much of the firm’s revenue growth. The consulting practice eventually separated and rebranded as Andersen Consulting in 1989, though the two entities continued to operate under a shared structure until a complete legal separation occurred in 2000. This split was driven by internal disputes regarding profit-sharing and strategic direction.

At the height of its operations, Arthur Andersen was considered one of the “Big Five” accounting firms globally, alongside PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young. The firm's clients included Fortune 500 companies, governments, and large corporations worldwide, cementing its reputation as a leader in professional services.

The Enron Scandal and Legal Troubles

Arthur Andersen’s downfall can be traced to its involvement in the Enron scandal in the early 2000s. Enron, an energy company based in Houston, Texas, was revealed to have engaged in widespread accounting fraud. As Enron’s auditor, Arthur Andersen was responsible for reviewing and approving the company's financial statements. The firm was accused of failing to identify, and in some cases actively participating in, the manipulation of Enron’s financial data to hide its losses and inflate earnings.

The situation escalated when it was discovered that Arthur Andersen employees had destroyed key documents related to Enron’s audits after the U.S. Securities and Exchange Commission (SEC) began investigating the company. This led to obstruction of justice charges against the firm. In 2002, Arthur Andersen was convicted of obstructing justice, effectively putting the firm out of business. The conviction led to a mass exodus of clients, and shortly after, Arthur Andersen voluntarily surrendered its license to practice before the SEC.

Legal Repercussions and Legacy

Arthur Andersen’s conviction was later overturned by the U.S. Supreme Court in 2005, which ruled that the jury instructions for the obstruction of justice charges were flawed. However, by that time, the damage had already been done. The firm’s reputation was irreparably tarnished, and most of its clients and employees had moved on to other firms. While the ruling technically cleared Arthur Andersen of wrongdoing in the legal sense, the firm’s role in the Enron scandal remained a significant blemish on its legacy.

Several of Arthur Andersen’s offices and personnel were absorbed by other major accounting firms. Andersen Consulting, which had rebranded itself as Accenture, was able to avoid much of the fallout and continues to operate as a successful global consulting firm.

Impact on the Accounting Industry

The collapse of Arthur Andersen had a lasting impact on the accounting industry. It led to increased regulatory scrutiny and stricter oversight of audit practices. In the United States, the Sarbanes-Oxley Act was passed in 2002 as a direct response to the Enron scandal and other corporate fraud cases. This legislation introduced stricter requirements for financial reporting, enhanced the responsibilities of corporate boards, and created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of auditors.

The disappearance of Arthur Andersen also reduced the number of major accounting firms from five to four, contributing to increased consolidation within the industry. The remaining “Big Four” firms—PwC, Deloitte, Ernst & Young, and KPMG—faced new challenges in terms of managing conflicts of interest, ensuring the independence of audit functions, and rebuilding public trust.

The Bottom Line

Arthur Andersen’s rise and fall serve as a cautionary tale in the history of corporate America. Once a beacon of integrity and excellence in the accounting profession, the firm’s role in the Enron scandal and subsequent legal troubles led to its rapid demise. Despite its early success and contributions to the accounting field, Arthur Andersen is often remembered for its involvement in one of the largest corporate fraud scandals in U.S. history. The firm’s downfall had wide-reaching consequences, influencing regulatory changes and reshaping the landscape of the global accounting profession.