Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the
largest and most respected accounting firms in the world through his reputation for honesty and
“Think straight, talk straight” was his motto and he insisted that his clients adopt that
same attitude when preparing and issuing their periodic financial statements.
auditing philosophy was not rule-based, that is, he did not stress the importance of clients
complying with specific accounting rules because in the early days of the U.S. accounting
profession there were few formal rules and guidelines for accountants and auditors to follow.
Instead, Andersen invoked a substance-over-form approach to auditing and accounting issues.
He passionately believed that the primary role of the auditor was to ensure that clients reported
fully and honestly to the public, regardless of the consequences for those clients.
Ironically, Arthur Andersen & Co.’s dramatic fall from prominence resulted from its
association with a client known for aggressive and innovative uses of “accounting gimmicks” to
window dress its financial statements.
Enron Corporation, Andersen’s second largest client, was
involved in large, complex transactions with hundreds of special purpose entities (SPEs) that it
used to obscure its true financial condition and operating results.
Among other uses, these SPEs
allowed Enron to download underperforming assets from its balance sheet and to conceal large
During 2001, a series of circumstances, including a sharp decline in the price
of Enron’s stock, forced the company to assume control and ownership of many of its troubled
As a result, Enron was forced to report a large loss in October 2001, restate its earnings
for the previous five years, and, ultimately, file for bankruptcy in December 2001.
During the early months of 2002, Andersen became the focal point of attention among
law enforcement authorities searching for the parties responsible for Enron’s sudden collapse.
The accusations directed at Andersen centered on three key issues.
The first issue had to do with
the scope of professional services that Andersen provided to Enron.
Critics charged that the
enormous consulting fees Enron paid Andersen impaired the audit firm’s independence.
second issue stemmed from Andersen’s alleged role in Enron’s aggressive accounting and
financial reporting treatments for its SPE-related transactions.
Finally, the most embarrassing
issue was the massive effort of Andersen’s Houston office to shred Enron audit documents,
which eventually led to the demise of the firm.