Arthur Andersen LLP

Arthur Andersen LLP
Name	Arthur Andersen LLP
Type	Partnership
Fate	Dissolved (2002)
Founded	1913
Founder	Arthur E. Andersen; Clarence DeLany
Defunct	2002
Headquarters	Chicago, Illinois, United States
Products	Audit, tax, consulting, business advisory
Num employees	~85,000 (2000)

Arthur Andersen LLP Arthur Andersen LLP was a major American professional services firm founded in 1913 in Chicago by Arthur E. Andersen and Clarence DeLany. For much of the 20th century it was one of the "Big Five" accounting firms alongside Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers. The firm provided auditing, tax, and consulting services to corporations and governments and played a central role in shaping United States and international accounting practice until its collapse following the Enron scandal and subsequent legal actions.

History

Founded in 1913, the firm grew through the 1920s and 1930s under the leadership of Arthur E. Andersen and partners who emphasized stringent Securities and Exchange Commission-style auditing principles and professional ethics. Post-World War II expansion paralleled multinational growth in General Electric, Ford Motor Company, and other large industrial clients, while the firm diversified into tax and advisory practices amid regulatory changes like the Revenue Act of 1954. In the late 20th century, mergers and global alliances connected the firm to networks in United Kingdom, Japan, Germany, and Australia, aligning it with international firms including Coopers & Lybrand and Andersen Consulting (later Accenture), which itself split after a high-profile dispute resolved by International Chamber of Commerce-style arbitration.

Services and Business Structure

The firm operated as a partnership and offered services across audit, tax, consulting, and corporate finance, serving clients such as Enron, WorldCom, Waste Management, Inc., and multinational corporations like Hewlett-Packard and Sun Microsystems. Its consulting division—initially marketed under Andersen Consulting—provided technology and management consulting to firms and public institutions, competing with McKinsey & Company, Boston Consulting Group, and Booz Allen Hamilton. The partnership structure created geographic independence for member offices in cities like New York City, London, Tokyo, and Sydney, while centralized quality control groups liaised with bodies such as the Financial Accounting Standards Board and the Internal Revenue Service.

Role in Major Accounting Standards and Practices

Partners and technical staff from the firm frequently served on committees and advisory panels of the Financial Accounting Standards Board, International Accounting Standards Committee, and the American Institute of Certified Public Accountants, influencing standards on revenue recognition, consolidation, and audit methodology. Andersen professionals contributed to debates over Securities Act of 1933-related disclosure, Sarbanes–Oxley Act-era reform proposals, and interpretive guidance for Generally Accepted Accounting Principles (United States). The firm published guidance used by corporate controllers and audit committees and trained auditors in sampling methods, materiality thresholds, and independence rules advocated by the Public Company Accounting Oversight Board after 2002 reforms.

Enron Scandal and Legal Proceedings

The firm's audit of Enron drew intense scrutiny after Enron's bankruptcy in 2001, with investigations by the United States Department of Justice, the Securities and Exchange Commission, and congressional panels including hearings before the United States Senate Committee on Finance and the House Committee on Energy and Commerce. Allegations centered on failures to identify off-balance-sheet vehicles involving counterparties such as LJM Cayman, questionable revenue recognition, and interference tied to consulting engagements with Enron. In 2002, criminal charges of obstruction of justice were brought by the United States Department of Justice; a jury convicted the firm, prompting immediate client losses and partner departures. Subsequent appeals led to a unanimous reversal of the conviction by the United States Supreme Court in 2005 on legal grounds related to jury instruction, though by then the firm's global network had disintegrated.

Dissolution and Aftermath

Following the 2002 conviction and rapid client defections, the firm’s member practices in the United Kingdom, Canada, Australia, and Spain were sold or rebranded, with many professionals joining Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers. Andersen Consulting had previously separated and become Accenture after arbitration with the firm’s partners. Litigation and regulatory reforms continued for years, including civil suits by shareholders of Enron and other corporate clients such as WorldCom. The collapse precipitated legislative and regulatory responses culminating in the Sarbanes–Oxley Act of 2002 and the creation of the Public Company Accounting Oversight Board to oversee auditors of public companies.

Legacy and Impact on the Accounting Profession

The firm’s rise and fall reshaped practice, education, and oversight in auditing and professional services. The Enron episode accelerated reforms involving auditor independence, partner rotation, separation of consulting and audit services, and enhanced disclosure obligations affecting firms like PricewaterhouseCoopers and Deloitte. Academic analyses in journals such as those associated with Harvard Business School, Columbia Business School, and Stanford Graduate School of Business examined governance failures, ethics training, and risk management. The legal reversal by the United States Supreme Court spurred debate in Congress and among regulators about the balance between criminal enforcement and regulatory remedies, informing subsequent policy positions from institutions including the Financial Accounting Foundation and international standard setters like the International Accounting Standards Board.

Category:Accounting firms Category:Companies based in Chicago