Arthur Andersen & Co. and Enron Scandal Emily Thomas, Sam Glover, Brett Herron
"The far-reaching impact of Enron's collapse clearly highlights the need for such an organization. Issues of jurisdiction, funding, governance, and legal protection are complex and they certainly need to be explored. Such an investigative board would emphasize forward-looking lessons that can improve the efficiency and integrity of the entire capital market system.” -James Copeland, CEO of accountants Deloitte and Touche
Audit • Interim Review • Hard Close • Final • Stakes
Conflict of Interest • Arthur Levitt • Big 5 • Proposed Law • Intensive Lobbying Campaign • $27 Million
Management Consulting • Best Practices • Analytical Techniques • Change Management • Technology Implementations • Strategy Development
Background Info • Arthur Andersen is an accounting and consulting service that operates businesses throughout the US & world. • The 89 year old company was apart of the “Big 5” accounting firms. • Main headquarters are in Chicago, Illinois and Houston, Texas. • Enron, the large energy corporation, has been a client of Andersen’s for 16 years up until Enron’s 2001 bankruptcy.
Background • In the past, Arthur Andersen has been linked to the CIA and Mafia of Chicago. • Andersen covered up a massive embezzlement of the First National Bank in Chicago in the 70’s. • It was apart of an underground espionage operation in Greece. • Andersen is thought to have done questionable accounting for Enron, which hid millions of dollars of debt from the public.
Timeline of Scandal • In the summer and fall of 2001, Arthur Andersen foresaw government litigations and investigations against Andersen and Enron. • October 16th,2001- Enron issued a press release announcing the company’s $618m net loss for the 3rd quarter of 2001. • On the same day, Enron reduced shareholder’s equity in the stock and the stock price plummeted.
Timeline Cont. • October, 2001- Enron informs Andersen to destroy all paper documents and emails concerning Enron. • Shortly after, the SEC starts an investigation of the two companies. • Lawyers defending Arthur Andersen argued that shredding documents was a routine practice. • Eventually, Andersen was charged with obstruction of justice for destroying the documents before the collapse of the energy giant.
What will happen? • Many of Andersen’s auditing clients are choosing other accounting firms to perform auditing work. Andersen has lost over 130 publicly traded corporations. Firms like Oracle, International Paper, Sara Lee, Newell Rubbermaid, Federal Express, Delta Airlines, and Waste Management are choosing other auditors. • Already attorneys for Enron shareholders and creditors have reached a tentative agreement to cap payments made by Andersen and their insurance company to between $250 and $300 million. • A large number of partners and employees have either gone to work with other accounting firms or are considering leaving Andersen.. In a recent move to reduce costs, Andersen laid off 7,000 employees. Loss of quality employees may hamper Andersen’s ability to retain current clients and obtain new clients in the years ahead.
major blow accounting firms worldwide • sparked a wider debate about auditing practices in general. • Possible that financial markets need an independent regulatory body, capable of both investigating disasters (such as Enron & AA) and preventing their recurrence.
Discussion • How did the Enron meltdown affect the employees at Arthur Andersen? How did it affect the employees at Enron? • Lenders, investors, the accounting industry, and the nation’s economy have also been affected by the Enron scandal. How were each of these groups affected? • Many of the decisions relating to the Enron meltdown have ethical implications. Assume that you were in charge of the Houston-based auditing team that examined Enron’s accounting records. As a result of your work, you know that some of the accounting information is questionable and could damage Enron’s reputation. If reported, this same information could lower Enron’s stock value and hurt both investors and employees with pension plans heavily invested in Enron stock. Would you report this information or would you keep the information to yourself?
Bibliography http://www.accountancyage.com/News/1129120 www.ncpers.org/PastConf/ html/an2002_14.html http://college.hmco.com/business/phk/business/7e/students/andersen.html http://www.opensecrets.org/news/accountants/index.asphttp://en.wikipedia.org/wiki/Arthur_Andersen www.strangecosmos.com