How One Of The Biggest Accounting Firms Collapsed In A Year

Posted on Tuesday, January 17, 2023 by Lydia SinclairNo comments

The world of accounting is built on trust, respect and expertise, which is why so many recruiters look for skilled professionals to take on forensic accounting jobs to ensure that businesses are conducting themselves legally and based on these three principles.

What can happen if an auditing and accounting firm do not follow these core principles is a sudden and acrimonious collapse, perhaps best epitomised by one of the biggest and most sudden collapses of an accounting firm in history.

Few stories highlight just how vital trust and reputation are more than the demise of Arthur Andersen, one of the Big Five accounting firms swept up in the biggest financial scandals in history.

 

Think Straight, Talk Straight

Given that the company spent over eight decades preaching the virtues of high standards, responsibility and honesty, it is important to look at what Arthur Andersen was for so very long.

It initially started with Arthur E. Andersen, a Chicago-based accountant who in 1908 became the youngest Certified Public Accountant in the state of Illinois and when he set up his own firm with Clarence DeLany, he aimed to build the burgeoning profession on strong foundations.

He created the first-ever central training programme dedicated to accounting, was an earlier believer in training taking place not as night courses but during regular opening hours and used his position to help assist and support charities, civic organisations and educational institutions.

As for the values of his company, Mr Andersen was, somewhat ironically given the fate of his company, one of the biggest advocates for high standards, honesty and impartiality.

He was one of the first major accountants to make the argument that accountants worked for their client’s investors, rather than the management, and believed in providing a uniform, impartial but high-quality service to all of their clients, leading to the “Arthur Androids” moniker for employees.

He practised what he preached as well, with one of his most famous quotes coming in response to an Illinois rail utility firm demanding he sign off on accounts with financial irregularities.

He said there was “not enough money” in the entire city of Chicago to convince him to breach his ethics, and for many years after his death in 1947, these ethical decisions would steer the company, such as proposing that stock options should be treated as a business expense.

However, in the wake of the laissez-faire accounting world of the 1980s, Arthur Andersen would not leave the decade unscathed.

 

Conflicts Of Interest

In the 1980s, accounting firms increasingly diversified, and one of the most lucrative endeavours was consultancy. This led to potential conflicts of interest between different parts of the same company, which was seen in dramatic fashion with what happened with Enron.

The Enron Scandal is still one of the biggest financial frauds in history, with the misuse of special purpose entities, mark-to-market accounting techniques and other questionable accounting practices signed off by Arthur Andersen, who served as both auditor and consultant.

This conflict of interest led to major scrutiny when Enron filed for what was at that time the largest bankruptcy in history, and ultimately the company would be convicted of obstruction of justice for shredding documents related to its Enron audit, as well as other famous bankruptcies such as WorldCom.

Even when that conviction was overturned in 2005, theoretically leaving the company free to practice accounting again, they have never returned.

 
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