Fraud

It seems unfortunate that the only time auditors (Certified Public Accountants) make the news is when they are involved in some corporate scandal or another. The fall of Enron and MCI WorldCom also led to the fall of the once-proud accounting firm of Arthur Andersen. I've heard different things, but I wondered what the heck ever happened to Andersen? I investigated further, and found the firm has a rich and tragic history.

The firm's founder (Arthur Andersen himself) took the moral high road in his approach to auditing. He believed the auditor's responsibility was to investors, not the client. He somewhat famously refused to sign off on the flawed accounts of a very lucrative client, and accepted the risk of losing all the potential revenue.

The firm did very well for many years. It established a reputation as the top accounting firm in the world. There was no close second. I am told that all the other firms looked to Andersen for guidance in the profession.

Then Enron came along. It was just a small energy trading company that grew like crazy. Enron chose to hire Arthur Andersen to audit their financial statements, as well as provide other consulting services. Things were great for a few years. In a twist of practice, Andersen allowed itself to be blinded by money (by this time Enron's audit fee exceed $45 million annually), and Andersen allowed Enron to take advantage of some loopholes in accounting principles to hide vast amounts of debt off its balance sheet. Once this debt was revealed, and the corresponding interest payments revealed huge losses rather than gains, Enron went under.

In 2002, Andersen was convicted of obstruction of justice for shredding documents related to the Enron audit. Since the SEC does not allow convicts to audit public companies, Andersen voluntarily gave up their license. Subsequent scandals, notably at Sunbeam and WorldCom (the largest bankruptcy in world history - Enron is second), led to a crisis at Andersen. Accountants left the firm in droves, as did clients. The firm was dying.

What interested me most is to find out that Andersen is still extant. The firm has declined - it went form a high of 85,000 employees worldwide to some 200 currently. These 200 are apparently overseeing the "orderly dissolution" of the company. The Supreme Court even repealed Andersen's prior conviction due to serious flaws in the jury instructions. Even though again able to register with the SEC, it is unlikely that any public company would want Andersen's name on its annual report. It seems that the company will eventually disappear completely, once all the lawsuits are settled.

What a story! The best accounting firm in the world was brought low because it failed to stay true to the vision of its founder (to be fair, every major firm was involved in some scandal in the late 1990's and early 2000's).

One of my professors has made some comments regarding this trend. One is that he is not proud of what his generation has done to the accounting profession. Another is that he doesn't want to read about us in the paper (accountants only make the paper when they get sued or otherwise brought to court). Finally he told us that the accounting profession has the potential to be the single most important profession in the U.S. capital market (by providing assurance that financial statements are reliable), or we can be absolutely worthless. Hopefully we will be the former, but another scandal like Enron might make that impossible.