author andersen

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Arthur Andersen

The Tale of an Untimely Demise


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Brief history

Founded December 1913 by Arthur Andersen& Clarence DeLany

By 2000: 85,000 employees

350 offices in 84 countries

Largest of the Big Five accounting firms

100,000 clients including governments andmultinationals

Provided auditing and accounting, tax advice,

business and IT consulting


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Brief history

1989: Andersen Consulting becomes separate business unit

-- Arthur Andersen continues consulting

2000: split with Andersen Consulting (Accenture)

March 2002: charged with obstruction of justice related toEnron investigation

Convicted June 16, 2002

Doors closed August 31, 2002


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Arthur Andersen

What Happened?

TitleUp to the 1970s, audit firms were exactly that due to

independence concerns.

AA is historically a firm that would stand up to clients.

In the late 1960s, audit firms realized that extra money could be

made by offering consulting and tax services to existing

clients.

There were some concerns within these firms due to

independence.

The services offered were within SEC rules, so okay.

In 1978, consulting provided 21% of AAs revenue.


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Arthur Andersen

What Happened?

Through the 1980s and 1990s, increasing

amounts on money were made on these

extra services.

Specifically, these services represented

increasing percentages of the revenue atArthur Andersen, from 20% in the 1970s to

over 50% in the late 1990s.


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Arthur Andersen What Happened?

In 1988, Andersen Consulting split off from

Arthur Andersen LLP.

Now 2 units under one organization.

AA LLP to bid on smaller clients only.

Significant lost revenue to AA LLP.

This also created disparity between consultants

and auditors.


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Arthur Andersen

What Happened?

2001: Enron.

Total breakdown of AA internalpeer review processes.

AA did not appropriately address

problems with Enrons accounting. Not limited to Enron. AA has had

problems with other clients as well.


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Actuarial Audit Assist

Beginning in the 1980s, the actuarial profession

gave a great deal of power with regard to

insurance companies away to the accountingprofession.

Traditional audit in the 1990s -the actuary is

working at the direction of the accounting

partner to address areas where the accounting

partner feels he does not have sufficient

expertise.


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The actuary reviews the detailed actuarial work

papers with regard to assembly of reserve,

claim liabilities and DAC items in the financialstatements. Recalculations on a sample basis

are performed.

Audit beginning in 2000:

Continued pressure on audit fees. Continued

increase in actuarial billing rates.


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Audit beginning in 2000:

Increased amounts of the companys actuarial

work is done by computer systems andelectronic interfaces instead of manual

processing. The scope of the audit moves away

from detailed test work, with increased focus

on procedures and controls in place at

companies.


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What is the Impact of Enron?

Increased disclosureRules are changing such

that details of business relationships andtransactions must be very clear.

Stricter independence rules

Rules are changing to restrict the kinds of

activities a company can perform and still be

considered independent for auditing.


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Stricter independence rulesThere will be a

reduction in the type of consulting work an

actuary can perform for a company if he/she is

auditing the company, or if he/she is

associated with the auditing firm.

Use of a specialistIt is anticipated that stricter

rules will define when a specialist (actuary)

must be involved in an audit.


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What is the Impact of

Enron? Use of a specialistThe involvement ofan actuary in certain situations will be

mandatory. Areas that the actuary is

used will no longer be at the judgmentof the audit partner.

Increased focus on role of the audit

committeeReport issued by the BigFive accounting firms and the AICPA

providing a call to action.


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Timeline of Scandal

In the summer and fall of 2001, ArthurAndersen foresaw governmentlitigations and investigations against

Andersen and Enron.

October 16th,2001- Enron issued a pressrelease announcing the companys$618m net loss for the 3rd quarter of

2001. On the same day, Enron reduced

shareholders equity in the stock andthe stock price plummeted.


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Timeline of Scandal October, 2001- Enron informs Andersen

to destroy all paper documents andemails concerning Enron.

Shortly after, the SEC starts an

investigation of the two companies. Lawyers defending Arthur Andersen

argued that shredding documents was aroutine practice.

Eventually, Andersen was charged withobstruction of justice for destroying thedocuments before the collapse of theenergy giant.


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Enron? Increased focus on role of the audit

committeeReport included a list of

ways to improve financial reporting. Thedesired goal is high quality, transparent

financial reporting.

Evaluate managements tone from the

top.

Challenge management about

uncorrected audit differences.


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committee

Understand related party transactions

and disclosures.

Determine that users can understand

financial statements and MD&A

disclosures. Ask auditors about pressure from

management.


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committee

Challenge management and theauditors about:

Risks and risk of material

misstatement.

Estimates and judgments.

Impact of changes in the business

environment.


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committee

Challenge management and theauditors about:

Critical accounting principles.

Quality of financial reporting anddisclosures.

Gray areas of accounting.


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New rules regarding audit committee

membership:

Require at least 3 independent financiallyliterate members.

One member must have financial expertise.

In response, many audit committees haveinitiated some form of self-evaluation,

especially with regard to independence.


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What will happen?

? Andersens auditing clients were. Firms like Oracle,

International Paper, Sara Lee, Newell Rubbermaid,Federal Express, Delta Airlines, and WasteManagement are choosing other auditors.

Already attorneys for Enron shareholders andcreditors have reached a tentative agreement to cappayments made by Andersen and their insurancecompany to between $250 and $300 million.

Andersen laid off 7,000 employees. Loss of qualityemployees may hamper Andersens ability to retaincurrent clients and obtain new clients in the yearsahead.


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What will happen?

?major blow accounting firms worldwide

sparked a wider debate about auditing practicesin general.

Possible that financial markets need an

independent regulatory body, capable of bothinvestigating disasters (such as Enron & AA) and

preventing their recurrence.


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