Audit and Corporate Governance
ANDERSEN
WORLDWIDE
USA
Presented by: Ritu Kumari 21BC438
Kalpana 21BC457
OVERVIEW
01 02 03
Background Development Enron Scandal
04 05 06
Arthure Andersen
Worldcom and AA Accenture
Collapse
BACKGROUND
Arthur Edward Andersen. Born in
1885 Piano, Illinois
He received a degree in accounting from the university
and at 23 years old became the youngest certified
public accountant in Illinois.
1908
From 1908 to 1911, Andersen served as
1911 senior accountant for Price Waterhouse
in Chicago.
He founded the public accounting firm
of Andersen, DeLany & Company in 1913
Chicago
when DeLany left the partnership, his
1918 firm became known as Arthur
Andersen & Company.
Mr. Andersen dies. Leonard Spacek steps
in as managing partner, preventing the firm 1947
from dissolving. During Spacek's tenure,
Andersen moves to the top of its
profession.
It obtained worldwide growth and opened its first International offices during 1950s.
In 1950 Josef glickauf demonstrated that computers can be used to automate
bookkeeping.
In 1954 it launched its new computer consulting Business.
During 1970s its consulting business exploded as the demands for information technology
increased.
By 1979 almost a half of its worldwide fees came from consulting and tax.
In 1979 it surpassed 1000 partners and became the world's biggest business services firm.
In 1989 it formed a separate consulting practice.
Arthur Andersen Andersen
Andersen Worldwide Consulting
Enron: American energy, commodities, and services company in
Houston, Texas.
Established in 1985 through a merger of Houston Natural Gas
and InterNorth.
Employed around 20,000 staff and operated in electricity,
natural gas, communications, and pulp and paper sectors.
Recognized by Fortune as "America's Most Innovative Company"
for six consecutive years
Enron's profits dropped as competition grew in the energy-
trading industry with the end of the boom years.
Skilling became CEO in February 2001, but abruptly resigned in
August, leading Lay to resume the CEO position.
In October, Enron disclosed a $638 million loss for the third
quarter.
On December 2, 2001, Enron filed for Chapter 11 bankruptcy
protection.
CAUSES OF THE SCANDAL
Faulty Revenue SPE Market to Market Ineffective Auditing
Recognition Accounting
In total, by 2001, Enron had Enron used mark-to-market
Arthur Andersen, Enron's
The company showed entire sales used hundreds of special accounting for long-term
auditor, faced accusations of
value as revenue in it financial purpose entities to hide its contracts, estimating income
lax audit standards due to a
statements. debt. based on future cash flow
conflict of interest arising from
As a result, Enron's revenues Enron's balance sheet despite uncertainties.
substantial consulting fees
increased from $13.3 billion to understated its liabilities and With this method, Enron could
received from Enron.
$100.8 billion. overstated its equity, and its record income from projects
In 2000, Arthur Andersen
This 65% annual increase was earnings were overstated. even if they hadn't actually
earned $25 million in audit fees
unprecedented in the energy Notable examples of special gotten the money yet, making it
and $27 million in consulting
industry wherein growth of 2-3% purpose entities that Enron look like they were making more
fees, leading to concerns about
is considered respectable. employed were JEDI, Chewco, money on their financial records.
compromised independence.
Whitewing, and LJM
Enron was one of the biggest clients of AA.
Enron paid fees to AA for provision of better auditing
consequences.
AA completed the better report by sending untrained
auditors to the client's sides or other unethical
methods.
When Enron came under investigation of federal
authorities, AA had a huge "shred" campaign.
They set out to make as much money for themselves
as possible.
These selfish acts led both companies into an eventual
downfall in bankruptcy.
On December 2, 2001 Enron Corporation filed for
chapter 11 bankruptcy, which was the largest
bankruptcy petition in U.S. history.
WorldCom and AA
Arthur Andersen was the auditor of the
company till 2002.
But, it failed to detect the accounting
impropriety committed in 2001 and 2002.
It didn't have designed its audit standards to
detect the misclassifications of the magnitude
of $11bn
They should have taken into account the
increasingly precarious financial condition of
WorldCom and paid more attention to the
possibility of aggressive accounting practices.
Arthure Andersen Collapse
The federal authorities authorities after the Enron collapse started the
overall investigation of other AA clients.
As a result, WorldCom, Qwest Communications, Global Crossing, Merck
and Baptist Foundation of Arizona announced themselves insolvent.
In the end, Andersen agreed to cease auditing public corporations by
the end of August in 2002, essentially marking the end of the ninety-
year-old accounting institution.
All the international offices of AA were bought by the "big four".
In 2002, the investigation was finished and AA was found guilty.
In 2005, the Supreme Court of the US remitted the verdict against
Arthur Andersen.
Nevertheless, the discharge did not help one of the worlds the ding
auditing companies the come back to work
The birth of Accenture through Andersen
Consulting
In the 1970s and 1980s, Andersen Consulting experienced rapid
growth, outpacing the traditional accounting, auditing, and tax
services of Arthur Andersen.
Friction arose between the two divisions due to disagreements over
profit sharing, leading to their separation in 1989 as Andersen
Worldwide Société Coopérative.
Arthur Andersen leveraged its accounting services to attract clients
for Andersen Consulting, leading to a bitter dispute throughout the
1990s.
In August 2000, arbitration granted Andersen Consulting
independence but awarded past payments to Arthur Andersen,
resulting in the rebranding of Andersen Consulting to Accenture
and Arthur Andersen to "Andersen".
Conclusion
The Enron case led to the accounting
industry making changes to improve itself
and the economy.
Acting unethically hurts the public, so it's
important for accounting to follow ethical
standards for everyone's benefit.
Putting making money above doing what's
right and following the law is not okay.
