Question

Identify and discuss why Arthur Andersen as Enron’s auditor was forced out of accounting business.

Answer 1

Arthur Andersen LLP, based in Chicago, is an American holding company. Formerly one of the "Big Five" accounting firms (along with PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG), the firm had provided auditing, tax, and consultingservices to large corporations. By 2001, it had become one of the world's largest multinational companies. On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron, resulting in the Enron scandal. Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple (in the firm's legal department) and David Duncan (lead partner for the Enron account) were cited as the responsible managers in this scandal because they ordered subordinates to shred relevant documents.

Because the U.S. Securities and Exchange Commission will not accept audits from convicted felons, the firm agreed to surrender its CPA licenses and its right to practice before the SEC on August 31, 2002—effectively putting the firm out of business. It had already started winding down its American operations after the indictment, and many of its accountants joined other firms. The firm sold most of its American operations to KPMG, Deloitte & Touche, Ernst & Young and Grant Thornton LLP. The damage to Andersen's reputation also destroyed the firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms.