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The Fall of Arthur Andersen - Organizational Culture Issues – Worth 25 points
A Shamed Company
In March 2002, one of the world's leading auditing firms, Andersen (previously Arthur
Andersen), was indicted by the US Department of Justice (DOJ) on charges of obstructing
the course of justice. The company was blamed for hampering DOJ's investigations in the
on-going Enron case.1 Andersen was accused of deliberately destroying evidence (by
shredding many Enron-related documents), while the US Securities and Exchange
Commission (SEC) was investigating the numerous charges.
Ever since DOJ had begun a criminal investigation of Andersen in early January 2002, the
firms' employees and partners expected the firm to reach an outside settlement with DOJ.
The firm had even roped in Paul Volcker, a former Federal Reserve Chairman, to set things
right and restore its reputation. Thus, the indictment came as an unexpected and severe blow
to the firm. DOJ's investigation revealed that Andersen had indeed shredded Enron-related
documents during October 2001 and early November 2001, even as SEC's probe at Enron
was underway. Andersen accepted DOJ's charges, but passed on the blame to David Duncan,
the partner in-charge for Enron's auditing, and fired him.
And Enron severed ties with Andersen for destroying the documents wanted by SEC. The
repercussions of the indictment were soon felt by Andersen. There was an exodus of clients
from Andersen to other firms in early 2002: between January 2002 to March 2002, Andersen
lost 690 clients (public limited companies) against a client base of 2,311 in December 2001.
Andersen also saw many partners joining rival firms. Since it had also laid-off employees in
huge numbers across the world and traded partners to other leading accounting firms during
the period of the trial, its US employee base had come down from 27,000 to a little over
10,000 during the period.
The remaining employees literally took to the streets (in Boston and Philadelphia), protesting
the indictment. They accused DOJ of attempting to punish the whole firm and its thousands
of employees for the misdeeds of a handful of corrupt partners.
The DOJ, which had began proceedings in early June 2002 and concluded them in mid-June
2002, found Andersen guilty of obstructing SEC's proceedings. The SEC revoked
Andersen's license to audit public limited companies and ordered the firm to pay a fine of
$1,000 for obstructing state investigation (this was the highest fine that a state board could
charge).
Andersen accepted the revocation and the fine, and declared that it would cease auditing
corporate clients by the end of August 2002. After taking the above decision, Andersen laidoff its remaining employees and closed its offices across the US by the end of August 2002.
Andersen was once known as one of the 'Big Five' accounting and consulting firms in the
US that had prospered for nearly a century. Considering the fact that the firm had itself set
the standards for honest and law-abiding accounting ever since its inception, its shameful
1] One of the largest companies in the US, Enron was primarily involved in the trading businesses of energy and natural
gas. The company lied about its profits and concealed debts so as to show a healthy financial position for many years. As
investors and creditors abandoned the company, it had to file for bankruptcy in December 2001. Andersen had been the
internal and external auditor of Enron since the mid-1990s.
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descent into becoming one of the 'Big Corporate Frauds' was even more painful and
humiliating. According to industry observers, Andersen's fall can be seen as a perfect
example of how even great institutions founded on integrity, value, stewardship and personal
growth, could collapse in the absence of internal controls, a good work culture and sound
values.
1. Summarize the article in no less than 6 sentences.
2. Refer to paragraphs 5-6, what are your thoughts on the fact that innocent Arthur
Andersen employees lost their jobs because of poor choices by a few individuals.
3. How did values play a part in this case for Arthur Andersen?
4. List at least 3 steps the Big 4 accounting firms can take to prevent something like this
in the future.
5. If you were asked by your future employer to “shred documents” or another action
that you knew was unethical, how would you handle the situation?
1] One of the largest companies in the US, Enron was primarily involved in the trading businesses of energy and natural
gas. The company lied about its profits and concealed debts so as to show a healthy financial position for many years. As
investors and creditors abandoned the company, it had to file for bankruptcy in December 2001. Andersen had been the
internal and external auditor of Enron since the mid-1990s.