Arthur Andersen - Enron Scandal

Enron Scandal

Following the 2001 scandal in which $100bn revenue energy giant Enron was found to have sustained itself by means of institutional and systematic accounting fraud, Andersen's performance and alleged complicity as an auditor came under intense scrutiny. The Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001) came to the following assessment: "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions".

On June 15, 2002 of obstruction of justice, resulting in the Enron scandal. Although later reversed in a pyrrhic Supreme Court victory, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm. Nancy Temple (Andersen Legal Dept.) and David Duncan (Lead Partner for the Enron account) were cited as the responsible managers in this scandal as they had given the order to shred relevant documents. Since the U.S. Securities and Exchange Commission cannot 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 viability of the firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms.

The Andersen indictment also put a spotlight on its faulty audits of other companies, most notably Waste Management, Sunbeam, the Baptist Foundation of Arizona and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the then biggest bankruptcy in history (the record is now held by Lehman Brothers and Washington Mutual) led to a domino effect of accounting and like corporate scandals that continue to tarnish American business practices.

On May 31, 2005, in the case Arthur Andersen LLP v. United States, the Supreme Court of the United States unanimously reverted the chargers due to what it saw as serious flaws in the jury instructions. In the court's view, the instructions were far too vague to allow a jury to find obstruction of justice had really occurred. The court found that the instructions were worded in such a way that Andersen could have been convicted without any proof that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The opinion, written by Chief Justice William Rehnquist, was also highly skeptical of the government's concept of "corrupt persuasion"—persuading someone to engage in an act with an improper purpose even without knowing an act is unlawful.