Arthur Andersen (C): The Collapse of Arthur Andersen

Appendix: Timeline—The History of Arthur Andersen, LLP

• 1907: Arthur E. Andersen starts his audit career at Price Waterhouse, where he meets Clarence M. DeLany.
• December 1, 1913: Andersen and DeLany found Andersen DeLany & Co.
• 1914: When confronted by an angry railroad executive who wants questionable bookkeeping approved, Arthur E. Andersen refuses, saying there is not enough money in the entire city of Chicago to induce him to change his mind. This legendary confrontation results in the loss of a big client but also creates a concrete example of the company's integrity that would be used to inspire and assure future Andersen employees, accounting professionals, and clients for years to come.
• 1918: Clarence M. DeLany resigns, and the firm becomes known as Arthur Andersen & Co.
• 1922: Arthur E. Andersen resigns from teaching and his post as head of the accounting department at Northwestern University to concentrate full-time on his audit practice.
• 1933: The Securities Act of 1933 is enacted. Financial statements are now considered to be representations of the company, and the auditor's role is to examine the statements, recommend adjustments, verify that statements have been prepared in accordance with GAAP, and sign off on them.
• 1939: “Blueback” memorandums become a mandatory part of each client audit, with unsolicited suggestions and recommendations for improvements in client accounting methods, procedures, and operations.
• 1942: Andersen starts an “administrative accounting division” to handle consulting-type activities such as the development of accounting systems, methods, and procedures for client companies.
• 1947: Arthur E. Andersen dies. The firm's twenty-five partners elect Leonard Spacek as the managing partner.
• Post-WWII: The rapid growth of the U.S. economy leads to extremely rapid growth at Arthur Andersen, which goes from auditing 7 percent of NYSE-listed companies in 1947 to 17 percent in 1973; from 2,300 clients in 1947 to 50,000 in 1973. Seventy-six new offices opened worldwide during this twenty-six-year time period.
• Early 1950s: Andersen designs and implements the first business applications for a computer at General Electric, thereby establishing itself as the leader among big accounting firms in computer technology consulting services.
• 1973: Leonard Spacek retires from the firm, and Harvey Kapnick becomes managing partner. Arthur Andersen has 826 partners worldwide, 137 of whom are with global offices and are nationals of the countries in which they operate.
• 1977: Andersen creates a Geneva-based holding company to coordinate global activities.
• 1979: Kapnick resigns after an ill-fated proposal to split the firm along auditing and consulting lines. Duane Kullberg takes over as the new managing partner.
• 1982: Accused of faulty audits of DeLorean Motor Co., Andersen pays more than $60 million to settle with investors.
• 1989: The firm officially splits into two parts: Arthur Andersen & Co. and Andersen Consulting, both under the Andersen Worldwide umbrella. Under the agreement, Arthur Andersen is still permitted to provide consulting services for smaller companies with less than $175 million in annual revenues. Duane Kullberg retires as CEO.
• Mid-1990s: Andersen, giving into pressure from the high-tech industry and the U.S. Congress, reverses the Professional Standards Group's ruling that stock options must be treated as an expense.
• 1992: Arthur Andersen conducts a purge of low-performance partners.
• 1994: Arthur Andersen formally launches its own consulting business, Arthur Andersen Business Consulting. Andersen declares in its SEC filing that its consulting practice “does not perform, or hold itself out as performing, systems integration consulting services, which account for the bulk of Andersen Consulting's business.”
• December 1997: Andersen Consulting votes to sever ties with Arthur Andersen and Andersen Worldwide and files with an international arbitration panel for divorce.
• February 1998: Waste Management announces a $1.7 billion restatement of its earnings, the largest in U.S. corporate history at the time.
• February 2000: Andersen partner Robert Kutsenda submits a new policy on organization, retention, and destruction of client engagement information that will play a major role in the Enron debacle.
• August 7, 2000: The International Chamber of Commerce in Paris rules that Andersen Consulting can separate from the parent company but must relinquish the Andersen name by the end of the year and pay Arthur Andersen $1 billion in fees that were previously owed under the terms of the 1989 split but had been held in escrow for the duration of the arbitration process.
• January 1, 2001: Andersen Consulting is renamed Accenture.
• January 10, 2001: Joseph Berardino is named managing partner and chief executive of Andersen Worldwide.
• April 2001: Andersen agrees to pay $110 million to settle a class action lawsuit with shareholders from Sunbeam Corporation.
• June 2001: Andersen settles with the SEC over Waste Management, pays a $7 million fine, and agrees to a consent decree enjoining future violation of securities laws. Ultimately, Andersen pays around $220 million to settle litigation with Waste Management shareholders.
• October 12, 2001: Nancy Temple sends an e-mail to the Houston office, reminding employees of the document retention policy.
• October 16, 2001: Enron reports a $618 million third-quarter loss and discloses a $1.2 billion reduction in shareholder equity, partly related to partnerships run by chief financial officer Andrew Fastow.
• October 17, 2001: The SEC sends a letter to Enron that requests voluntary disclosure for an “informal investigation.”
• October 22, 2001: Enron discloses that the SEC is making an inquiry into a possible conflict of interest related to the company's dealings with partnerships.
• October 23, 2001: David Duncan orders his team to comply with the document retention policy.
• October 30, 2001: The SEC begins its formal investigation and sends a letter requesting the accounting documents.
• November 8, 2001: Andersen receives the SEC subpoena regarding the Enron investigation. Enron revises its previous five years' financial statements to account for $586 million in losses.
• November 9, 2001: Duncan orders his team to stop shredding documents related to Enron. In the end, more than a ton of documents were destroyed and more than 30,000 e-mails and computer files related to Enron deleted.
• November 29, 2001: The SEC investigation expands to include the actions of Arthur Andersen as Enron's auditor.
• December 2, 2001: Enron files for Chapter 11 bankruptcy protection.
• December 12, 2001: Joseph Berardino defends Andersen's work for Enron before Congress, acknowledging that financial accounting practices need to change.
• January 9, 2002: The Department of Justice opens a criminal investigation of Enron's collapse.
• January 10, 2002: Arthur Andersen discloses that individuals at the firm disposed of “a significant but undetermined number” of documents related to its work for Enron.
• January 15, 2002: David Duncan is fired.
• January 24, 2002: Congressional hearings begin. Duncan refuses to testify, citing his Fifth Amendment right against potential self-incrimination.
• February 4, 2002: Andersen announces that it has retained former Federal Reserve chairman Paul Volcker to lead an outside panel that would guide “fundamental change” in the accounting firm.
• February 21, 2002: Andersen begins to negotiate a universal settlement with Enron's shareholders, creditors, and employees for between $700 and $800 million.
• Early March 2002: A host of Andersen's clients defect, including Merck & Co., Freddie Mac, Delta Air Lines, Texaco, and FedEx.
• March 14, 2002: The Department of Justice announces that Arthur Andersen has been indicted for obstruction of justice. This is the first time in history that a major accounting firm is brought up on a criminal charge.
• March 22, 2002: Volcker urges Andersen's top management to step aside so he can install and head an independent board. Other SEC investigations begin in Andersen's telecommunications sector clients.
• March 25, 2002: The Wall Street Journal reports that Duncan has met with federal prosecutors to discuss cooperating with the government's criminal case against Andersen.
• March 26, 2002: Berardino resigns amid the sweeping exodus of clients and overseas partners.
• April 3, 2002: Accounting firms Arthur Andersen Singapore and Ernst & Young announce a merger of their operations, an arrangement likely to lead to similar mergers in other countries. Andersen's Spanish practice agrees to merge with Deloitte Touche Tohmatsu.
• April 4, 2002: The Department of Justice considers a deal to settle its criminal obstruction case against Andersen, but then refuses when the firm declines to admit that it “illegally shredded documents.”
• April 9, 2002: Duncan pleads guilty to obstruction of justice. Andersen cuts roughly 7,000 jobs, or 27 percent of its 26,000 U.S. employees.
• April 17, 2002: Talks between Andersen and the government to settle the criminal case collapse.
• May 1, 2002: Settlement talks to resolve civil suits for Enron shareholders collapse.
• May 6, 2002: Paul Volcker formally acknowledges that his role is over. The Andersen trial begins. In separate news, Andersen agrees to pay $217 million to settle civil litigation over its audits for the Baptist Foundation of Arizona, the second-largest settlement ever agreed to by a major accounting firm.
• May 7, 2002: The federal judge presiding over the case rules that the government can introduce the firm's past misconduct as evidence that Andersen had ample motive to obstruct justice by destroying its Enron documents.
• May 8, 2002: KPMG Consulting signs a letter of intent to acquire nearly all of Andersen Worldwide's business-consulting operation.
• May 10, 2002: In trial proceedings, lead Andersen lawyer Rusty Hardin signals that the firm's defense strategy will strive to convince jurors that there was nothing improper about destroying Enron-related documents the previous fall in the weeks before the firm received a November 8 subpoena from the SEC.
• May 14, 2002: Duncan testifies that he ordered subordinates to follow Andersen's “document retention policy,” knowing the instruction would direct them to destroy, not save, documents related to the firm's audits of Enron. He later testifies that he did so because he feared potential lawsuits and regulatory inquiries and knew he could face a prison sentence.
• June 3, 2002: In a bankruptcy court filing, Enron creditors assert that Andersen's 1,700 partners could be held personally liable for major chunks of the firm's debts.
• June 12, 2002: The jury in the Arthur Andersen criminal trial announces that it is deadlocked, prompting the federal judge hearing the case to order jurors to redouble their efforts to reach a verdict and resume deliberations.
• June 15, 2002: After ten days of deliberation, the federal jury convicts Andersen of obstruction of justice. Andersen says it will cease auditing publicly traded companies and surrender state licenses by the end of August. Myriad other lawsuits and probes continue. The SEC and the Department of Justice can still pursue Andersen, its partners, and staff members involved in the Enron audits for securities fraud, the violation of professional standards, and improper or unprofessional behavior.
• June 25, 2002: Andersen asks a federal judge to reverse the jury verdict, arguing that the verdict is “insupportable,” and that the firm be granted a new trial. In a separate turn of events, WorldCom—another Andersen client—admits a $3.8 billion accounting error, fires its chief financial officer, and announces plans to lay off 17,000 people.
• July 21, 2002: WorldCom declares bankruptcy. Listing more than $107 billion in assets, the filing is the largest bankruptcy in U.S. history, far surpassing even Enron.
• August 28, 2002: Andersen Worldwide tentatively agrees to pay $60 million to settle lawsuits related to the collapse of Enron.
• August 31, 2002: Andersen surrenders its licenses to practice accounting in every U.S. state.
• January 7, 2005: The U.S. Supreme Court accepts an appeal on behalf of Andersen.
• April 27, 2005: The U.S. Supreme Court hears oral arguments on behalf of Andersen.
• May 31, 2005: The U.S. Supreme Court votes unanimously to overturn the criminal conviction of Andersen for obstruction of justice.