The Arthur Andersen Story — From Big 5 to Zero.
Way before we were accustomed to the term “Big4”, Until the late 20th century, the market for professional services was actually dominated by eight networks that were nicknamed the “Big Eight”. The Big Eight consisted of Arthur Andersen, Arthur Young, Coopers & Lybrand, Deloitte Haskins and Sells, Ernst & Whinney, Peat Marwick Mitchell, Price Waterhouse, and Touche Ross.
Arthur Andersen was a prominent accounting firm founded in Chicago, Illinois, in 1913 by Arthur Andersen and Clarence DeLany. Over the years, it grew to become one of the largest and most reputable accounting firms in the world, providing services in auditing, tax, and consulting.
The firm gained significant recognition for its auditing and accounting practices and was involved with many high-profile clients and companies. For decades, it was considered one of the “Big Five” accounting firms, alongside Deloitte, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers (PwC).
By the start of the 21st century, it had become one of the world’s largest multinational corporations and was one of the “Big Five” accounting firms (along with Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers). Most of the previously known Big8 firms had either merged or defuncted.
In the 2001 Enron Saga, Enron was found to have fraudulently reported $100 billion in revenue through 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) went 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, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the Supreme Court reversed the firm’s conviction, the scandal's impact combined with the findings of criminal complicity ultimately destroyed the firm.
Just nine months after the scandal broke, the firm was found guilty of crimes in the auditing of Enron. By that time, Arthur Andersen had lost most of its business and two-thirds of its 28,000 employees and was facing multi-million dollar lawsuits.
The 2005 US Supreme Court in Arthur Andersen LLP v. United States, unanimously reversed Andersen’s conviction because of errors in the trial judge’s jury instructions. The Supreme Court held that the instructions were too vague to allow a jury to find that obstruction of justice had 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 2005 Supreme Court ruling theoretically left Andersen free to resume operations. However, Media reported that by then, Andersen was “nearly defunct,” with about 200 employees remaining from a high of 28,000 in 2002.
The birth of Accenture through Andersen Consulting
The consulting wing of the firm became increasingly important during the 1970s and 1981, growing much faster than the more established accounting, auditing, and tax practice. This disproportionate growth, and the consulting division partners’ belief that they were not garnering their fair share of firm profits, created increasing friction between the two divisions.
In 1989, Arthur Andersen and Andersen Consulting became separate units of Andersen Worldwide Société Coopérative. Arthur Andersen increased its use of accounting services as a springboard to sign up clients for Andersen Consulting’s more lucrative business.
The two businesses spent most of the 1990s in a bitter dispute. Andersen Consulting saw a huge surge in profits during the decade. The consultants, however, continued to resent transfer payments they were required to make to Arthur Andersen. In August 2000, at the conclusion of the International Chamber of Commerce arbitration of the dispute, the arbitrators granted Andersen Consulting its independence from Arthur Andersen but awarded $1.2 billion in past payments (held in escrow pending the ruling) to Arthur Andersen, and declared that Andersen Consulting could no longer use the Andersen name. As a result, Andersen Consulting changed its name to Accenture on January 1, 2001, and Arthur Andersen, having the right to the Andersen Consulting name, rebranded itself to “Andersen”.
What happened to Arthur Andersen Partners & Employees?
Many partners formed new companies or were acquired by other consulting firms. Examples include:
- 60% of the total Andersen practices globally merged into Ernst & Young, with some going to Deloitte (notably the UK, Spain, and Portugal)
- Accuracy was founded in 2004 by a team of seven former partners and is headquartered in Paris.
- Andersen Tax acquired the rights to the company name and changed its name from WTAS in 2014.
- BearingPoint, formerly the US consulting unit spun off by KPMG, purchased Andersen business consulting practices in France and Spain.
- West Monroe Partners which was founded in 2002 by four former consultants, based in Chicago.
- KPMG absorbed the computer forensics division based in Cypress, California, and the Boise, Kansas City, Philadelphia, Portland, Salt Lake City and Seattle offices, among others.
- Navigant Consulting which absorbed eleven partners in Chicago and Washington D.C.
- Perot Systems which absorbed six partners.
- Protiviti was formed in 2002 by hiring more than 700 professionals who had been affiliated with the internal audit, business, and technology risk consulting practice of Arthur Andersen.
- SMART Business Advisory and Consulting which absorbed some of the Philadelphia office.
- JCBA Limited which was founded by a partner from the aviation practice
- Grant Thornton International which absorbed the North Carolina, South Carolina, Albuquerque, and Tulsa offices
