The Demise of Andersen: A Consequence of Corporate Governance Failure in the Context of Major Changes in the Accounting Profession and the Audit Market

Abstract

The sudden collapse of Enron at the end of 2001 provoked the fall only a few months later of one of the most prestigious accounting firms in the world, the 89-year-old, Chicago-based global network, Andersen, the smallest of the accounting’s Big Five. As the auditor of Enron Corporation, the US firm Arthur Andersen LLP was charged in March 2002 with obstructing justice by shredding Enron-related documents to impede a Securities and Exchange Commission (SEC) investigation. When the trial started in May 2002, the break-up of the organisation was already under way with a mass exodus of Andersen partners and staff, as well as clients all over the world. The firm had disintegrated before the verdict was handed down by a grand jury at the Federal District Court in Houston on 15 June 2002. It was the first criminal case, if not the first victim, to emerge from the December 2001 Enron collapse.¹ Although the US Supreme Court overturned the 2002 criminal conviction of Arthur Andersen three years later, on 31 May 2005, this event raised questions about failures and loopholes in the accounting firm’s specific corporate governance operating process. Undoubtedly, Andersen’s ability to enforce quality standards and internal procedures and to impose tougher controls to its regional offices was called into question. This deficiency in quality control was closely related to the specific organisation of the firm as a partnership and to features of the prevailing self-regulated model favoured by the accounting profession.