Questionable Accounting Practices
Arthur Andersen and partner Clarence DeLany founded Arthur Andersen LLP in Chicago in 1913. Over a span of nearly ninety years, the Chicago account-ing firm would become known as one of the "Big Five" largest accounting firms in the United States, together with Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young, and KPMG. For most of those years, the firm's name was nearly syn-onymous with trust, integrity, and ethics. Such values are crucial for a firm charged with independently auditing and confirming the financial statements of public corporations, whose accuracy investors depend on for investment decisions.
In its earlier days, Andersen set standards for the accounting profession and ad-vanced new initiatives on the strength of its then undeniable integrity. One example of Andersen's leadership in the profession occurred in the late 1970s when companies began acquiring IBM's new 360 mainframe computer system, the most expensive new computer technology available at the time. Many companies had been depreciating computer hardware on the basis of an assumed ten-year useful life. Andersen, under the leadership of Leonard Spacek, determined that a more realistic life span for the machines was five years. Andersen therefore advised its accounting clients to use the shorter time period for depreciation purposes, although this resulted in higher ex-penses charged against income and a smaller bottom line. Public corporations that failed to adopt the more conservative measure would receive an "adverse" opinion from Andersen's auditors, something they could ill afford.
Arthur Andersen once exemplified the rock-solid character and integrity that was synonymous with the accounting profession. But high-profile bankruptcies of clients such as Enron and World Com capped a string of accounting scandals that eventually cost investors nearly $300 billion and hundreds of thousands of people their jobs. As a result, the Chicago-based accounting firm was forced to close its doors after ninety years of business.
Leonard Spacek joined the company in 1947 following the death of founder Arthur Andersen. He was perhaps best known for his uncompromising insistence on auditor in-dependence, which was in stark contrast to the philosophy of combining auditing and con-sulting services that many firms, including Andersen itself, later adopted. Andersen began providing consulting services to large clients such as General Electric and Schlitz Brewing in the 1950s. Over the next thirty years, Andersen's consulting business became more profitable per partner than its core accounting and tax services businesses.
According to the An1erican Institute of Certified Public Accountants (AICPA), the objective of an independent audit of a client's financial statements is "the expres-sion of an opinion on the fairness with which [the financial statements] present, in all material respects, financial position, results of operations, and its cash flows in confor-mity with generally accepted accounting principles." The primary responsibility of an auditor is to express an opinion on a client firm's financial statements after conduct-ing an audit to obtain reasonable assurance that the client's financial statements are free of material misstatement. It is important to note that financial statements are the re-sponsibility of a company's management and not the outside auditor.
At Andersen, growth became the priority, and its emphasis on recruiting and re-taining big clients perhaps came at the expense of quality and independent audits. The company linked its consulting business in a joint cooperative relationship with its au-dit arm, which compromised its auditors' independence, a quality crucial to the exe-cution of a credible audit. The firm's focus on growth also generated a fundamental change in its corporate culture, one in which obtaining high-profit consulting business seems to have been