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From Big 5 to Bankruptcy-The Rise and Fall of Arthur Andersen

We all know about the Big 4 Accounting firms- KPMG, PwC, EY and Deloitte. But what if we tell you there were actually Big 5, just twenty years ago. Wondering what happened to the fifth one?

Let's dive into the scandal of Arthur Andersen and Enron Corporation.

Enron Corporation is an American Energy Company based in Houston, Texas whereas Arthur Andersen was then one of the five largest audit and accountancy partnerships in the world, based in Chicago. The scandal happened as a result of accounting and auditing irregularities leading to a loss of $74 billion. Enron was an audit failure by Arthur Andersen and the case came into light when Enron encountered a collapse in the third quarter of 2001 which resulted in the largest Bankruptcy in US history.

Let's dive in to know exactly what happened

In the beginning, Andersen was well known attributable to a regime of following clear rules and top grade accountants. Everything was done the "right" way following a bunch of qualities:-

1.Respectability and Honesty 

2.One Firm, One Voice Partnership Model 

3.Preparing to a Share Method 

It was through these qualities that Arthur Andersen and Co. became one of the biggest accounting firms. Likewise, it was with the new laws and guidelines of Securities and Exchange Board of India that Arthur Andersen took off higher than ever. It was during this period that they saw their incomes bounce from $8 million to $190 million. This leap cemented it as the second biggest auditing firm. Regardless of the series of consolidations that moved through the business during the 1990s, Andersen stayed independent. During this basic period, the company's central focus began moving from auditing to consulting and advisory services. 

The Outset of the Doom

As the dual business focus developed stronger, the organization redesigned itself into two units: Andersen Worldwide, as the partnership holding organization and Andersen Consulting, as the consulting unit, transformed into an income regime. Disputes between the auditing and consulting units started mounting. The company's audit administrations led to complications as consulting incomes dominated auditing incomes by a three to one edge during the 1990s. In mid 2000, following a time of continuous disagreements, Andersen Consulting split away as an autonomous unit.

Despite the fact that Anderson went through burdensome situations and assembled a poor record on a portion of its audit work, its breakdown began with Enron and the work it accomplished for the organization over a multi-year time frame. Enron was one of Andersen's key records, yielding enormous accounting and consulting revenue. By the beginning of the new Millennium, Anderson was generating $1 million every week from Enron. While the audit unit evaluated Enron's budget summaries, the Consulting division was focused on building up a significant number of Enron's SPE's and tax plays. A portion of Andersen and Enron related issues started as of 1997 when Andersen started signing the audits, in spite of dubious discoveries. 

Time for Revelations

In February 2001, a few audit partners communicated concern about the organization's questionable practices. One senior examiner was removed from the record and partners liable for the Enron were allowed to overrule more traditionalist audit proposals. As the Enron examination unfolded due to organization's income discharge in 2001, Andersen's administration consented to assemble Enron reports for the Securities and Exchange Commission's (SEC) own examination concerning SPE’s. But rather than furnishing the documents to the SEC, Andersen accomplices, led by chief Enron relationship administrator Duncan, started an efficient disposal of relevant reports. In January 2002, one month after Enron's bankruptcy filing, Andersen's administration accepted that it had disposed off an enormous number of Enron documents after the SEC examination began. Duncan and a few partners were terminated, yet CEO Bernardino and different chiefs denied any criminal wrongdoing.

In March 2002 the US District Court charged Andersen in the issue of "wholesale destruction" of Enron’s documents. The organization employed previous Federal Reserve administrator Volker to make a free oversight board, however the work yielded no outcomes. Bernardino stepped down as the CEO in the last attempt to avert further activities against Andersen. 

The Final Curtain

Enron ended its bankruptcy in November 2004 following a court-approved plan of reorganization. A new Board of Directors changed the name of Enron Corporation to Enron Creditors Recovery Corporation and emphasized on reorganizing and liquidating operations and assets of the pre-bankruptcy Enron. When many started to question the future possibilities of Andersen, it prompted further withdrawal of customers and representatives.

Andersen went to trial shortly and following six weeks of proceedings, he was found guilty of hindering justice, causing the SEC to ban the firm from future audits of public organizations. The partnership was terminated and the firm was dissolved. While Andersen's base of intangibles like knowledge/intellectual property, ethics, goodwill, and reputation— was in an unstable state preceding the trial, the SEC destroyed what was left from the establishment. Andersen filed for bankruptcy in late 2002, transforming the Big Five into the Big Four.


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