This summary provides the key details about the document in 3 sentences: The document discusses the rise and fall of Arthur Andersen from an accounting firm founded on principles of ethics, to one that valued profits over ethics. Andersen's culture shifted to prioritizing client satisfaction over integrity. This led Andersen to engage in improper practices like helping Enron hide debts, and later destroying documents during an SEC investigation of Enron, ultimately leading to Andersen's conviction for obstruction of justice and demise.

1. The Rise and Fall of Arthur Andersen
A Cautionary Tale For Those Who Value Profit
Over Ethics and Principles.
Nina Richardson
Seminar in Accounting Topics
11/08/2014

2. Table of Contents
Executive Summary……………………………………………………………………………………………..3
Introduction………………………………………………………………………………………………………4
Values and Ethics Gives Way to Profit…………………………………………………………...........5
The Auditors Dilemma……………………………………………………………………………………….6
The Battle Between Consulting and Auditing………………………………………………………6
Arthur Andersen’s Culture Problem……………………………………………………………………8
Improper Use of In House Lawyers……………………………………………………………………10
Arthur Andersen’s Most Deadly Client……………………………………………………………….11
Arthur Andersen’s Response to the Enron Crisis………………………………………………..12
Why Arthur Andersen Was Found Guilty…………………………………………………………...13
Nancy Temple’s Dilemma…………………………………………………………………………………14
Conclusion………………………………………………………………………………………………………14
References………………………………………………………………………………………………….......16

3. Executive Summary
Arthur Andersen was an accounting firm founded on the principles and
ethics of a man who wanted to stand above and beyond the rest. Arthur Andersen
had a dream of creating an accounting firm that would do more than audit or
bookkeeping. His vision was to create accounting standards everyone else would
follow. Arthur was legendary in his time. He was known for standing up for what
was right even if it meant losing a client. Arthur’s decision to remain true to ethics
and proper accounting made his firm not only profitable but also one with a
reputation. Investors knew they could rely on financial statements audited by
Arthur Andersen. However, as the years went by the firm and the partners began to
forget what they stood for. The pursuit of profit became more important than
ethics. The partners followed the path of what became popular to the rest of the
accounting world. The attitude in accounting in the eighties switched from saying
no to saying yes to the client. Pleasing the client became fashionable even though it
meant risking the integrity of the firm. Ultimately, Arthur Andersen paid a terrible
price when in 2002 the firm stopped practicing. The firm was brought to ruin by
becoming bed partners with one of the most corrupt corporations; Enron. What
happened to the firm who began based on integrity to become an auditing firm who
helped clients engage in fraud. This paper will discuss what led Arthur Anderson
from being a firm that said no to a firm that said yes.

4. Introduction
Arthur Andersen began as a preacher who became an auditor. His mother
had taught him, “Think straight, talk, straight”. He set up his accounting practice in
1913 with partner Clarence Delaney. At that time, there were only a few large
accounting firms who had their beginnings in London. Andersen wanted to be
different than everyone else. He wanted his firm to have a larger focus than making
money and bookkeeping. When Arthur crafted the announcement of his firm’s
opening on Dec. 1, 1913 he promised to provide “the designing and installing of new
systems of financial and cost accounting and organization.” (Brown & Dugan, 2002).
He insisted his firm have integrity unlike the accounting firms in London. He set the
tone for his company in 1914; when a railroad executive burst into his office and
demanded Arthur give his blessing on the corporate ledger. Andersen, whose words
were legendary for the firm, declared there wasn’t enough money in Chicago to
make him approve bad bookkeeping. Arthur Andersen lost the client, but the
railroad went bankrupt a few months later. The reputation of Arthur Andersen was
cemented as a firm of independent thinking. The firm experienced prosperity from
the commitment to integrity. The firms’ accountants were bold in their stance on
accounting issues and were known to make clients angry. However, investors knew
they could trust the financial statements of firms audited by Andersen. In 2004,
Arthur Andersen declared bankruptcy after losing the majority of their clients. The
firm had been found guilty of obstruction of justice and was a major player in
several large accounting scandals including Enron, Waste Management, and
WorldCom.

5. Values and Ethics Gives Way to Profit
The decline of Andersen did not begin overnight. The descent began
gradually with compromises and misjudgments by management. One of the culprits
was the modern day computer. In the 1950’s “the firm introduced the “Glickiac” to
the world” (Brown & Dugan, 2002). Joseph Glickauf, an Andersen engineer, created
the Glickiac. The device proved computers weren’t just for scientists but could be
used by companies for bookkeeping. Anderson began setting up the computers for
clients who wanted automated bookkeeping. It wasn’t long until the selling of
computers was making record profits.
The new money caused tension within the firm. The design of the firm and
how profits were shared was the problem. Auditors ran the firm and all the profits
were collected into a pool and divided amongst the partners. The tables turned with
the sale of computers to clients. Consultants were bringing in more money than the
auditors. The consultants complained they were bringing in more money and it was
unfair the auditors should receive all the profits. The second week of 1989, the
consultants won an agreement to separate the company into two units. The two
units would be Arthur Andersen and Andersen Consulting united under Andersen
Worldwide SC. The accounting side agreed to profit sharing that would be more
equal. The firm with less profitability would get a smaller portion of the profits than
the more profitable firm.

6. The Auditor’s Dilemma
The new profit sharing equation left the auditors with a dilemma.
Traditional accounting wasn’t making much of a profit. There was greater
competition in the market, and audit fees weren’t doing so well. Auditors worked
long hours, but their salaries were far behind those of lawyers and bankers. They
felt embarrassed to be passed up by consultants. Richard Measelle, a top partner of
Arthur Andersen, decided to fight back. “It was a matter of pride”, Mr. Measelle said.
Mr. Measelle wanted the auditors to do more than audit. He believed they could still
do quality work while boosting sales. Job objectives for auditors were changed.
They would now be judged on how much business they brought. Auditors were
now judged on their numbers and how much money they made the firm. To keep
costs from escalating Anderson began requiring partners to retire after they turned
56 years old. The company was able to save money but they were left with more
inexperienced partners. There were also fewer partners to oversee audits.
The Battle Between Consulting and Auditing
The consulting side and the audit side had fierce competition to bring in the
most revenue. There was much at stake. The losing side would have less to share
amongst the partners. In 1993, the race was so close, people dashed madly through
the office trying to find ways to cut expenses to raise revenue. That was the year the
auditors won. It was in this environment Steve Samek became a force within
Anderson. He quickly made partner at the young age of 32. He was known for
sometimes approving aggressive accounting tactics. In the 1990s, he acquired a
lucrative contract with a chain of restaurants called Boston Chicken. He was praised

7. in his performance review for “turning a $50,000 audit fee into a $3 million full-
service engagement”(Brown & Dugan, 2002). While auditing the client, he allowed
them to keep losses off the financial statements. The client was being prepared for
an IPO and needed to look like a success. However, the façade didn’t last because in
1998 Boston Chicken filed for bankruptcy. Arthur Anderson’s auditing went down
the slippery slope afterwards. Mr. Anderson, the founder, would have been appalled
one of his auditors had approved aggressive accounting practices, which led to
financial statements being materially false. The principled ideals of the man who
refused to change a financial statement for a railroad tycoon were gone.
Mr. Samek continued his climb up the company ladder. In 1996, he was the
firm’s worldwide manager of auditing. He gave inspiring speeches to the auditors
to sell anything they could to a client. His view of being an accountant was different
than those who saw the profession as the gatekeepers for honesty. He mocked the
partners who refused to change to his way of thinking. Mr. Samek said,
“Accountants tend to be a bit more dry. I tend to be a little different, a little more
visual, right brain versus left brain, a little bit more creative”. While Mr. Samek was
giving his pep talks to the auditors, the problems with the audits were beginning to
grow. “Andersen paid investors $110 million for its botched audits of Sunbeam, the
home appliance maker that was caught artificially boosting revenues by offering
retailers incentives to accept more product than they could sell” (Brown & Dugan,
2002).

8. Arthur Andersen’s Culture Problem
The war between audit and consulting wasn’t the only reason behind the fall
of Arthur Andersen. The firm had a culture problem. In the late 1980s, the high
standards of accounting were changing. The shift in attitude was a desire not to
anger the client. The desire was more prominent at Andersen because the firm was
known for having the highest billings and the largest profits. The stiff competition
between auditors and consulting had placed a greater emphasis on profit and fees
rather than integrity. The client’s wishes were to be granted regardless if they were
ethical or legal. “The worst possible sin one could commit at Arthur Andersen was
to upset the client even if the client desperately needed to hear the bad news”
(Kinsler, 2008).
Jeffrey Kinsler who interviewed for an in house legal position at Arthur
Andersen wrote an in depth journal about what was wrong with the company and
why it came to ruin. He provided an outsiders view of the culture at Arthur
Andersen. During his first interview he noticed quite a few things that warned him
against the company. One of the oddities was the lack of individualism. “Everyone I
met stressed that there was no room for individualism at Andersen; everyone had to
be part of the “team” (Kinsler, 2008). The fervor for lack of individuality had a cult
like obsession. His second observation was in house attorneys did not have a
private office. They worked in cubicles, which lacked confidentiality. Anyone could
eavesdrop on a conversation. When Kinsler pointed this out he was told, “there
were no secrets” at Andersen. Kinsler was advised there had to be two interviews
because all the in house attorneys had to approve a new hire “because the team was

9. more important than the individual” (Kinsler, 2008). When Kinsler attended the
second interview, he noted the in house lawyers were not interested in practicing
law. The were more interested in talking about employee benefits such as flex time
and how easy it was to work at Andersen compared with other firms. Kinsler ended
up turning down the position because he believed “Andersen was not seeking an
independent, legal advisor as much as a legal yes-man” (Kinsler, 2008). His
observations during the interview process caused him to suspect in house council
was expected to rubber stamp transactions whether or not they were legal or
ethical.
The culture of Andersen revolved around the belief “protect the firm and
clients at all costs”. Everyone from auditors, consultants, attorneys, and
management was included in the expectation. Employees at Andersen were referred
to as “Androids”. An android is programmed to perform the will of the master and
that is what employees were trained to do. If an employee was asked by a partner
to violate a legal or ethical issue they did it without question. Challenging a partner
was unthinkable. The culture of conformity had been established from the very
beginning. “For most of Andersen’s existence, this was not a place where
independent activities were tolerated or encouraged. It was a culture in which
everyone followed the rules and the leader. When the rules and leaders stood for
decency and integrity, the lockstep culture was the key to competence and
respectability. But when the game and the leaders changed direction, the culture of
conformity led to disaster” (Toffler & Reingold, 2004).

10. Andersen’s culture was centered on “up or out”. An employee either moved
up the ranks or was sent out the door. In the 1990’s, the only way to move up in the
firm was to keep the bosses and the people at Enron happy. A sure way to get fired
was to disagree with an Enron transaction. Angering a crown jewel client was the
ultimate sin and Enron was the top crown jewel. Senior partner Carl Bass’
experience at Arthur Andersen is good example of the “yes man” culture. Mr. Bass
served on the Professional Standards Group (PSG) who reviewed and approved
accounting issues local Andersen offices had. The word of the PSG group was law at
Andersen. Enron was a high-risk client and in 2001, Bass was assigned to monitor
high-risk audits. He objected to Enron’s accounting when he audited their
statements. However, partners in the Houston office overruled his objections. Bass
continued to disagree with Enron’s accounting causing tension between himself and
the company. Enron was becoming angry with Bass for being a roadblock to their
deal makings. In response, members of Andersen’s PSG group demoted Bass and
removed him from oversight of Enron. The demotion was unprecedented and sent a
message loud and clear to every employee. Say no to Enron and the employee will
be demoted.
Improper Use of In House Lawyers
The yes culture and profit sharing war between auditors and consultants was
not the only problems at Arthur Andersen. The firm improperly used in house
lawyers. If the firm had encouraged the attorneys to give independent legal advice
Arthur Andersen would have never been found guilty of obstruction of justice. The
firm may have even survived the Enron debacle. The culture of pleasing the client

11. had not only infected the audit side of Andersen but the legal side as well. Everyone
was expected to please the client, especially Enron, even if the client was doing
unethical business practices.
Arthur Andersen’s Most Deadly Client
Enron began as a natural gas company but grew itself into an energy trading
and investment company in the 1990’s. Arthur Andersen began auditing Enron’s
statements in 1985. Enron was Andersen’s largest client and “accounted for $58
million of Andersen’s revenue in 2000” (Samaha, 2010). The client and auditor had
a close relationship because more than 100 Andersen employees worked inside
Enron’s Houston headquarters. There was also a revolving door between the
companies because many executives and accountants of Andersen ended up on the
payroll of Enron. In the late 1990’s, Enron began engaging in aggressive accounting
practices. They started using special purpose entities (SPEs) Andersen helped
design so Enron could remove liabilities off the balance sheet.
In 2001, investors began to smell trouble at Enron. In October of 2000,
hedge fund manager James Chanos began looking at Enron’s financial statements
and was shocked with what he discovered. He found “murky references to related
party transactions involving Enron’s senior officers, and massive insider selling”
(Sherman, 2002). In February of 2001, Chanos tipped off a reporter at Fortune who
published an article “Is Enron Overpriced?”. The story caused a chain reaction that
destroyed the company along with Arthur Andersen. On August 14, 2001 Jeff
Skilling resigned as CEO from Enron. Sherron Watkins gave her famous
whistleblowing memo to Kenneth Lay, Enron’s Chairman, and two senior

12. accountants at Arthur Andersen, a few days later. Arthur Andersen went into crisis
mode immediately. They created an internal crisis group, which included Nancy
Temple an in house lawyer from the Chicago office.
Arthur Andersen’s Response to the Enron Crisis
At the beginning of October, Temple had a meeting with Andersen’s senior
in-house counsel. She told them an SEC investigation of Enron and Arthur Andersen
was highly likely. On October 12, 2001 Temple sent an email to Michael Odom to
suggest he remind the Enron engagement team about Andersen’s document
retention policy. Michael forwarded her email to David Duncan, the audit partner
for Enron, who felt justified by the email to destroy Enron documents. Michael
Odom, the senior Andersen partner, sent a message to all personnel to comply with
the document retention policy. Andersen’s document retention policy was to
destroy client documents if the client was under investigation. According to Michael
Odom, “if it’s destroyed in the course of normal policy and litigation is filed the next
day, that’s great…we’ve followed our own policy and whatever there was that might
have been of interest to somebody is gone and irretrievable”.
The SEC had begun an informal investigation of Enron in October and
advised Andersen they would be sending an accounting letter to the firm. The next
morning the crisis group had a conference and Nancy Temple reminded everyone
about the document retention policy. On October 30, the SEC began a formal
investigation of Enron and requested Andersen’s accounting documents. However,
Andersen kept the shredding party going. They followed the advice of Nancy
Temple, and according to witnesses, “almost two tons of paper were shipped to

13. Andersen’s main office in Houston for shredding” (374 F 3d 281). The destruction
of documents continued until the SEC had a subpoena sent to Andersen advising it
to stop shredding documents. On March 7, 2002 Andersen was indicted for
obstruction of an SEC investigation. On June 15, 2002 a jury found Andersen guilty.
The SEC does not allow convicted felons to audit public companies so Andersen
informed the SEC they would cease to practice on August 31, 2002. The firm, which
was almost 100 years old, and began with high ethical standards, had been brought
to ruin by the pursuit of money at the expense of a commitment to ethics.
Why Arthur Andersen Was Found Guilty
The reason for Arthur Andersen’s conviction was due to laws regarding
document retention policies. During the trial, Andersen’s defense was they were
allowed to destroy documents until the SEC notified the firm it was subject to a
proceeding. However, if litigation is reasonably foreseeable evidence must be
retained. The duty requires the firm to notify personnel and to suspend the
document destruction policy. A firm must also follow their document retention
policy consistently. The destruction of documents should not be sporadic or
unusual. Andersen’s in house counsel advised employees to destroy documents
even though it was clear there would be an SEC investigation. Nancy Temple had
acknowledged in an email; litigation with the SEC was highly probable. She had an
ethical obligation to notify all personnel that an investigation was imminent and to
stop any document destruction.

14. Nancy Temple’s Dilemma
Unfortunately for Nancy, she was stuck between a rock and a hard place.
She had an obligation for client confidentiality to her employer Arthur Andersen.
She also had a legal obligation to follow laws concerning document retention. Nancy
could have refused to participate in the destruction of documents but she would
have needed to follow the requirements of Illinois Rule of Professional Conduct
1.13(b). The steps required would be to ask the people involved in the destruction
to reconsider their actions, advise those destructing documents to seek separate
legal opinion, and refer the matter to a higher authority such as senior partners or
the CEO if necessary. Obviously the professional advice of Nancy would have fallen
on deaf ears, as Andersen’s culture was to protect Enron at all costs. The only
option she had was to resign as counsel. Rule 1.6, as it was written in 2001, would
have prevented Nancy from sharing the document destruction with the SEC because
it would have been an ethical violation of client confidentiality.
Conclusion
Nancy Temple would have never been placed in the ethical dilemma she
faced if Arthur Andersen had remained true to the high ethical standards the firm
began with. The founder Mr. Andersen would have declined companies like Enron
as a client. The firm’s partners who made profit sharing a competition had led the
firm’s management astray. A decline in accounting values and a desire to please the
client contributed to the moral decay at the firm. The culture of obedience and
conformity to the partners was a weakness. Employees were rewarded for
complying and disciplined for questioning authority. Employees lacked an outlet to

15. voice concerns. The story of Arthur Andersen should serve as an example for
accounting firms in existence today. Remaining true to ethical behavior and saying
no to a client should never go out of style.

16. References
Brown, K., & Dugan, I. J. (2002, June 7). Arthur Andersen's Fall From Grace Is a Sad
Tale of Greed and Miscues. Retrieved September 18, 2014, from Wall Street Journal:
http://online.wsj.com/articles/SB1023409436545200
Kinsler, J. S. (2008, February 1). Arthur Andersen and the Temple of Doom. Retrieved
September 9, 2014, from Kinsler Article.
McRoberts, F. (2002, September 1). The fall of Andersen. Retrieved September 18,
2014, from Chicago Tribune: http://www.chicagotribune.com/news/chi-
0209010351sep01-story.html
Samaha, J. (2010). Criminal Law. Boston, Massachusetts: Cengage Learning.
Sherman, S. (2002, March). Enron: Uncovering the Uncovered Story. Retrieved
October 19, 2014, from The Official Website of Scott Sherman; Contributing Writer.
The Nation: http://scottgsherman.com/investigations/onenron.php
Toffler, B. L., & Reingold, J. (2004). Final Accounting: Ambition, Greed, and the Fall of
Arthur Andersen. New York , New York: Doubleday.