International Institute of Islamic Economics

CORPORATE GOVERNANCE & FINANCE TOPIC ARTHUR ANDERSEN

Submitted by: M.ARSHAD SAEED TAYAB BUTT EHTAZAZ UL HASNAIN TASAWAR ABBAS Submitted to: Mr. SYED KASHIF SAEED International Islamic university Islamabad

TABLE OF CONTENTS
ACKNOWLEDGEMENT DEDICATION HISTORY PRODUCTS REVENUES EMPLOYEES ANDERSEN CONSLUTING STRENGTH & GOODWILL OF FIRM ISSUES OF THE FIRM DOWNFALL OF THE FIRM CORPORAT GOVERNANCE & ARTHUR ANDERSEN REFERENCES 03 04 05 06 06 06 06 07 09 11 12 13

ACKNOWLEDGEMENT
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ll praise to ALLAH Almighty, the most merciful, and the most gracious, without His help and blessing we would have been unable to complete this project. We would like to acknowledge the support of our parents and family members for their love, good wishes and acknowledgement without which we would have been unable to accomplish anything worthwhile. We would like to express sincere and heartiest thanks to our respected teacher of Corporate Governance & Finance MR. SYED KASHIF SAEED who guided us for the accomplishment of this project and gave us the valuable information in the understanding of this course.

Dedicate This Humble Task,

Fruit of My Thoughts and Study

To our

Affectionate Parents

Who Always Wished and helped

Us for our Studies

History
Arthur Andersen LLP, based in Chicago, was once one of the Big Five accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 1913, Arthur Andersen and Clarence Delany, both from price waterhouse, bought out The Audit Company of California to form Andersen, Delany & Co which became Arthur Andersen & Co. in 1918. Andersen was orphaned at the age of 16 at which point he began working as a mailboy by day and attended school at night, eventually being hired as the assistant to the controller of Allis chalmerse in Chicago. At 23 he became the youngest CPA in Illinois. The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany & Co.The firm changed its name to Arthur Andersen & Co. in 1918. Arthur Andersen's first client was the Joseph schlitz Brewing Company of Milwaukee. In 1915, due to his many contacts there, the Milwaukee office was opened as the firm's second office. In 1917, after attending courses at night while working full time. Andersen had an unwavering faith in education as the basis upon which the new profession of accounting . should be developed. He created the profession's first centralized training program and believed in training during normal working hours. He was generous in his commitment to aiding educational, civic and charitable organizations. In 1927, he was elected to the Board of Trustees of Northwestern University and served as its president from 1930 to 1932. He was also chairman of the board of certified public accountant examiners of Illinois.

Products
Professional services are the product of company

Revenue
Its reenue US$ 9.3 Billion (in 2002).

Employees
Its employees are approx 85000 in year 2002.

Andersen Consulting
AA was a pioneer in non-audit consulting. It began as a way to help its clients. In 1954,it set up one of the original Univac computers at GE to help with its payroll, and AA was soon selling its services as systems analysts in bringing computer technology to its customers. At first, the consultants were all accountants and were required to spend two years in audit practice before being permitted to do consulting work. When that rule was rescinded in the late 1960s, it stopped time being wasted on training people who were not going to stay in accounting, but it eliminated the common ground and culture that had kept both sides feeling as though they were on the same team. Some time in the 1970s, the consultants became more profitable per partner than the auditors. The opposing forces of a stagnating audit business and a rapidly growing consulting business created a stress fracture along these practice lines.3 As one insider described it, The solid, trustworthy, proudly boring way of the accountants began to lose its appeal
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as auditing revenues plateaued. And the stability and respectability of Arthur Andersen was losing its pull as the booming economy gave young business majors many different career options. Slowly, a mighty culture was disintegrating into a soulless cult behind those doors, and I stumbled right into the middle of it. The firm had always had a clear idea of its values and its value. The defining story about Andersens refusal to sign off on the railroad executives books set the stage for AAs view of itself and its uncompromising integrity. That was more than just a corporate value. It was the key corporate asset. Clients would come to a firm whose name on the audit provided an extra sense of confidence and comfort to investors, regulators, and employees. But that began to change when the two sides of AA fell into bitter sibling rivalry. The audit side still controlled the firms management, and the consultants chafed at being told what to do by people who were not part of their group. They chafed even more at subsidizing the less profitable side. They felt they were paying for much more than they were getting. Spaceks successor in 1970 was Harvey Kapnick. He was concerned about the possible ethical conflicts that might arise between the consulting and audit sides. His concerns were practical and political after being called to testify before a Senate committee on the issue of potential conflicts between accounting and consulting, he concluded that the government would require a split and that AA should do it first. He proposed a spin-off of the consultants into a separate firm at the partners meeting of 1979. But he handled the issue poorly, and failed to get the approval of the partnership. The partners thought they would be at a competitive disadvantage if they split. And they didnt want to lose the lucrative fees. The audit partners loudly refused to let go of the consulting golden goose.5 Kapnick was forced out. Kapnicks successor, Duane Kullberg, did his best, and it worked for a while. But hostilities between the two sides of the firm continued to simmer. When Kullberg was given a copy of a memo the consultants drew up that showed an estimate of their value as a separate entity, the relationships deteriorated further. To make things more confusing, the audit side of AA set up its own consulting divisions.The two groups became separate in operations and marketing in 1989 so much for the concept of one firm, one voice. The Andersen Consulting offices did not even have the trademark mahogany doors. It was like a bad marriage. They tried counseling, bringing in mediators, but it did not work. At an April 1997 meeting in Paris, for the first time the nearly 2,800 partners had a contested election for head of the firm, with one candidate from consulting and one from the audit side. Both lost, neither gaining the required two-thirds majority. In December, the consulting partners voted unanimously (with one abstention) to split themselves off from AA. The final split was accomplished through arbitration of a thicket of legal and financial disputes. Andersen Consulting changed its name to Accenture and omitted any mention of AA in the corporate history on its website. The audit side was deeply bitter. It also left them with less money; $100,000 per partner had to go to the consulting side according to the terms of the arbitration. Both pride and pocketbook pushed what was left of AA to become much more aggressive in seeking and expanding business, and that meant rebuilding the consulting practice.Auditors became

salesmen. They were already under a lot of pressure to meet specific revenue goals. In an absurd 1989 partnership pep talk, audit chief John Edwards brought

a live tiger on stage while the Rocky II theme song Eye of the Tiger boomed out, as he urged the accountants to go for the gold. AA was determined to show Accenture that it could do better and make more money without them. And you cant do that if you are going to tell a client that there isnt enough money in Chicago to make you sign his cooked books.

Strength & Good will of the firm

Andersen, who headed the firm until his death in 1947, was a zealous supporter of high standards in the accounting industry. A stickler for honesty, he argued that accountants' responsibility was to investors, not their clients' management. During the early years, it is reputed that Andersen was approached by an executive from a local rail utility to sign off on accounts containing flawed accounting, or else face the loss of a major client. Andersen refused in no uncertain terms, replying that there was "not enough money in the city of Chicago" to make him do it. Leonard Spacek, who succeeded Andersen at the founder's death, continued this emphasis on honesty. For many years, Andersen's motto was "Think straight, talk straight." Arthur Andersen audited major corporations in the US in the early 1960s, such as Louis Lesser Enterprises, Inc.. Andersen also led the way in a number of areas of accounting standards. Being among the first to identify a possible sub-prime bust, Andersen dissociated itself from a number of clients in the 1970s. Later, with the emergence of stock options as a form of compensation, Andersen was the first of the major accountancy firms to propose to the FASB that stock options should be included on expense reports, thus impacting on net profit just as cash compensation would. By the 1980s, standards throughout the industry fell as accountancy firms struggled to balance their commitment to audit independence against the desire to grow their burgeoning consultancy practices. Having established a reputation for IT consultancy in the 1980s, Andersen was no exception. The firm rapidly expanded its consultancy practice to the point where the bulk of its revenues were derived from such engagements, while audit partners were continually encouraged to seek out opportunities for consulting fees from existing audit clients. By the late-1990s, Andersen had succeeded in tripling the per-share revenues of its partners. Predictably, Andersen struggled to balance the need to maintain its faithfulness to accounting standards with its clients' desire to maximize profits, particularly in the era of quarterly earnings reports. Andersen has been alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products, Waste

Management, Inc., Asia Pulp & Paper, and the Baptist Foundation of Arizona, WorldCom, as well as the infamous Enron case, among others. Two of the last three Comptroller Generals of the US General Accounting Office (now the General Accountability Office) were top executives of Arthur Anderson.

Issues of the firm

Arthur Andersen was charged with obstructing justice for shredding and erasing information from documents relating to the audit of Enron Later, investigations also found that a memo relating to Enrons loss was also altered David Duncan, partner of Arthur Andersen, and Nancy Temple, Arthur Andersens lawyer, were major players in the Arthur Andersen scandal o David Duncan, who was the Andersen partner overseeing the Enron audit, pleaded guilty to the obstruction of justice, however he testified that an email from Nancy Temple, an Arthur Andersen lawyer, had influenced his decision to shred the documents o There was an email from Temple to Duncan to delete Andersens objection to the use of non-recurring by Enron on its loss o From when Arthur Andersen was first charged with obstruction of justice, the clients started leaving to find other accounting firms o On April 9, 2002, Duncan admitted to the shredding and erasing of the documents and pleaded guilty to obstruction of justice at court o Arthur Andersen was found guilty of obstruction of justice on the 15th of June, 2002 and the jury made their decision based on the destruction and altering of documents and also the omission of Duncans disagreement to the information on documents about Enrons losses o On October 16, 2002, the Arthur Andersen firm was fined $500 000 and given five years probation o Arthur Andersen had stopped auditing public clients as of August 31, 2002 o As of 2011, Arthur Andersen has not been dissolved and has not declared bankruptcy, however does not exist as an accounting entity anymore o The ownership of this firm has been left to four individual partners, who have created limited liability corporations o Impact on Accounting o New audit rules were made: Statement on auditing standards 112 There was the enactment of Sarbanes Oxley

Prohibits the knowing destruction of documents that relate to jurisdiction of any department or agency of the United States The reputation of accounting is less reliable Future outlook of accounting More auditing rules will probably be made to decrease the possibility of manipulation of the books of companies, and to try to keep the accounting reputation from being more tarnished

Enron scandal Energy company Enron was broken up after revelations of Andersen's performance as an auditor. The Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001) came to the following assessment: "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enrons financial statements, or its obligation to bring to the attention of Enrons Board (or the Audit and Compliance Committee) concerns about Enrons 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, resulting in the Enron scandal. Nancy Temple (Andersen Legal Dept.) and David Duncan (Lead Partner for the Enron account) were cited as the responsible managers in this scandal as they had given the order to shred relevant documents. Since the U.S. Securities and Exchange Commission does not allow convicted felons to audit public companies, the firm agreed to surrender its CPA licenses and its right to practice before the SEC on August 31, 2002 - effectively putting the firm out of business. It had already started winding down its American operations after the indictment, and many of its accountants joined other firms. The firm sold most of its American operations to KPMG, Deloitte & Touche, Ernst & Young and Grant Thornton LLP. The damage to Andersen's reputation also destroyed the viability of the firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms. The Andersen indictment also put a spotlight on its faulty audits of other companies, most notably Waste Management, Sunbeam, the Baptist Foundation of Arizona and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the biggest bankruptcy in history - the record is now held by Lehman Brothers and Washington Mutual - led to a domino effect of accounting and like corporate scandals that continue to tarnish American business practices.

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On May 31, 2005, in the case Arthur Andersen LLP v. United States, the Supreme Court of the United States unanimously reversed Andersen's conviction due to what it saw as serious flaws in the jury instructions.[6] In the court's view, the instructions were far too vague to allow a jury to find obstruction of justice had really 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 opinion, written by Chief Justice William Rehnquist, was also highly skeptical of the government's concept of "corrupt persuasion"persuading someone to engage in an act with an improper purpose even without knowing an act is unlawful

Down fall of the firm

Since the ruling vacated Andersen's felony conviction, it theoretically left Andersen free to resume operations. However, the damage to the Andersen name was so severe that it has not returned as a viable business even on a limited scale. There are over 100 civil suits pending against the firm related to its audits of Enron and other companies. In addition, its reputation was so badly tarnished that no company wanted Andersen's name on an audit. Even before voluntarily surrendering its right to practice before the SEC, it had many of its state licenses revoked. A new verb, "Enroned" was coined by John M. Cunningham, the former Arthur Andersen Director in the Seattle Office, to describe the demise of Arthur Andersen. From a high of 28,000 employees in the US and 85,000 worldwide, the firm is now down to around 200 based primarily in Chicago. Most of their attention is on handling the lawsuits andpresiding over the orderly dissolution of the company Many partners formed new companies or were acquired by other consulting firms. Examples include: SMART Business Advisory and Consulting which absorbed some of the Philadelphia office Perot Systems which absorbed six partners in the East Huron Consulting Protiviti WTAS which was started in San Francisco, Los Angeles, New York, Boston, Washington D.C. and West Palm Beach and later expanded to 8 other locations West Monroe Partners KPMG which absorbed the Computer Forensics division based in Cypress, CA

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Corporate governance and arthur andersen

Corporate governance operates on the premise that it ensures the accountability of a firms management through regulations that alleviate the principal-agent predicament. Another arena of Corporate governance focuses on its impact in economic efficiency, primarily keeping in mind the shareholders welfare Corporate governance has been a hot cake particularly due to the high profile crumpling of a large number of firms such as Enron, WorldCom and the recent Satyam debacle. The US federal government passed the Sarbanes-Oxley Act in 2002 to reinforce the confidence of the masses in, Corporate governance which had suffered a huge blow due to the accounting and corporate malpractices surroundings. Commitment and honesty in audits were pitted against the desire to grow the consultancy practices, which were greater revenue generators from the existing audit clientele. Predictably, Andersen gave in to the pressures of the clients desires to maximise profits and succumbed to fraudulent accounting and auditing practices in order to capitalise on the opportunities to increase consultancy fees

AA, as a limited partnership, had little independent oversight. As noted above, it had a Public Review Board which was shut down when the firm split, and it overruled and then marginalized its internal standard-setters when they disagreed with the clients about accounting for stock options. The firms own governance and compensation structures created incentives that benefited individual outposts and partners over the good of the firm as a whole. The 20year battle over the relationship between the auditors and the consultants demonstrated the limitations of trying to run a large, complex organization as a partnership. Tofflers book documents the almost unthinkably enormous partners meetings at which the election of a new leader was in reality determined ahead of time. Worse was the one dreadful meeting that foreshadowed the fall of the firm, when neither of the candidates received the requisite number of votes, creating great uncertainty and disruption. The firms CEO at the time of the Enron revelations was Joseph Bernardino. His emphasis on growth over audit quality, his reluctance to walk away from big clients with questionable accounting, and a stunning ignorance of potentially crippling issues all contributed to the firmsundoing, according to Business Weeks John Byrne in an August 12, 2002 cover story.But they were as much a reflection as a cause of what was wrong at AA at the end.

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REFERENCES
Corporate Governance Robert A.G. Monks and Nell Minow Internet

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