Jennifer White
SOUTHEASTERN OKLAHOMA STATE UNIVERSITY
ARTHUR ANDERSEN: AN EXAMPLE OF
ETHICAL CONSEQUENCES
Arthur Andersen: An Example of Ethical Consequences
Introduction
Integrity can be defined as, “the adherence to moral and ethical principles.” This,
integrity, is the trademark of the accounting profession. In this paper I will examine the effect
that ethical decisions have on businesses by investigating the case of Arthur Andersen & Co., the
company known today as Arthur Andersen LLP, and how their involvement with Enron took the
company to its knees. I will show how it began as a small company that’s foundation was
establishing a comprehensive, quality centered approach, and how the company grew into one of
the ‘Big 5’ accounting firms in the world, then, how it met its’ demise because of dishonesty
among a few members, and lastly, how this case effected ethics in today’s accounting world.
This case demonstrates a change from personal integrity into social ethics, shown by the
enactment of the Sarbanes-Oxley Act of 2002. The founder Arthur Edward Andersen was a man
of integrity and founded his company on this foundation.
Who was Arthur Andersen?
Born 1885, in Plano, Illinois to immigrant parents was Arthur Edwards Andersen. As a
man orphaned at age 16, when his parents passed away, he learned early that education and hard
work paid off. At the age of 18 he graduated high school while working as a mail boy for Allis-
Chalmers Company in Chicago and in just three years he was promoted to controller of the
company. In 1907 Andersen left Allis-Chalmers and began working for the Chicago brewery,
Price Waterhouse as a Senior Accountant. While working at Price Waterhouse, Andersen
attended night classes at Northwestern University in Chicago, completing his accounting degree
in 1908. At the age of 23 years Arthur Andersen became the youngest person in Illinois to
become a Certified Public Accountant. In 1912 he was appointed as a chairperson for
Northwestern University’s accounting department and in 1913 he, alongside a fellow co-worker
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Arthur Andersen: An Example of Ethical Consequences
at Price Waterhouse, decided to open a humble public accounting firm. They named their firm
Andersen, Delany & Company. When his partner left the small firm, in 1918, the name changed
to Arthur Andersen & Company.
During his career he accomplished many things. Andersen’s writings included “The
Complete Accounting Course,” in 1915, along with “Duties and Responsibilities of the
Controller” and “Present Day Problems Affecting the Presentation and Interpretation of Financial
Statements.” Highly respected in many economic fields he had governed as the president of the
board of Trustees at Northwestern University; he also held honorary degrees from Northwestern
as well as St. Olaf and Luther College. Andersen built his business pursuing the strategy of
reputation over revenue. He knew that his quality centered approach would help them compete
with large established accounting firms.
Growth of Arthur Anderson & Co.
1913 proved to be a great beginning for the accounting firm. The 16th Amendment to the
U.S. Constitution, enacted that year, established Federal Income Tax, which gave legal authority
to tax the income of households and corporations alike. This new law skyrocketed demand for
auditing and accounting providers. During the 1920’s Arthur Andersen & Company opened
offices from New York (1921) to Los Angeles (1926). The business expanded rapidly, acquiring
many utility companies as clients. In fact, utility companies became approximately half of
Andersen’s revenues.
The Great Depression was a severe economic depression that spanned worldwide. It
devastated entire countries, likewise personal incomes, tax revenues, and profits. International
trade had declined by more than 50% while unemployment swelled to 25%. It was these
conditions that had utility companies like Insull in overwhelming debt.
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Arthur Andersen: An Example of Ethical Consequences
Insull, trying to overcome economic hardships, looked to the Chicago banking
community for help to supplement their need for cash but was unable to receive. They then
turned to the East Coast who in turn chose Arthur Andersen & Company to oversee the
supervision of cash inflows and outflows for Insull. It was through this client that Andersen
added to their reputation of integrity. They kept a firm grasp on Insull and in return no client
went bankrupt. This helped to build up the reputation of the growing accounting firm.
In 1940, Andersen named Leonard Spacek a partner. Andersen was known to hire like
minds and he was very involved in his business, keeping a hands on approach until his death in
1947. After Andersen’s passing, Spacek took over the company and stayed until his retirement in
1973. During this time he had turned the Arthur Andersen & Company into an international
success. Keeping with Andersen’s tradition of fairness and transparency he crusaded for uniform
accounting principles, even though the industry was resistant to standardization.
GAAP, or Generally Accepted Accounting Principles, was developed by the Canadian
Institute of Chartered Accountants (CICA) and the American Institute of Certified Public
Accountants (AICPA) in 1933. GAAP is not a list of strict rules, instead, they are guidelines to
the recording of an economic entities financial statements both correctly and consistently. In
1973 FASB or Financial Accounting Standards Board was born. FASB is in the private sector
and is established for standardizing financial accounting that governs the preparation of financial
statements by nongovernmental organizations. It is officially recognized by the Securities and
Exchanges Commission (SEC) and the American Institute of Certified Public Accountants
(AICPA). According to the FASB website:
The mission of the FASB is to establish and improve standards of financial accounting
and reporting that foster financial reporting by nongovernmental entities that provides
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Arthur Andersen: An Example of Ethical Consequences
decision-useful information to investors and other users of financial reports. That
mission is accomplished through a comprehensive and independent process that
encourages broad participation, objectively considers all stakeholder views, and is subject
to oversight by the Financial Accounting Foundation’s Board of Trustees. (Facts about
FASB)
The board for FASB is made up of only seven members. Daryl E. Buck, who graduated summa
cum laude from Southeastern Oklahoma State University’s accounting program, is a current
board member of the FASB. Buck was also a former employee of Arthur Andersen & Company,
Oklahoma City offices.
Andersen & Company expanded its services in 1954 to include consulting. During the
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