Fall of Arthur Andersen

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Case Details:

Case Code : BECG027
Case Length : 15 Pages
Period : 1997 - 2002
Pub. Date : 2002
Teaching Note :Not Available
Organization : Arthur Anderson, US DOJ
Industry : Financial Services
Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The Fall - Was Andersen Guilty?

In October 2001, Enron, a leading energy trading company in the US and one of the biggest clients of Andersen, announced its third-quarter results for 2001. The third-quarter results included a loss of $638 million, a $35 million write-down due to losses on its partnerships, and a decrease in shareholder's equity by $1.2 billion.

This announcement led to a sharp decline in the stock price of Enron (40%). Following this, suspecting Enron of financial misappropriations, the SEC launched an investigation into Enron's financial dealings in late October. The investigation revealed serious accounting misappropriations by Enron between 1996 and 2001.

In November 2001, Enron restated its financial statements for the years, 1997 to 2000 and for the first two quarters of 2001, and reported a loss of $586 million for that period. According to reports, Enron had huge accumulated debts on account of its dubious financial dealings with its partners and had even traded its shareholders' equity...

The Fall - Nailing Andersen

In April 2002, Duncan pleaded guilty to the charge of obstruction of justice (by shredding documents) and agreed to cooperate with the DOJ and testify against Andersen.

Duncan testified that though at first the Andersen audit team had known about certain accounting errors at Enron, it did not force Enron to reflect it in its financial statements. This was because the team found that amount to be negligible compared to the company's vast revenues and shareholders' equity.

However, in mid-2001, the team changed its mind and forced Enron to write-down $1.2 billion in shareholders' equity and asked it to attribute the write-down to an accounting error. Commenting on this, analysts felt that Duncan had been willing to play the same game his colleagues played at Waste Management and at other companies, 'Let it go and hope it fixes itself later'...

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