Every accountancy student knows the Big Four accounting firms; Deloitte, EY, KPMG and PwC. However, until 2001 there was another player in the field. Who is this fifth player and what happened to the firm for it to vanish completely?
Arthur Andersen, once one of the biggest accounting firms and according to many, the most pretentious.
We are talking about Arthur Andersen, once one of the biggest accounting firms and according to many, the most pretentious. It was a privilege for students to work here and a name people proudly put on their resumes. Integrity of the accountant was of great importance to Andersen.
Andersen was responsible for checking the accounting of energy company Enron. The energy company went down with great noise because of shoddy accounting. Trouble came for Andersen as they had approved this accounting. After learning the Securities and Exchange Commission had begun an investigation of Enron’s accounting, orders were given at Andersen to destroy thousands of documents and e-mail messages. These illegal acts resulted in a conviction, which made it impossible to act as a public accountant for American stock exchange funds. Andersen decided to hand in its licenses before the SEC would withdraw them.
Suddenly the image of the firm who placed high value on integrity completely changed as they did not act accordingly.
However, contrary to what many think, this is not the only case that ruined the company’s image. At the time, Andersen’s name appeared in several cases. Suddenly the image of the firm who placed high value on integrity completely changed as they did not act accordingly. And not so surprisingly, many stakeholders did not want to continue cooperating, particularly various governments stopped the collaboration. The name Andersen had become suspicious.
The few employees that stayed, worked on litigation arising from past audits.
On appeal for the destruction of the files, Andersen was acquitted and there was no formal objection to the continuation of the audit practice. However, almost all employees had left due to the obscure practices. The practice had changed hands and the name would always be linked to this scandal. The few employees that stayed, worked on litigation arising from past audits, as well as pension issues and few other matters. Also there still is another firm which reminds us of the existence Andersen, namely Accenture. Accenture started off as the consultancy part of Andersen, which split off just in time, before the scandal happened.
As is often the case. the stable door is locked after the horse has bolted. The Enron scandal, together with other accounting scandals, such as Worldcom and Tyco, made the U.S. Congress realize it was time for stricter supervision. Therefore, the Public Company Accounting Reform and Investor Protection Act, also known as Sarbanes Oxley, was enacted. Since many top managers of firms claim they are not aware of accounting discrepancies, one of the requirements Sarbanes Oxley set, was to require the managers to certify the accuracy of their company’s financial data. Other requirements, are for instance audit reporting and audit of the audits. Other changes were provisions to prevent corporate analysts to benefit from conflicts of interest, including the public disclosure of any potential conflicts of interest. All this to address the potential conflicts of interest that can arise.
As is often the case. the stable door is locked after the horse has bolted.
Hopefully this new set of rules sets a new standard of integrity within the accountancy proficiency, before the Big Four shrinks to the Big Three. However, enough scandals happened since, such as the Scaytam scandal and currently the Steinhoff scandal. I am afraid these new scandals speak for themselves. Therefore, we should all remain vigilant and to create a world without accountancy scandals there is still a long way to go.