Arthur Andersen & Company, Sociét

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Arthur Andersen & Company, Société Coopérative

18, quai General-Guisan
1211 Geneva 3
Switzerland
41 22 214 444
Fax: 41 22 214418

Private Company
Incorporated:
1989
Employees: 66,478
Operating Revenues: $6.02 billion
SICs: 8721 Accounting, Auditing & Bookkeeping Services; 8742 Management Consulting Services

Arthur Andersen & Company, Societe Cooperative, is a Swiss-based entity created to manage and coordinate the worldwide operations of Arthur Anderson and Company and Andersen Consulting, two divisions of Arthur Anderson, the largest accounting and consulting firm in the United States and the third largest in the world after Ernst & Young and KPMG. The two units were created in 1989; Arthur Anderson and Co. provides auditing and tax services as well as specialty business and corporate services, while Andersen Consulting is the worlds largest provider of management consulting services in technology, systems integration, and application software products.

The founder and guiding force behind the early years of the accounting firm was Arthur Edward Andersen. Born in Piano, Illinois, in 1885, Andersen was the son of a Norwegian couple who had immigrated to the United States four years earlier. At a young age, Andersen displayed a propensity for mathematics. Upon graduating from high school, he worked in the office of the comptroller at Allis-Chalmers Company in Chicago, while attending classes at the University of Illinois. In 1908, he received a degree as a certified public accountant from the university and at 23 years old became the youngest CPA in Illinois.

From 1907 to 1911, Andersen served as senior accountant for Price Waterhouse in Chicago. Following a one-year term as comptroller for the Uihlein business interests in Milwaukee, primarily Schlitz Brewing Company, Andersen was appointed chairperson of Northwestern Universitys accounting department. Soon thereafter, however, in 1913, Andersen decided to establish his own accounting firm. At the age of 28, he founded the public accounting firm of Andersen, DeLany & Company in Chicago.

Andersens small company began to grow rapidly, as demand for auditing and accounting services increased dramatically following Congresss establishment of federal income tax and the Federal Reserve in 1913. One of Arthur Andersens first clients was Schlitz Brewing, and the companys client list soon expanded to include International Telephone & Telegraph, Colgate-Palmolive, Parker Pen, and Briggs & Stratton. However, the companys primary business consisted of numerous utility companies throughout the Midwest, including Cincinnati Gas & Electric Company, Detroit Natural Gas Company, Milwaukee Gas Light Company, and Kansas City Power & Light Company. Into the 1920s, work for utility companies comprised about 50 percent of Andersens total revenues, and the company became known as a utility firm, a dubious distinction in accounting circles. In 1917, Andersen was awarded the degree of B.B.A. from Northwestern University, and, the following year, when DeLany left the partnership, his firm became known as Arthur Andersen & Company.

Licensed as accountants and auditors in many states across the country, the company grew rapidly during the 1920s. The firm opened six offices nationwide, the most important of which were located in New York (1921), Kansas City (1923), and Los Angeles (1926). Serving as auditor for many large industrial corporations, Arthur Andersen also began providing financial and industrial investigation services during this time. In 1927, company representatives testified as expert witnesses in the Ford Motor Company tax case. However, the companys most important investigation, a milestone in the history of Arthur Andersen & Company, involved Samuel Insulls financial empire.

Samuel Insull emigrated from England to the United States in 1892. Hired as a secretary by Thomas Edison, Insull would soon prove to be an adept entrepreneur. During this time, the use of Edisons incandescent lights was provided only to licensed utility companies, which became known as Edison Companies. As many of Chicagos utilities approached bankruptcy early in the twentieth century, Edison sought someone to organize them and keep them solvent. Insull volunteered for the job and immediately began to acquire and manage his own utility companies. In a few years, Insull had built an empire of utility companies, including the first utility to construct a generator with a capacity more than 12,000 kilowatts. In 1907, Insull created Commonwealth Edison, which was formed by the merger of two Insull holdings, Commonwealth Electric and Chicago Edison.

By the early 1930s, Insulls utilities, many of which had suffered during the Great Depression, represented a complicated network of holdings nearly $40 million in debt and badly in need of reorganization. When the Chicago banking communityon which Insull had always relied exclusivelywas unable to provide the required cash, Insull was forced to turn to the East Coast banks for help. The East Coast banks refused to extend financial assistance, but, rather than forcing Insull into bankruptcy, they chose Arthur Andersen to act as their representative and manage the reorganization and refinancing of InsulFs business holdings.

In 1932, the firm was placed in charge of supervising all the Insull utility companies income and expenditures and was also involved in the subsequent financial reorganization of all the Edison companies within Insulls empire. To Arthur Andersens credit, none of the utility companies went bankrupt; the firm maintained a firm control on all the assets during the period of refinancing. Moreover, Arthur Andersen not only increased its gross revenues by 20 percent through the Insull account but also garnered a reputation for honesty and independence that heightened its stature in the business community across the country. Thereafter, the company had no difficulty attracting large corporate clients. The incident also gave rise to the companys self-proclaimed role as watchdog of the accounting industrys methods and procedures.

Andersen not only provided direction for his company and personally approved of all the firms clients, but he remained involved in nearly every aspect and detail of company business. Until the day he died, he paid himself 50 percent of the firms profits, while the other 50 percent was distributed among the rest of the partners. As he grew older, and as the company grew increasingly successful, Andersen became less tolerant of those within the firm who disagreed with him or began to eclipse his leadership, and he tended to fire or drive out those with whom he wasnt compatible. Nevertheless, he had an uncanny sense of hiring particularly talented accountants, and many of the individuals hired during the 1920s and 1930s would play prominent roles in the companys development years later.

Under the watchful eye of its founder, Arthur Andersen and Company brought in many new accounts during the 1930s, including Montgomery Ward, one of the most sought-after clients during the decade. By 1928, the company employed approximately 400 people, and, by 1940, that figure had increased to 700. To provide greater accessibility to its clients, the firm opened new offices in Boston and Houston (1937) and in Atlanta and Minneapolis (1940).

During World War II Andersen himself reached the pinnacle of his success. His numerous writings on accountingincluding Duties and Responsibilities of the Comptroller and Present Day Problems Affecting the Presentation and Interpretation of Financial Statementsprompted a growing admiration and respect for him in financial, industrial, and academic circles. Andersen served as president of the board of Trustees at Northwestern University and as a faculty member in accounting at the school. In recognition of his contribution to the field of accounting, and also for his devotion to preserving Norwegian history, he was awarded honorary degrees by Luther College, St. Olaf College, and Northwestern.

During this time, Andersen began grooming his associate, Leonard Spacek, for the companys leadership position. Spacek joined the company in 1928 and was named a partner in 1940, becoming one of Andersens closest and most trusted confidants. Upon Andersens death in January 1947, Spacek took over the company, remaining committed to the regimented management style of the founder. During Spaceks tenure, the firm grew from a regional operation located in Chicago with satellite offices across the United States into an international organization with one-stop, total service offices located around the world. Most importantly, however, Spacek began to focus on Andersens idea that the company serve the public role of industry policeman.

Until the 1950s, the accounting profession was generally regarded as a club, with its own principles, methods, and procedures that had developed over the years without any standardization. Spacek began a campaign to improve accounting methods and practice by emphasizing the importance of implementing uniform accounting principles that would ensure fairness. Spacek argued that accounting principles should be fair to the consumer, to labor, to the investor, to management, and to the public. Spacek hoped that his concept of fairness would serve as a foundation for accounting principles that the whole profession would ultimately find acceptable.

Most business historians agree that Spacek did the profession a service by initiating the standardization movement within the industry and by bringing public attention to the fact that existing auditing practices varied according to each company. Yet like Andersen before him, Spacek drew considerable criticism from the profession. Unable to change the prevailing attitudes of those within the industry, Spacek focused on his own company, creating Andersen University, with its Center for Professional Education. A training center located in St. Charles, Illinois, the university provided company employees with the opportunity to attend courses in a variety of accounting subjects.

By the time Spacek retired from the company in 1973, Arthur Andersen & Company had opened 18 new offices in the United States and over 25 offices in countries throughout the world. With a staff of over 12,000 and an increase of revenues from $6.5 million to over $51 million during the period from 1947 to 1973, Andersen had grown into one of the worlds preeminent accounting firms. The company also featured a profitable consulting service, helping large corporations install and use their first computer systems in the 1950s and branching out into production control, cost accounting, and operations research in the 1960s. Moreover, with audit and accounting revenues reaching a plateau due to the maturity of the industry, the companys consulting services began to represent an increasing share of Andersens income. In the 1970s, Arthur Andersen became involved in a host of consulting activities, including systems integration services, strategic services, developing software application products, and providing a variety of additional technological services.

Under the aggressive leadership of Spaceks successor, Harvey Kapnick, the consulting services developed rapidly, and by 1979, its fees represented over 20 percent of Andersens total revenues. Anticipating the importance of the burgeoning market for consulting services, Kapnick proposed to split the company into two separate firms, one to oversee auditing and another to focus on consulting as a comprehensive service business. When he presented this proposal to the companys partners, however, he met with protest. The auditors summarily rejected Kapnicks strategy, demanding proprietary control over all aspects of the companys managerial and financial affairs.

Kapnick resigned in October 1979 and was replaced by Duane Kullberg, who had joined the company in 1954 as an auditor. Reassuring the auditors that he would not take any action to split the company along operational lines, Kullberg nevertheless gave more operating control to the consulting side of the business, where employees were becoming increasingly irritated with the centralized control of the auditors. Kullbergs strategy seemed to work; internal discord subsided and both the auditing partners and the consulting principals (who were not called partners until later) devoted themselves to their respective businesses.

However, other problems arose for Arthur Andersen. In the mid-1980s, the company was the subject of several lawsuits filed by creditors and shareholders of bankrupt companies the firm had audited. These companiesincluding DeLorean Motors Company, Financial Corporation of American (American Savings & Loan), Drysdale Government Securities, and othersclaimed that Arthur Andersen had failed to realize the extent of their financial struggles, and, moreover, had failed to inform the public of their findings. In 1984, Arthur Andersen was forced to pay settlements amounting to $65 million within a two-month period.

Nevertheless, Arthur Andersens business continued to thrive, particularly in the field of consulting services. By 1988, 40 percent of the companys total revenues were generated from consulting fees, making Arthur Andersen the largest consulting firm in the world. During this time, conflict between the auditors and the consultants flared up again, centering on discrepancies in the pay scale and disagreement over the control of consulting operations. Specifically, consultants questioned why they should earn less than auditors, when typical auditing projects brought in $4 million in fees in 1988, and consulting jobs garnered as much as $25 million. Furthermore, consultants took issue with the companys practice of allowing accounting partners to manage the consulting business.

Tensions continued to increase; when the firms disgruntled consulting partners resigned, management filed lawsuits and infiltrated meetings held by the consultants. Finally, in an effort to end the chaos, Kullberg agreed to restructure the company. Under Kullbergs plan, Arthur Andersen was divided into two entities, an auditing and tax firm known as Arthur Andersen & Company and a consulting firm dubbed Andersen Consulting. Each of these firms then became separate financial entities under the Swiss-based Arthur Andersen Societe Cooperative, the ruling body of the companys worldwide organization, which would coordinate the activities of the entire firms operations. In addition, the traditional management hierarchy, in which consultants reported to auditors, was altered, allowing consultants to report to managers in their field all the way up through the level of consulting partner.

In 1989, Lawrence A. Weinbach replaced Kullberg as chief executive officer. A graduate of the Wharton Business School, Weinbach had joined Arthur Andersen and became a partner after nine years. Known for his diplomacy, Weinbach helped smooth over the harsh feelings among auditing and consulting partners, encouraging everyone to concentrate on increasing business. Under his leadership, Arthur Andersens revenues skyrocketed. Between 1988 and 1992, Andersens revenues increased from just under $3 billion to almost $5.6 billion, an increase of nearly 50 percent brought on mostly by the companys burgeoning consulting activities. During these years, revenue from Andersen Consulting grew by 89 percent while revenue from Arthur Andersen & Companys accounting and tax services grew by 38 percent. Clearly, Weinbach recognized the importance of the companys position as the largest management consultant firm in the world.

In the early 1990s, Arthur Andersen was beset with lawsuits from creditors of thrifts that had collapsed during the 1980s. Furthermore, in 1992, the company was sued by the governments watchdog Resolution Trust Corporation for negligence in its auditing of the failed Ben Franklin Savings & Trust. Nevertheless, the company weathered these difficulties, renewing its commitment to high-quality, irreproachable auditing services and focusing on improving and developing both its auditing and consulting services. In 1993, total revenues surpassed the $6 billion mark, primarily due to an increase in management consulting fees.

As it approached the turn of the century, the companys future seemed to depend on the success of the measures taken by Kullberg and Weinbach to settle the rift between auditors and consultants, as well as the companys ability to overcome accusations of negligence made earlier in the decade. However, most analysts regarded Arthur Andersens position as the worlds preeminent auditing and consulting firm secure.

Further Reading:

Spacek, Leonard, The Growth of Arthur Andersen and Company, 1928-1973: An Oral History, New York: Garland, 1989.

Stevens, Mark, The Big Six, Simon & Schuster: New York, 1991.

Thomas Derdak

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