How can the provisions of the Sarbanes–Oxley Act help minimize the likelihood of auditors failing to identify accounting irregularities?
Arthur Andersen LLP was founded in Chicago in 1913 by Arthur Andersen and partner Clarence DeLany. Over a span of nearly 90 years, the Chicago accounting firm would become known as one of the “Big Five” largest accounting firms in the United States, together with Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young, and KPMG. For most of those years, the firm’s name was synonymous with trust, integrity, and ethics.
Such values are crucial for a firm charged with independently auditing and confirming the financial statements of public corporations, whose accuracy investors depend on for investment decisions.
In its earlier days, Andersen set standards for the accounting profession and advanced new initiatives on the strength of its then undeniable integrity. One example of Andersen’s leadership in the profession occurred in the late 1970s when companies began acquiring IBM’s new 360-mainframe computer system, the most expensive new computer technology available at the time. Many companies had been depreciating computer hardware on the basis of an assumed 10-year useful life. Andersen, under the leadership of Leonard Spacek, determined that a more realistic life span for the computers was five years. Andersen therefore advised its accounting clients to use the shorter time period for depreciation purposes, although this resulted in higher expenses charged against income and a smaller bottom line. Public corporations that failed to adopt the more conservative measure would receive an “adverse” opinion from Andersen’s auditors, something they could ill afford.
Arthur Andersen once exemplified the rock-solid character and integrity that was synonymous with the accounting profession. However, high-profile bankruptcies of clients such as Enron and WorldCom capped a string of accounting scandals that eventually cost investors nearly $300 billion and hundreds of thousands of people their jobs. As a result, the Chicago-based accounting firm closed its doors in 2002, after 90 years of business.