Arthur Andersen, once known as the "gold standard of auditing," was founded in Chicago in 1913 on a legend of integrity as Andersen, Delaney \& Co. In those early years, when the business was struggling, Arthur Andersen was approached by a well-known railway company about audit work. When the audit was complete, the company CEO was outraged over the results and asked Andersen to change the numbers or lose his only major client. A 28-year-old Andersen responded, "There's not enough money in the city of Chicago to induce me to change that report!" Months later, the railway filed for bankruptcy. 473 Over the years Andersen evolved into a multiservice company of management consultants, audit services, information systems, and virtually all aspects of operations and financial reporting. Ultimately, Andersen would serve as auditor for Enron, WorldCom, Waste Management, Sunbeam, and the Baptist Foundation, several of the largest bankruptcies of the century as well as poster companies for the corporate governance and audit reforms of the Sarbanes-Oxley Act, federal legislation enacted in the wake of the Enron and WorldCom collapses. However, it would be Andersen's relationship with Enron that would be its downfall.

Enron's executives and internal accountants and the Andersen auditors resorted to two discretionary accounting areas, special purposes entities (SPEs) and mark-to-market accounting, for booking the revenues from its substantial energy contracts, approximately \(25 \%\) of all the existing energy contracts in the United States by 2001.480 Their use of these discretionary areas allowed them to maintain the appearance of sustained financial performance through 2001. One observer who watched the rise and fall of Enron noted, in reference to Enron but clearly applicable to all of the companies examined here, "If they had been going [at] a slower speed, their results would not have been disastrous. It's a lot harder to keep it on the track at 200 miles per hour. You hit a bump and you're off the track." \({ }^{241}\) The earnings from 1997 to 2001 were ultimately restated, with a resulting reduction of \$568 million, or \(20 \%\) of Enron's earnings for those four years. \({ }^{482}\)
Sherron Watkins, who became one of Time's persons of the year for her role in bringing the financial situation of Enron to public light, was the vice president for corporate development at Enron when she first expressed concerns about the company's financial health in August 2001. A former Andersen employee, she was fairly savvy about accounting rules, and with access to the financial records for purposes of her new job, she quickly realized that the large off-the-books structure that had absorbed the company's debt load was problematic. \({ }^{483}\) Labeling the SPEs "fuzzy" accounting, she began looking for another job as she prepared her memo detailing the accounting issues, because she understood that raising those issues meant that she would lose her Enron job. \({ }^{484}\) Ms. Watkins did write her memo, anonymously, to Kenneth Lay, then-chair of Enron's board and former CEO, but she never discussed her concerns or discussed writing the memo with Jeffrey Skilling, then Enron's CEO, or Andrew Fastow, its CFO, because "it would have been a job-terminating move.......................

Discussion Questions 1. With regard to the destruction of the documents, was there a difference between what was legally obstruction of justice and what was ethical in terms of understanding what was happening at Enron? When the U.S. Supreme Court reversed the Andersen decision, the Wall Street Journal noted that the Andersen case was a bad legal case and a poor prosecutorial decision on the part of the Bush administration. 506 Why do you think the prosecutors took the case forward? What changes under SOX would make the case easier to pursue today?
2. David Duncan was active in his church, a father of three young daughters, and a respected alumnus of Texas A\&M. Mr. Duncan's pastor talked with the New York Times following Enron's collapse and Duncan's indictment, and discussed with the reporter what a truly decent human being Duncan was. \({ }^{50}\) ' What can we learn abuut the nature of those who commit these missteps? What can you add to your credo as a result of Duncan's experience? Was the multimillion-dollar compensation he received a factor in his decision-making processes? Can you develop a decision tree on Duncan's thought processes from the time of the first SPE until the shredding? Using the models you learned in Units 1 and 2, what can you see that he missed in his analysis?
3. When a law firm reviewed who knew what and when in the lead-up to the Enron collapse and bankruptcy, the firm concluded that Andersen was aware of all of the off-the-book partnerships that had been created noting that it appeared that the documents had been reviewed by Andersen. What factors contributed to Andersen's failure to do more regarding the off-the-book entities and other accounting issues at Enron. Based on what you have learned in Units1and 2, discuss what reasoning processes and rationalizations those at Andersen may have been using.
Now, think about the Penn State case (Case 2.11) and how leaders there framed the issue. Then determine who the Andersen partners were framing the Enron issue. Is it difficult to envision bad outcomes or is judgment clouded when you are under pressure or are concerned about your job? How would a credo help when you are evaluating an issue with serious personal and business consequences?
4. One of the tragic ironies to emerge from the collapse of Arthur Andersen, following its audit work for Sunbeam, WorldCom, and Enron, was that it had survived the 1980s savings-and-loan scandals unscathed. In Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, the following poignant description appears: "The savings-and-loan crisis, when it came, ensnared almost every one of the Big 8. But Arthur Andersen skated away virtually clean, because it had made the decision, years earlier[]] to resign all of its clients in the industry. S\&Ls for years had taken advantage of a loophole that allowed them to boost earnings by recording the value of deferred taxes. Arthur Andersen accountants thought the rule was misleading and tried to convince their clients to change their accounting. When they refused, Andersen did what it felt it had to: It resigned all of its accounts rather than stand behind accounting that it felt to be wrong. "508 What takes a company from the gold standard to indictment and conviction?