Arthur Andersen (A) - Tuck School of Business - Dartmouth College

Arthur Andersen (A) 

“Nothing…is duller than accounting––until someone is defrauded. And 

after every modern financial disaster… investors have tended to ask the 

same question: where were the auditors?” 1 

no. 1-0032 

Joseph Berardino, CEO of Arthur Andersen, slept peacefully in a hotel room in Tokyo on 

November 28 th , 2001 when he was suddenly awakened by a phone call from one of his 

colleagues in New York City. “The Justice Department is thinking of indicting Andersen, 

Joe,” said one of his partners. Berardino was instantly awake. 

Berardino had remained upbeat about the future of Andersen since he became that 

company’s CEO six months earlier. He had written an essay for the company newsletter a 

year earlier describing the business world as entering “. . . terrific times. Exciting times for 

our clients and our people. 2 ” But an indictment from the SEC could ruin his accounting firm 

and end the “terrific times” that he’d predicted for Andersen a only a few months before. 

At the end of 2001, Andersen faced criticism for its botched audits of Enron Corporation, a 

failed energy-trading firm, and for destroying documents related to the audits. Already 

Enron’s woes had made front-page headlines for weeks. “This is going to be a whole new 

ballgame,” thought Berardino 3 . If the SEC announced that it would subpoena Andersen’s 

files, the story would appear in the nation’s major newspapers the next day. Clearly, 

Andersen would have to make some sort of announcement about the investigation. He 

picked up the phone to call David Tabolt, chief spokesman for Andersen, to discuss 

communication options, especially with the media. “David, it’s Joe, how should we respond 

to questions about this problem?” 4 . 

1 Mayer, Jane. “The Accountants’ War”. The New Yorker, April 22, 2002. Pg. 64. 

2 Schwartz, John and Jonathan Glater. “At Andersen’s Helm, A Winner of Battles Who Faces a War”. The New York Times. Jan 

14, 2002. 

3 Brown, Ken and John R. Wilke. “Berardino’s Hopes of Saving Andersen Were Dashed Following Indictment”. The Wall 

Street Journal. March 28, 2002. 

4 This case study is a fictionalized account based on actual events that occurred at Arthur Andersen, LLP. 

This case was written by Professor Paul A. Argenti and Kimberley Tait D’01, with additional research by Abigail 

Nova D’01, based on an earlier case entitled “The Case of Missing Time”, developed by Northwestern University 

in 1971. All names and organizational designations have been disguised. 

© 2001 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of 

Business at 603-646-3176.

Arthur Andersen (A) no. 1-0032 

Founding of Arthur Andersen 

Arthur Andersen and Clarence DeLany co-founded the accounting firm Andersen, DeLany, 

& Company in 1913. Soon afterwards, in 1918, DeLany left the company and the name 

changed to Arthur Andersen & Co. After DeLany’s departure, Arthur Andersen built his 

company as its sole leader over the next four decades. 

Andersen grew steadily throughout the Roaring Twenties, Great Depression, and both World 

Wars. The firm benefited from new government regulations that required more company 

filings and led to an increasingly complicated tax code for corporations. Andersen 

continually sought out chances to increase its reach. In 1928, it began the financial 

investigations that would eventually become its consulting practice. In 1932, it became the 

bankruptcy trustee for Samuel Insull’s failed utility empire. Andersen’s branches spread to 

new locations throughout the United States, and after 1963 it would venture into foreign 

countries as well. 

When Arthur Andersen died in 1947, he left behind a modestly successful, well-established 

firm. He was replaced, after a brief bout of family infighting, by Leonard Spacek. Spacek 

quickly ended the arguments over Andersen’s successor that had put senior employees at 

odds with each other, and pulled the managers together to focus on a new era for Andersen, 

positioning the company to become one of the world’s leading accounting firms 5 . By the 

year 2001, the trademark Andersen would include a worldwide network of operations with 

annual revenues exceeding $9.3 billion (See Exhibit 1-1). 

Expanding Services at Arthur Andersen: 1950-2000 

In the nineteenth century, accounting included primarily bookkeeping responsibilities; over 

the course of the twentieth century, however, the accounting industry moved far beyond this 

original function. Work at Arthur Andersen eventually included services such as both 

internal and independent audits, tax process oversight, legal services, and human resource 

work. 

One of the most significant non-auditing functions that Andersen offered its clients was 

consulting. This piece of the firm’s business began early in the company’s history and by 

1954, Andersen had developed a separate unit for its consulting business. Andersen 

experienced internal conflicts between accounting and consulting from the time that these 

two branches split until the year 2000. Eventually, Andersen established Andersen World, a 

global corporation that provided an umbrella organization for both consulting and 

accounting, in the hope that a reorganized company structure could defuse some of the 

tension. But quarrels only intensified, especially as Andersen Accounting developed its own 

consulting division to serve those companies not covered under the Andersen Consulting 

unit. 

5 Hoover’s Online, “Andersen Overview”, 2001; Wartzman, Rick “After WW II, Founder’s Death Shook Arthur Andersen 

Firm”, The Wall Street Journal, May 1, 2002. 

Tuck School of Business at Dartmouth 2


Power struggles continued between the different departments at Andersen into the 1990’s. In 

the 1990’s the problems of how to combine consulting and auditing work grew in scope as 

observers outside of Andersen raised questions about potential conflicts of interest at the 

“Big Five” accounting firms, all of which derived significant revenues from consulting 

services. A 2002 report in The Accounting Review, for example, calculated that throughout 

the 1990s profits from consulting at the Big Five auditors were three times those produced 

by auditing work 6 . The ratios of an individual executive’s annual income were often 

weighted even more heavily towards consulting. The resulting incentive structure produced 

rewards for those workers who brought in a high volume of consulting work, not those who 

performed their duties well as auditors. In the best case this system advanced the careers of 

mediocre accountants. In the worst case, Andersen partners approved on poor auditing jobs 

when executives received high commissions from the consulting business generated by a 

company’s fraudulent financial transactions. 

Consulting was not the only relationship between auditors and their clients that came under 

scrutiny in the 1990s. Individual branches of Andersen each focused on a single large client. 

Critics accused these offices of losing their neutrality through close associations with the 

companies they would audit. At Enron, for example, Andersen served not only as an external 

auditor, but the company’s internal auditor as well. This close connection led to a situation in 

which Andersen accountants, acting in their capacity as independent auditors, signed off on 

their own internal accounting work. Andersen accountants were also often checking the 

work of past, or potential, employers. The “cross pollination” of employee pools between 

Andersen’s Houston office and Enron headquarters was an established practice. The 

President, Vice President, and Chief Account Officer positions were all held by former 

Andersen employees 7 . 

Although the SEC would later accuse Andersen partners of actively promoting their own 

interest over their accounting duties in the new business climate, a large part of the changes 

seen in the accounting industry were simply responses to changes in business. During a 

period of incredible economic growth in the 1990s, new forms of assets and liabilities 

emerged, firms entered into joint-venture agreements, and engaged in a variety of business 

transactions across different markets. The public could now invest in “innovative” 

companies that had expanded beyond a focus on one or two fields to trade in multiple fields, 

many of which had little connection to each other. Enron, once a gas pipeline company, was 

considered a visionary leader in this new environment. The corporation placed a premium on 

novel ideas, investing in everything from broadband to pulp, and leveraging a large amount 

of debt to fund these projects. With the high volume of money changing hands in the bull 

markets, opportunities arose for some executives to divert funds for their personal use. These 

new strategies were unprecedented in the accounting world, and so auditors, like Andersen, 

had to discover new ways to monitor business effectively. Sometimes they did not succeed. 

6 Mayer, Jane. “The Accountants’ War”. The New Yorker, April 22, 2002. 

7 Ibid 



Setbacks at Andersen 1996-2000 

Not all transactions went smoothly as both the business community and auditing firms 

generated new functions that did not fit easily into the regulatory framework devised by the 

government in the 1930s. The SEC had begun to adapt, but only slowly, and during the 

process of changing federal oversight, the Big Five accounting firms entered into more and 

more political battles. Andersen found itself at odds with government regulators and 

eventually it came under investigation for several improper auditing jobs. 

Two major scandals broke at Andersen during the 1996-2001 period: Waste Management 

Systems and Sunbeam. Of these, Waste Management proved the most damaging. In 1998, 

Waste Management, an Andersen client for several decades, restated its earnings to show an 

overestimate of $1.4 billion over a four-year period. This was the largest restatement in 

American history (Enron would later reveal a $600 million error—less than half of Waste 

Management’s inflation). The SEC investigation into this incident turned up several 

incriminating documents at Andersen offices. After this investigation, Andersen instituted its 

document retention policy that would lead to the shredding of Enron documents three years 

later. 

Sunbeam also misstated its earnings for years when that company was an Andersen client, 

though not to the same degree as Waste Management. In both cases, Andersen paid fines that 

reached hundreds of millions of dollars, but managed to escape without any official 

recognition of wrongdoing 8 . 

Another blow to Andersen Accounting came in August of 2000, when a lengthy arbitration 

process ended in the formal separation of its consulting unit to become its own, unaffiliated 

company. The disputes between the consulting and auditing branches of Andersen reached 

back almost half a century. Directly following its legal split from Andersen, the consulting 

firm renamed itself Accenture and launched a massive campaign to reinvent its image, 

purging itself of any remaining ties with Andersen by emphasizing its historically separate 

nature (the Accenture website credits the company’s beginnings to a plan to install a 

computer in General Electric in 1953 without any mention of accountants). Now Accenture 

is a publicly owned company that specializes in fast-paced development of innovative 

technology solutions for its global clients 9 . 

Even with its setbacks at the end of the 1990’s, Andersen did not lose its place as a major 

accounting firm. The company had 1,500 senior partners and retained 85,000 employees in 

84 different countries at the start of 2000. At this time, hoping to prepare the company to 

handle any future crises, management brought in a new CEO: Joseph Berardino. 

8 Eichenwald, Kurt. “Andersen Misread Depths of the Government’s Anger”. The New York Times. March 18, 2002. A-1. 

9 Accenture company website: http://www.accenture.com (Accessed 7/30/2002). 



Berardino Heads Andersen 

Joseph Berardino was billed as a crisis manager who could “take Andersen back to its 

roots”, helping the company recover from its recent accounting scandals, along with healing 

the rift created by the contentious divorce with Andersen Consulting. Berardino had a solid 

accounting background. He took pride in his skills as an auditor and had been a dedicated 

employee at Arthur Andersen since he graduated from Fairfield University in 1972. Senior 

executives greeted him as a “buck stops here” type of CEO who could clean up the dubious 

bookkeeping that had gotten the company in trouble before 10 . 

Unfortunately for Berardino, most of the errors that would lead to Andersen’s unraveling 

were in place long before he took his place as CEO in January of 2001. For example, 

although he did consolidate top management into a council of 5 (down from 17) to chart a 

decisive course for the company, the partners who dealt with the hundred top clients had 

already established a high level of autonomy in their branches. David Duncan had abused 

this authority when his Houston office approved fraudulent Enron accounts. The inflated 

earnings in Enron reports that would prompt the SEC investigation had been recorded during 

the five years prior to Berardino’s promotion. It was too late for him to undo these mistakes; 

he could only mitigate their repercussions. 

Many of the problems Andersen faced were not unique to that company. In truth, for 

Berardino to truly return to accounting its “roots”, to the way it had been before the 1990s, 

he would have had to change an entire industry, not just one firm. Every auditor had to 

evaluate a new range of business activities engaged in by corporations who no longer 

conformed to traditional financial practices. The other Big Five accounting firms also all 

combined consulting and auditing work. The Big Five accountants shared so many concerns, 

in fact, that they had banded together into a single lobbying group to challenge Congress on 

unwanted regulatory changes and donate large sums to political campaigns sympathetic to 

their cause. 

Berardino himself had earned his reputation in the accounting world for his confrontations 

with then- chairman of the SEC Arthur Levitt. Berardino challenged Levitt directly when 

the chairman moved to block Andersen’s attempts to rejuvenate its consulting activities 

following the 2000 Accenture split. Like many in the accounting industry, Berardino argued 

that consulting work enhanced auditing by giving employees a firsthand knowledge of the 

industry that they monitored. Berardino understood that auditors were no longer just auditors 

and he saw no need to challenge what had become standard practice. 

10 Schwartz, John and Jonathan Glater. “At Andersen’s Helm, A Winner of Battles Who Faces a War”. The New York Times. 

Jan 14, 2002. 

Brown, Ken. “Berardino, Picked to Lead Audit Firm Back to its Roots, Faces Bigger Task.” The Wall Street Journal. January 

14, 2002. 



By 2001, the accounting industry bore little resemblance to 1913’s art of bookkeeping. 

Auditors faced unprecedented pressure. They monitored businesses that did not fit into 

established categories. And as technology evolved and information became quickly 

accessible and transmittable, accountants had greater capacity to add new services to their 

work, including consulting duties. The potential existed for a reshuffling of auditing practice 

not only at Andersen, but across every firm in the industry. When sweeping change did 

occur, it occurred with Arthur Andersen in the media spotlight as a symbol of the failures of 

the accounting industry. 

Arthur Andersen in the Public Eye 

Prior to 2001, most Americans paid little attention to the role of the “Big Five” auditors in 

the business world. The new business environment of increasingly close auditor-client ties 

had led to concerns within the industry. Lobbyists for the major accounting firms had 

established a place for themselves on Capitol Hill, while executives within the firms 

themselves struggled with questions of proper oversight and possible conflicts of interest. 

The general public, however, remained mostly disengaged from this debate. 

Arthur Andersen always had an indirect responsibility to the public. In its capacity as an 

independent auditor, Andersen oversaw business transactions and bookkeeping, and verified 

the profits that each company posted so that potential investors could base their investment 

decisions on credible information. At the same time, however, it was the large corporate 

clients that generated profits for Andersen and so it was these clients with whom top 

executives cultivated good relations, to the exclusion of relationships with other key 

constituencies. 

When Enron officials pointed their fingers at the fraudulent bookkeeping behind their 

company’s bankruptcy in 2001, the public began to ask how the $600 million error could 

have occurred. As the investigation into Enron’s business practices progressed, the media 

and the public both became increasingly critical of Arthur Andersen, which had consistently 

turned a blind eye to questionable financial transactions. Andersen had faced accounting 

scandals before but none of these had Enron’s potency. The auditing firm could not escape 

public censure in the aftermath of the energy giant’s demise. 

The American public, fueled by images of loyal Enron workers left with no work, no 

pension, and worthless stock options, immediately condemned Enron executives as 

criminals. Furthermore, they saw Arthur Andersen as directly implicated in these executives’ 

criminal activities. To many, Andersen would become synonymous with Enron’s failure. 

Whether or not Andersen was unique in its relations with its clients, its Enron association 

became the symbol of a corporate world in which unscrupulous top executives could use 

sophisticated financial manipulations for personal profit at the expense of their companies. 

In the wake of Enron, the auditing firm that had devoted so much of its time and attention to 

courting its top corporate clients would have to answer to a new constituency-- the American 

public. Many of Andersen’s new critics had no prior knowledge of the accounting business; 



they had never previously questioned who audited the books of the companies on which they 

relied for services, employment, or returns on their investments. Instead, the average citizen 

relied on a regulatory structure in place at the SEC to protect against fraudulent bookkeeping 

practices. This infrastructure had failed them. Worse, many Americans believed that the 

private auditors charged with enforcing accounting standards had joined forces with the very 

companies who were abusing these standards. To these critics, Andersen executives had 

committed a double betrayal, both collecting illegal profits and neglecting their duties as 

watchdogs. 

Andersen was not alone in questionable auditor/ client relations; the accounting industry as a 

whole had undergone substantial changes through the 1990’s. Andersen was alone, however, 

in its link to the Enron debacle and in bearing the brunt of Americans’ outrage over what had 

happened. The investors to whom Andersen’s corporate clients responded would soon 

demand stricter inspection of accounting procedures. Some would ask for a separation from 

Andersen. For the first time, a major auditing firm’s reputation with the American public 

would have a direct impact on the future of the company. And Andersen, by November of 

2001 was ill-prepared to handle this new constituency. 

The Enron Collapse 

Through the 1990s, Enron enjoyed a very close relationship with the Andersen partners that 

it hired as accountants. This relationship included the “cross pollination” of employee pools, 

both internal and external audits performed by Andersen, and a large volume of consulting 

work done by Andersen accountants as well. David Duncan was head of Andersen’s 

Houston office. He directly oversaw the auditing of Enron’s accounts and exercised 

significant power in determining the relationship between Andersen and Enron. Duncan had 

personal ties to both Houston, as a graduate and active alumnus of Texas A & M, and Enron, 

where he regularly joined in company sponsored events and even shared office space at 

Enron headquarters 11 . 

Duncan’s personal autonomy in handling the Enron portfolio extended beyond the Houston 

office to an ability to overrule those governance committees that Andersen headquarters had 

established to ensure proper accounting procedure. Duncan could even remove committee 

members from ruling on Houston office work. He acted on this power when, in December of 

1999, Carl Bass voiced concerns over bookkeeping at Enron. Bass was a member of 

Andersen’s Professional Standards Group (PSG), a committee of expert auditors charged 

with reviewing particularly complicated accounts. Duncan had dismissed PSG objections on 

four separate occasions prior to 1999. In that December, Bass detected improper records for 

a sale of options by a special purpose enterprise owned by an officer at Enron. Although the 

sale eventually went through as originally recorded, Bass would not drop his complaint over 

11 Herrick, Thaddeus. “Were Enron, Andersen Too Close?”. The Wall Street Journal. January 21, 2002. 



the transaction. Over a period of several years Duncan, on Enron’s behalf, petitioned to have 

Bass removed from the case. Bass was eventually removed from the PSG 12 . 

After the complaint about Bass, in February of 2001, executives at Andersen once again 

expressed serious reservations about Enron as a client. And once again the Houston office 

persuaded top officials not to terminate the contract. By this time the errors that would lead 

to Enron’s bankruptcy later that year had already accumulated. Congressional investigators 

would later find that Enron had used outside partnerships owned by Enron executives, like 

those uncovered in Bass’ review, to hide millions of dollars of debt. 

In spite of Duncan’s insistence on keeping the Enron account, Andersen headquarters still 

believed that something had gone wrong in the Houston bookkeeping. On October 12 th , 

2001, ten days before the SEC announced its investigation of Enron, Nancy Temple sent out 

an e-mail that reminded employees of the company’s document retention policy. This policy 

had begun several years earlier after the Waste Management investigation, in which the SEC 

had uncovered wrongdoing at Andersen using evidence pulled from its Waste Management 

files. These incriminating files had resulted in a nearly $300 million fine for Andersen. 

Following Temple’s e-mail, in accordance with company policy, employees began to shred 

documents, including documents relating to the Enron case. 

On October 22 nd , 2001, the SEC publicly announced its probe into Enron’s financial 

transactions. The internal debates at Andersen over these transactions, debates which began 

in 1999 and continued up to the SEC announcement, indicate that the accounting firm knew 

that its own role in the energy company’s financial trouble might be called into question. If 

any doubt remained over whether Enron’s scandal would reach the auditors, Enron 

executives settled the matter on October 31st by convening a special committee to 

investigate Andersen’s accounting failures. 

In spite of Andersen headquarters’ early realization that their Houston office could come 

under attack for its treatment of the Enron accounts, almost everyone else at the company 

remained in the dark about the problem. Branches outside of Houston received little or no 

preparation for October’s crisis. In fact, employees at Arthur Andersen described their 

preparation as virtually non-existent. Doug DeRito, the Atlanta partner at Andersen, went so 

far as to request Berardino’s resignation. He was angered by the lack of any internal 

information flow and declared “My ability to survive financially [through Enron] is at stake, 

and I have zero details” 13 . 

On November 8 th , 2001, Enron restated its finances back to 1997, revealing a $586 million 

loss. The company’s stock plummeted, and the finger pointing began in earnest. Enron 

disavowed its books and blamed Andersen’s poor accounting standards for allowing millions 

of dollars worth of improper transactions to pass without anyone sounding an alarm. Enron 

12 McNamee, Mike. “Out of Control at Andersen”. Newsweek. April 8, 2002. 

13 Brown, Ken, Ianthe Jeanne Dugan, Cassell Bryan-Low. “Berardino’s Resignation Leaves Andersen’s Drama Unresolved”. 

The Wall Street Journal. March 27, 2002. 



had made many unwise business deals. Company officials insisted, though, that the error 

hadn’t been theirs alone, but their accountants’ as well. 

Arthur Andersen had worked hard over the last century to develop a positive reputation 

among corporate clients like Enron (See Exhibit 1-2). The firm served these clients not only 

through external auditing services, but consulting and internal auditing work as well and 

oversaw transactions of billions of dollars in the fast-paced financial world of the 1990’s. 

When companies that had hired Andersen as an accountant started to fail, however, the close 

auditor/ client relationships that first attracted clients to Andersen began to appear too close. 

Federal investigators would soon attempt to separate out acceptable company practices from 

compromising ones in the much-changed accounting world of 2001. And Arthur Andersen 

would be at the center of this debate. 

Problems Facing Andersen 

With the SEC about to announce that it would subpoena Andersen’s files regarding 

the Enron case the next day, Berardino knew that his firm was in danger and needed 

immediate help. Andersen was already on SEC “probation” for earlier accounting 

errors with Waste Management and Sunbeam. Partners at the firm had reason to 

believe that the SEC would investigate its operations even further when it examined 

Andersen’s role as an auditor at Enron. Not only would Andersen be under federal 

scrutiny, but the heavy media coverage of Enron had placed the accountants under 

public scrutiny as well. Berardino had never represented Andersen to such a broad 

audience before, and he had almost no foundation from which to build a new 

campaign now. It would be difficult to put together a corporate communication 

strategy given the firm’s limited effort in this area, but Berardino knew he had to do 

something now, or the firm might never recover. 

Case Questions 

1. How does the changing environment for business affect Arthur Andersen’s ability to 

communicate in this situation? 

2. Where is the firm most vulnerable, from a communications standpoint? 

3. Who needs to be involved in discussions about how to communicate in the face of the 

SEC investigation of Andersen? 

4. What role will Joe Berardino need to play in this situation? 

5. What advice would you give Mr. Berardino if you had received his call from 

Tokyo instead of David Talbot?

Arthur Andersen (A) - Tuck School of Business - Dartmouth College

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