Discipline, honesty, and a strong work ethic were three key traits that John and Mary
Andersen instilled in their son. The Andersens also constantly impressed upon him
the importance of obtaining an education. Unfortunately, Arthur’s parents did not
survive to help him achieve that goal. Orphaned by the time he was a young teenager,
Andersen was forced to take a fulltime job as a mail clerk and attend night classes
to work his way through high school. After graduating from high school, Andersen
attended the University of Illinois while working as an accountant for Allis-Chalmers,
a Chicago-based company that manufactured tractors and other farming equipment.
In 1908, Andersen accepted a position with the Chicago office of Price Waterhouse.
At the time, Price Waterhouse, which was organized in Great Britain during the early
nineteenth century, easily qualified as the United States’ most prominent public accounting
firm.
At age 23, Andersen became the youngest CPA in the state of Illinois. A few years
later, Andersen and a friend, Clarence Delany, established a partnership to provide
accounting, auditing, and related services. The two young accountants named
their firm Andersen, Delany & Company. When Delany decided to go his own way,
Andersen renamed the firm Arthur Andersen & Company.
In 1915, Arthur Andersen faced a dilemma that would help shape the remainder of
his professional life. One of his audit clients was a freight company that owned and operated
several steam freighters that delivered various commodities to ports located on
Lake Michigan. Following the close of the company’s fiscal year but before Andersen
had issued his audit report on its financial statements, one of the client’s ships sank
in Lake Michigan. At the time, there were few formal rules for companies to follow
in preparing their annual financial statements and certainly no rule that required the
company to report a material “subsequent event” occurring after the close of its fiscal
year-such as the loss of a major asset. Nevertheless, Andersen insisted that his client
disclose the loss of the ship. Andersen reasoned that third parties who would use the
company’s financial statements, among them the company’s banker, would want to be
informed of the loss. Although unhappy with Andersen’s position, the client eventually
acquiesced and reported the loss in the footnotes to its financial statements.
Two decades after the steamship dilemma, Arthur Andersen faced a similar situation
with an audit client that was much larger, much more prominent, and much more profitable
for his firm. Arthur Andersen & Co. served as the independent auditor for the
giant chemical company, du Pont. As the company’s audit neared completion one year,
members of the audit engagement team and executives of du Pont quarreled over how
to define the company’s operating income. Du Pont’s management insisted on a liberal
definition of operating income that included income earned on certain investments.
Arthur Andersen was brought in to arbitrate the dispute. When he sided with his subordinates,
du Pont’s management team dismissed the firm and hired another auditor.
Throughout his professional career, Arthur E. Andersen relied on a simple, fourword
motto to serve as a guiding principle in making important personal and professional
decisions: “Think straight, talk straight.” Andersen insisted that his partners
and other personnel in his firm invoke that simple rule when dealing with clients,
potential clients, bankers, regulatory authorities, and any other parties they interacted
with while representing Arthur Andersen & Co. He also insisted that audit clients
“talk straight” in their financial statements. Former colleagues and associates
often described Andersen
as opinionated, stubborn and, in some cases, “difficult.”
But even his critics readily admitted that Andersen was point-blank honest. “Arthur
Andersen wouldn’t put up with anything that wasn’t complete, 100% integrity. If anybody
did anything otherwise, he’d fire them. And if clients wanted to do something
he didn’t agree with, he’d either try to change them or quit.”1
As a young professional attempting to grow his firm, Arthur Andersen quickly
recognized
the importance of carving out a niche in the rapidly developing accounting
services industry. Andersen realized that the nation’s bustling economy of the
1920s depended heavily on companies involved in the production and distribution
of energy. As the economy grew, Andersen knew there would be a steadily increasing
need for electricity, oil and gas, and other energy resources. So he focused his
practice development efforts on obtaining clients involved in the various energy industries.
Andersen was particularly successful in recruiting electric utilities as clients.
By the early 1930s, Arthur Andersen & Co. had a thriving practice in the upper
Midwest and was among the leading regional accounting firms in the nation.
The U.S. economy’s precipitous downturn during the Great Depression of the 1930s
posed huge financial problems for many of Arthur Andersen & Co.’s audit clients in
the electric utilities industry. As the Depression wore on, Arthur Andersen personally
worked with several of the nation’s largest metropolitan banks to help his clients obtain
the financing they desperately needed to continue operating. The bankers and
other leading financiers who dealt with Arthur Andersen quickly learned of his commitment
to honesty and proper, forthright accounting and financial reporting practices.
Andersen’s reputation for honesty and integrity allowed lenders to use with
confidence financial data stamped with his approval. The end result was that many
troubled firms received the financing they needed to survive the harrowing days of
the 1930s. In turn, the respect that Arthur Andersen earned among leading financial
executives nationwide resulted in Arthur Andersen & Co. receiving a growing number
of referrals for potential clients located outside of the Midwest.
During the later years of his career, Arthur Andersen became a spokesperson for
his discipline. He authored numerous books and presented speeches throughout the
nation regarding the need for rigorous accounting, auditing, and ethical standards
for the emerging public accounting profession. Andersen continually urged his fellow
premise of the more mature professions such as law and medicine. He also lobbied
for the adoption of a mandatory continuing professional education (CPE) requirement.
Andersen realized that CPAs needed CPE to stay abreast of developments in
the business world that had significant implications for accounting and financial reporting
practices. In fact, Arthur Andersen & Co. made CPE mandatory for its employees
long before state boards of accountancy adopted such a requirement.
By the mid-1940s, Arthur Andersen & Co. had offices scattered across the eastern
one-half of the United States and employed more than 1,000 accountants. When
Arthur
Andersen died in 1947, many business leaders expected that the firm would
disband without its founder, who had single-handedly managed its operations over
the previous four decades. But, after several months of internal turmoil and dissension,
the firm’s remaining partners chose Andersen’s most trusted associate and protégé
to replace him.
Like his predecessor and close friend who had personally hired him in 1928, Leonard
Spacek soon earned a reputation as a no-nonsense professional—an auditor’s auditor.
He passionately believed that the primary role of independent auditors was to
ensure that their clients reported fully and honestly regarding their financial affairs
to the investing and lending public. Spacek continued Arthur Andersen’s campaign
to improve accounting and auditing practices in the United States during his long tenure
as his firm’s chief executive. “Spacek openly criticized the profession for tolerating
what he considered a sloppy patchwork of accounting standards that left the investing
public no way to compare the financial performance of different companies.”2 Such
criticism compelled the accounting profession to develop a more formal and rigorous
rule-making process. In the late 1950s, the profession created the Accounting Principles
Board (APB) to study contentious accounting issues and develop appropriate
new standards. The APB was replaced in 1973 by the Financial Accounting Standards
Board (FASB). Another legacy of Arthur Andersen that Leonard Spacek sustained was
requiring the firm’s professional employees to continue their education throughout
their careers. During Spacek’s tenure, Arthur Andersen & Co. established the world’s
largest private university, the Arthur Andersen & Co. Center for Professional Education,
located in St. Charles, Illinois, not far from Arthur Andersen’s birthplace.
Leonard Spacek’s strong leadership and business skills transformed Arthur
Andersen
& Co. into a major international accounting firm. When Spacek retired in
1973, Arthur Andersen & Co. was arguably the most respected accounting firm not
only in the United States, but worldwide as well. Three decades later, shortly after the
dawn of the new millennium, Arthur Andersen & Co. employed more than 80,000
professionals, had practice offices in more than 80 countries, and had annual revenues
approaching $10 billion. However, in late 2001, the firm, which by that time
had adopted the one-word name “Andersen,” faced the most significant crisis in its
history since the death of its founder. Ironically, that crisis stemmed from Andersen’s
audits of an energy company, a company founded in 1930 that, like many of Arthur
Andersen’s clients, had struggled to survive the Depression.
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