Arthur Andersen
The accounting firm that forgot a simple truth: when the referee joins the game, the entire sport dies.
The accounting firm that forgot a simple truth: when the referee joins the game, the entire sport dies.
Founded in 1913 on principles of "absolute integrity," Arthur Andersen grew to 85,000 employees and $9 billion in revenue as one of the Big Five accounting firms. The company's reputation was built on being the third-party enforcer - the auditor whose approval meant financial statements could be trusted. This role gave Andersen enormous power but also enormous responsibility: trust in the entire cooperation system (capital markets) depended on enforcers staying clean.
Then consulting revenue ($5.5B by 2000) exceeded audit revenue ($3.5B), creating a fatal incentive misalignment. Andersen had more to lose from angering clients than from approving questionable accounting. When Enron collapsed in 2001 and Andersen's role in facilitating fraud became clear, the firm compounded the betrayal by destroying documents. Criminal conviction followed. Within five months - five months - an 88-year-old institution employing 85,000 people ceased to exist.
The biological lesson: third-party enforcers face existential punishment when they cheat because their corruption undermines trust in the entire system. You can survive as a cheater in direct competition. You cannot survive as a corrupt enforcer - the ecosystem will kill you to preserve cooperation itself. Andersen's death wasn't a bankruptcy; it was an immune response. The business ecosystem destroyed the infected cell to protect the organism.
Key Leaders at Arthur Andersen
Arthur E. Andersen
Founder
Established firm on principle of absolute integrity; famously refused to approve questionable accounting even at cost of 25% of revenue
David Duncan
Partner (Enron account)
Ordered document destruction that led to obstruction of justice conviction
Cautionary Notes on Arthur Andersen
- Consulting revenue ($5.5B) exceeded audit revenue ($3.5B), creating conflicts of interest
- Partners evaluated on total fees generated rather than audit quality
- Document destruction (shredding) after Enron collapse constituted obstruction of justice
- Conviction later overturned by Supreme Court but firm already dissolved
Arthur Andersen Appears in 2 Chapters
Once-legendary accounting firm (85,000 employees, $9B revenue) collapsed when consulting revenue ($5.5B) exceeded audit revenue ($3.5B), creating incentives to approve questionable client accounting. Enron scandal + document destruction led to criminal conviction and organizational death in 5 months.
Read about cheater detection →Dissolved after Enron audit failure in 2002, demonstrating regulatory extinction - destroyed by accounting fraud scandal as ecosystem immune response to corrupted third-party enforcer.
Read about extinction events →