The Big Five accounting firm scandal refers to the 2001-2002 collapse of Arthur Andersen LLP, one of the world's top five accounting firms, following its involvement in the massive Enron fraud. Andersen was convicted of obstruction of justice for shredding audit documents, turning the "Big Five" into the "Big Four".
The big 5 accounting firms were the largest accounting firms in the world until 2002. They were formed from the big eight accounting firms. They were formed from many smaller member firms and would later go on to create the big 4 firms. They ceased being the 8 biggest accounting firms in the world in 1989.
Yes, several high-profile Enron executives, including CEO Jeffrey Skilling and CFO Andrew Fastow, went to jail for their roles in the massive accounting fraud, while founder Ken Lay was convicted but died before sentencing. Over 20 people were convicted in total, with sentences varying from years in prison to probation, resulting from one of the biggest corporate scandals in U.S. history.
The Enron scandal was an accounting scandal sparked by American energy company Enron Corporation filing for bankruptcy after news of widespread internal fraud became public in October 2001, which led to the dissolution of its accounting firm, Arthur Andersen, previously one of the five largest in the world.
Arthur Andersen's Involvement in Major Accounting Scandals
As investigations unfolded, it was revealed that Arthur Andersen had been involved in a number of other high-profile accounting scandals. These included the mismanagement of audits for companies like Waste Management, Sunbeam, and WorldCom.
The accounting firm Arthur Andersen was fined $500,000 today and sentenced to five years of probation for obstruction of justice in connection with its handling of documents relating to the Enron Corporation. The punishment was the maximum allowed.
It acquired rights to the Arthur Andersen name in 2014 and renamed itself Andersen in 2019. Andersen has mostly focused on tax and legal work but has been steadily building a consulting division under the guidance of George Shaheen, a former CEO of Andersen Consulting in its heyday.
Enron's demise was triggered by sharp losses as well as allegations of accounting fraud. As the company unraveled, its 25,000 employees lost their jobs as well as $2 billion in pension savings and $1.2 billion in retirement funds.
The "3% rule" in the Enron scandal refers to an accounting loophole that allowed companies to keep Special Purpose Entities (SPEs) off their main balance sheets if at least 3% of the SPE's total capital came from an independent investor, enabling Enron to hide massive debt and inflate earnings by treating these entities as separate. This rule allowed Enron to manipulate its financial statements, but it was eventually changed and tightened by the FASB after the scandal, leading to stricter consolidation rules.
Sherron Watkins, an Enron Vice President, famously exposed the massive accounting fraud by alerting CEO Kenneth Lay in August 2001, warning the company could implode. Her courageous actions, detailed in a letter, led to congressional investigations, national recognition (Time's 2002 Person of the Year with Cynthia Cooper and Coleen Rowley), and paved the way for the Sarbanes-Oxley Act, making her a key figure in uncovering the scandal.
Arthur Andersen's Houston office was billing Enron $1 million per week for auditing and consulting services, and David Duncan, the lead auditor, had an annual performance goal of 20% increase in sales.
On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm.
Andersen Consulting (a part of the Arthur Andersen auditing firm) was singled out as the most aggressive of these firms and the panel discussed Andersen's business practices.
In 2017, the accounting firm PricewaterhouseCoopers (PwC), which oversees vote counting and results distribution at the Academy Awards, caused a scandal for mixing up the envelopes that contained the names of the Best Picture winners.
One of the key factors that led to Andersen's downfall was its conflict of interest. Not only was Arthur Andersen auditing Enron's financial statements, but it was also providing lucrative consulting services to the company. This dual role compromised the firm's ability to perform its duties impartially.
The original Big Eight accounting firms, which dominated the industry before mergers reduced them to the current Big Four, were Arthur Andersen, Arthur Young, Coopers & Lybrand, Deloitte Haskins & Sells, Ernst & Whinney, Peat Marwick Mitchell, Price Waterhouse, and Touche Ross. These firms underwent significant consolidation and the collapse of Arthur Andersen (after the Enron scandal) to become the Big Four (Deloitte, PwC, EY, KPMG) by the early 2000s.
Where is the Arthur A Anderson now? Well, she is a familiar site near Sault Saint Marie. She's in fact been laid up in Toledo, Ohio since early 2025 and did not transit the Sioux Locks this shipping season.
Today, Andersen is one of the largest independent tax firms in the world.
The Court found that the jury instructions did not properly portray the law Arthur Andersen was charged with breaking. Even after the conviction was overturned, the damage to Arthur Andersen's reputation was such that it did not return as a viable business.
May 26, 2006 • A federal jury finds former top Enron executives Kenneth Lay, right, and Jeffrey Skilling guilty after more than 14 weeks of testimony. The two have been convicted of fraud and conspiracy in connection with the energy-trading giant's collapse.