Andersen Effect

  

In 2001, energy trading company Enron had well, let's call it a few problems. For that matter, so did Arthur Anderson, the company’s accounting firm...but we’ll get to that.

A handful of Enron executives had spent the previous few years using a variety of accounting tricks to hide massive losses at the firm. As a result, they got rich off of stock options and self-dealing side hustles using the company’s assets.

Through it all, Arthur Anderson, acting as the company’s auditor (meaning the firm was fundamentally in charge of making sure Enron’s books were correct) signed off on the dodgy balance sheet. It all came to a head in 2001, when the company imploded in a flurry of massive write downs and indictments of top executives.

Eventually, Arthur Anderson itself was found guilty of various infractions, including shredding documents in an attempted cover up. The conviction was eventually overturned, but the scandal led to the so-called “Anderson Effect”...basically, after that, auditors would be reluctant to be push overs for the companies they worked for and conduct a more stringent review of results.

Related or Semi-related Video

Finance: What are Unsuitable Recommendat...0 Views

00:00

finance a la shmoop what are unsuitable recommendations I'm putting little old

00:08

ladies in extremely risky venture capital investments that likely don't [Old lady cartoon travels along ventural capital timeline]

00:13

get liquid for a decade yeah that's unsuitable putting the whole

00:17

portfolio of twenty-eight year olds in US government short term paper [28 year old portfolio opens]

00:22

unsuitable telling anyone to buy lottery tickets unsuitable the basic idea is

00:27

that if you are guiding a client as their investment advisor you have to you

00:32

know do right by them so that you match their tolerance for risk and reward

00:36

hunger for the reward there yet in investment packages that make sense [Risk and reward on a balance beam]

00:41

old people for the most part just want to live their golden years in peace so

00:44

that they don't have to lean on their kids for financial support do they care [Children sitting on sofa]

00:48

whether they make twenty times their money on an investment in ten years no

00:53

at least probably none is by the time the investments pay off they'll likely

00:57

be doing backstroke Six Feet Under you know on a gentle sloping hill with a [Man points to gravestone]

01:01

view of the babbling brook or be so old and well they won't know the difference

01:05

yeah so they want their money safe just to keep up with inflation maybe a little [Elderly man sitting in rocking chair]

01:09

bit better than that and they want it to be managed with low risk until you know

01:13

the end young people have kind of the opposite concern ie not taking enough [Young girl holding bonds]

01:18

risk being too safe and just owning safe US government paper well that has them

01:23

losing buying power over time after tax three percent government paper a tax

01:28

that ordinary income is something less than two percent and if inflation is now

01:33

three percent while they're losing a point a year in buying power and with

01:36

20-somethings they have something like fifty years before they really have to

01:40

worry about drawing on their savings so they can handle this ups downs sideways

01:46

but over long periods of time the market goes up like think about where it [Market price increases]

01:50

was 50 years ago relative to today and while they go via one path or another

01:54

from here to here and the bottom line is that the recommendations financial

01:58

advisers give their clients have to be suitable for the key elements of their

02:02

life their stage in life like your age their level of wealth their tolerance [List of considerations appear]

02:06

for risk and a whole bunch of other things that make the market a lot more

02:09

like this than like and trust us you don't want to crap out

02:13

it feels a you know crappy [Young girl playing craps at a casino]

Up Next

Finance: What is an Ethical Fund?
22 Views

What is an Ethical Fund? An ethical fund is one in which a specified set of ethical principles for company and industry sector investment selection...

Finance: What are the Five Principles of Finance?
0 Views

What are the five principles of finance? 1) The time value of money. 2) Risk and reward are related. 3) The market as a popularity contest v. a wei...

Finance: What is Adverse Audit Opinion?
27 Views

What is Adverse Audit Opinion? An adverse audit opinion signals that an auditor has found flaws in a company’s financial statements. Adverse audi...

Finance: What is Acting Against Recommendations?
2 Views

What is Acting Against Recommendations? In the financial world, if an investor is acting against recommendations, they are not listening to a recom...

Find other enlightening terms in Shmoop Finance Genius Bar(f)