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.