ACCT622: Describe the legal and Ethical Issues Surrounding Andersen’s Auditing of Companies Accused of Accounting Improprieties: Advance Auditing Case Study, LU, Singapore

Questions

I. Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties?

2. Did Arthur Anderson contribute to the Enron disaster? Explain

3. What causes Arthur Andersen’s downfall?

CASE OF ARTHUR ANDERSEN SCANDAL

Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the largest and most respected accounting firms in the world through his reputation for honesty and integrity. Think straight, talk straight was his motto and he insisted that his clients adopt that same attitude when preparing and issuing their periodic financial statements.

Arthur Andersen’s auditing philosophy was not rule-based, that is, he did not stress the importance of clients complying with specific accounting rules because in the early days of the U.S. accounting profession there were few formal rules and guidelines for accountants and auditors to follow. Instead, Andersen invoked a substance-over-form approach to auditing and
accounting issues.

He passionately believed that the primary role of the auditor was to ensure that clients reported fully and honestly to the public, regardless of the consequences for those clients. Ironically, Arthur Andersen & Co.’s dramatic fall from greatness resulted from its association with a client known for aggressive and innovative uses of accounting gimmicks to window dress its financial statements.

Enron Corporation, Andersen’s second-largest client, was involved in large, complex transactions with hundreds of special purpose entities (SPEs) that it used to obscure its true financial condition and operating results. Among other uses, these SPEs allowed Enron to download underperforming assets from its balance sheet and to conceal large operating losses.

During 2001, a series of circumstances, including a sharp decline in the price of Enron’s stock, forced the company to assume control and ownership of many of its troubled SPEs. As a result, Enron was forced to report a large loss in October 2001, restate its earnings for the previous five years, and, ultimately, file for bankruptcy in December 2001. During the early months of 2002, Andersen became the focal point of attention among law enforcement authorities searching for the parties responsible for Enron’s sudden collapse.

The accusations directed at Andersen focuses on three key issues. The first issue had to do with the scope of professional services that Andersen provided to Enron. Critics charged that the enormous consulting fees Enron paid Andersen impaired the audit firm’s independence.

The second issue stemmed from Andersen’s alleged role in Enron’s aggressive accounting and financial reporting treatments for its SPE-related transactions. Finally, the most embarrassing issue was the massive effort of Andersen’s Houston office to shred Enron audit documents, which eventually led to the demise of the firm.