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Power Tends to Corrupt

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Learning Team C Week 2 Reflection

FIN 571
January 20, 2014
David Binder

Learning Team C Week 2 Reflection
“Power tends to corrupt and absolute power corrupts absolutely.” – Lord Acton

Mission, vision, and goals provide a professional and moral compass for corporations. In the case of Arthur Andersen’s decent, compromises were made that in the end destined the accounting firm to cease to exist (Parrino, Kidwell, & Bates, 2012, Ethics Case). The learning team’s discussion surrounded the blatant conflict of interest, greed and the breach of fiduciary duties of the firm to provide objective evaluation of its accounting practices and independence from its clients.
Greed
Joe and Jeffery pointed in there reflections the change of the market during the 1980’s resulted in a boom of mergers and acquisitions, and additionally the consulting practice of the firm experienced an extreme growth. Andersen partners began realizing the potential in profits from consulting contracts as companies were on a spending spree. Eventually, its auditing services was no longer the main source of revenue for the firm Soon tension started between the two groups which lead to some of the auditors forming their own auditing firm. Auditors remaining with Anderson were now forced to sell consulting services to clients to gain market share in the consulting business through their audit clients. This and other tactics was the first of many decisions that contributed to unethical business strategies.
One of Anderson’s largest accounts was Enron. $52 million in fees were received from Enron, 50% of which were for auditing, and 0% for consulting. Enron went bankrupt in 2001 after accounting regularities were discovered. The use of questionable accounting practices made the firm’s financials look better than what they were in reality. The auditing firm, Anderson, had not brought this to light due to the conflict of interest.
Conflict of Interest
Learning team C recognized the role of leadership in many situations contributed to the unethical behavior as “Andersen developed an aggressive culture” to increase sales of consulting contracts to existing audit clients. We considered this as a turning point in losing its reputation as a leader in ethical principles and integrity. As mentioned in all of our individual reflections, the change in purpose or mission should have been recognized as a conflict of interest early on they could have rewritten their policies and procedures to reflect their new business goals. Separating the consulting business from the auditing appears to be the right thing to do but if the managing partners did not want to divide the profits, there would have to be some personal sacrifices that partners were unwilling to make.
Breach of Duty The team also discussed and agreed the breach of duty to provide objectivity in their auditing services while providing consulting services. By selling consulting services to its auditing clients, they intentionally breached their duty as a CPA firm to remain independent. Intentional acts of breach of duty is punishable by law. As an auditing firm, Arthur Andersen’s chief responsibility is to provide, “generally accepted accounting principles in a consistent manner” and to, “render an opinion as to whether a firm’s financial statements are reasonably accurate” (Parrino, Kidwell, & Bates, 2012, p. 122). Andersen ignored the obvious and continued on business as usual, rewarding business partners for selling contracts and extracting those that questioned practices. This is another demonstration of arrogance by the leaders of Arthur Andersen and perhaps this arrogance stemmed from their lack of moral compass.

Summary Discussion in our learning team forum was cohesive in our perspective of the problems presented in the reading assignment. Arthur Andersen may be alive and well today if they weren’t blinded by the greed that ushered them into a path of bad business decisions using the exact. The use of accounting data to help managers make better business decisions was not the case for Enron and Arthur Andersen.

Reference
Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.). Hoboken, NJ: Wiley.

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