...Arthur Andersen LLP, based in Chicago, is a holding company and formerly one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's handling of the auditing of Enron, an energy corporation based in Texas, which had filed for bankruptcy in 2001 and later failed. The other national accounting and consulting firms bought most of the practices of Arthur Andersen. The verdict was subsequently overturned by the Supreme Court of the United States. The damage to its reputation, however, has prevented it from returning as a viable business, though it still nominally exists. Arthur Andersen was responsible for Enron’s accounting and auditing. Fraudulent reports were given by reps from Andersen on Enron’s account that led to filing bankruptcy. A report in October by Enron's law firm, commissioned by the company to investigate an employee's allegations of improper accounting, concluded that Andersen auditors reviewed and approved of transactions by Enron-related partnerships that contributed to the company's collapse. The employee, who made the allegations in an anonymous letter, has been identified as Sharron S. Watkins, an Enron vice president for corporate development...
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...Arthur Andersen (AA) had served as Enron’s outside auditor since 1985. Two years after the collapse of Enron, Arthur Andersen went from an international firm of 36,000 employees to nonexistence. In AA’s 16 years relationship with Enron, besides external auditing, AA also provided Enron internal auditing and consulting services. From 1997 to 2001, Enron overstated its profits by $568 million, 20 percent of Enron’s earnings for those four years. Andersen auditors helped Enron hide this earnings manipulation. On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron. (Arthur Andersen v. United State, 2005) Arthur Andersen contributed to the Enron scandal in four aspects. Firstly, facing the false financial condition, AA never disclosed it. Enron was one of AA’s major clients. In order to avoid the loss of this big client, AA helped Enron cheat on its financial statements. This action is not only unethical, but also illegal. To avoid losing this big client, AA determined to violate the standards. From the ethical aspect, AA should have stopped this fraud early. Instead, AA chose to act illegally to earn profits. Secondly, AA provided Enron external auditing, internal auditing and consulting services at the same time, violating accounting and auditing standards because there are conflicts of interests among these services. “There was a fluid atmosphere of transfers back and forth between those working...
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...factors that a company looks for when choosing. These factors could include integrity, reliability, honesty, responsibility, and prestige just to name a few. Enron and Arthur Andersen auditors had such a partnership where Arthur Andersen auditors provided accounting support. There were unethical practices that lead to the collapse of both companies. Arthur Andersen Auditors Arthur Andersen the founder of the company began his career at a young age. Mr. Andersen first partnered with another accountant to build an accounting firm. This partnership only lasted a few years. After the slip Mr. Andersen made it his mission to have his company do extremely well while having integrity in the accounting field. The company was taken internationally around the 1950’s. These years were very profitable for the company. There were known internationally and became very credible. In 1986 Arthur Andersen auditors began business with Enron. Enron Arthur Andersen auditors provided Enron with internal and external auditing for the business. Enron had a sizeable debt when it opens for business. The plans for the company was to purchase gas put it in a bank and then sell it to consumers. This was working well, however the debt was still noticeable. The problems arose when Enron began to lie on transactions and Arthur Andersen auditors looked the other way. There was important information being left out of reports. This was the beginning of the unethical behaviors by the companies. Downfall ...
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...The Rise and Fall of Arthur Andersen LLP In October 2001, Enron was accused of overstating their earnings in the last few years in excess of $1 billion dollars (Doost, 2001). At the same time, Arthur Andersen, one of the most reputable auditing firms, was responsible for auditing Enron’s financial statements. The Security Exchange Commission (SEC) ordered Arthur Andersen to provide all relevant Enron documentation and auditing files. Going against Arthur Andersen’s impeccable reputation of honesty, David B. Duncan, the Arthur Andersen partner in charge of the Enron account, had his staff destroy thousands of pages of documents and records related to this case of fraud (Oppel & Eichenwald, 2002). Ultimately, the Supreme Court of the United States overturned Arthur Andersen’s conviction of "knowingly...corruptly persuading another person to withhold or alter documents in an official proceeding" (Wojdacz, 2009). However, Arthur Andersen had imploded and was not able to recover. Founder and His Principles Arthur Andersen was founded December 11, 1913. Arthur Andersen had a reputation of exemplary honesty. Arthur Andersen himself came from an immigrant Norwegian family. He worked for Price Waterhouse. At 23, Andersen became the youngest certified public accountant (CPA) in the state of Illinois by educating himself at night (Marotta & Selman, 2009). At this time, CPAs were trying to establish accounting as a profession. Marotta and Selman (2009) stated Integral...
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...The youngest CPA in Illinois, Arthur Anderson, created Arthur Anderson & Company in 1913. The company developed throughout the years and became one of the largest auditing firms in the world. “Think straight, talk straight,” a quote from, Arthur Anderson, which described his viewpoints for auditing and the approach he took with his clients. Since America did not have strictly based accounting rules, Anderson believed as long as clients fully reported their financial statements minor accounting errors were acceptable. Arthur Anderson & Company adopted this philosophy and applied it with their clients. Arthur Anderson being a shrewd entrepreneur knew his company had to focus on energy companies because of the high demand for electricity, oil, and gas such as Enron. Northern Natural Gas Company was formed in the 1930’s primarily focusing on providing natural gas to customers to heat their homes. As the company grew and invested into several different types of energy supply and gain control of 40,000-miles of natural gas pipelines and became the largest Natural gas company in the United States. As a result in 1986 Enron was formed with Kenneth Lay being the top executive of the newly created firm. Jeffery Skilling, who was a top subordinate to Lay, transformed Enron into an energy trading company. Enron now having complete domination of energy sources grew rapidly and did not follow proper accounting standards. Arthur Anderson & Company was responsible for auditing...
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...inflated. Another practice is that they switched from an agent model to a merchant model when recognizing revenue. Doing this gave them a 65% increase when typical industry standards only gain between 2-3%. Once they switched to this accounting method other companies started to follow their lead in order to stay competitive with Enron. In addition, Enron understated its liability and overstated its equity. They would do this by creating special purpose entities. These entities were created to show investors the downside of risk. I believe the main reason the stock increased so much is due to corruption of Arthur Andersen, an independent audit firm. On Wikipedia’s website there was a statement from Enron’s Power Committee and it appears they were placing blame on the Andersen firm. They were quoted as saying, "… evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions" (“Enron Scandal”). After reading about...
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...profits became intense. Andersen leaders responded by pushing partners to become salesmen -- upsetting the delicate balancing act any auditor must perform between pleasing a client and looking out for the public investor. Seeds for Demise Although nobody knew it at the time, the seeds for Arthur Andersen's eventual demise were sown in 1950, when the firm introduced the "Glickiac" to the world. Named after its inventor, an Andersen engineer named Joseph Glickauf, the clunky device created a sensation by demonstrating that computers weren't just for scientists: Companies could use them to automate their bookkeeping. This ushered in an entirely new business. Rather than just audit the books, Andersen would set up the computers clients needed to keep the books. It wasn't long before Andersen boasted by far the largest technology practice of any accounting firm, raking in huge profits. The flood of money introduced a new element of tension into the partnership. Under rules set by the auditors who ran the firm, all of the profits from all the practice areas had to go into one big pot to be divided among partners. But since the average consultant brought in more money than the average auditor, the consulting side complained the arrangement was unfair. The week after New Year's Day in 1989, at a world-wide meeting of the firm in Dallas, the consultants finally made their break. They won an agreement to separate into two units -- Arthur Andersen and Andersen Consulting -- under a...
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...debt from the public. Three prominent SPEs, used by Enron, were known as “Chewco,” “LJM2,” and “Whitewing.” Enron had issues related to corporate governance. Enron’s audit committee only met a couple of times a year and covered numerous topics in a short period of time. The audit committee also lacked the technical knowledge needed to understand auditor questions, the financial statements, and the complicated transactions used by management (Healy and Palepu). As a result, Enron was able to hide its fraudulent activity from the audit committee with ease. Another issue with corporate governance is the role of the auditors. Arthur Andersen was accused of conducting less than adequate audits due to a conflict of interest; they collected over $50 million in audit and consulting fees from Enron in 2000 (Healy and Palepu). Essentially, Arthur Andersen looked the other way as Enron continued to lie to investors. Enron, like most companies, had to deal with outside pressures such as meeting earnings expectations. Not meeting earnings expectations will cause the stock price to drop. Enron met these expectations by managing its earnings, which increased their stock price. As a result, Management received large bonuses and the value of their stock options skyrocketed. Like most companies,...
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...Government regulation of securities exists so that firm’s cannot bloat their profits on their financial records. This in turn causes investors to invest money in them when they are not privy to their actual records. When people think of “shady” accounting the first thing that comes to mind is most likely the Enron scandal of 2001. “The Enron collapse illustrates that government regulation can lessen asymmetric information problems, but cannot eliminate them. The Enron bankruptcy not only increased concerns in financial markets about the quality of accounting information supplied by corporations, but also led to hardship for many of the firm’s former employees, who found that their pensions had become worthless” (Mishkin, F. S., & Eakins, S. G. (2009). Public distrust of financial institutions has a huge impact on the economy because it stops people from buying, trading and selling securities. “The solution, however, would involve the government in releasing negative information about the firms, a practice that might be politically difficult. A second possibility is for the government to regulate securities markets in a way that encourages firms to reveal honest information about themselves so that investors can determine how good or bad the firms are” (Mishkin, F. S., & Eakins, S. G. (2009). A novel idea one might say but an idea that our economy is built on and depends on to thrive. This is where the Securities and Exchange Commission (SEC) comes into play....
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...Strategic Management Process Paper MGT/498 March 10, 2014 Abstract: This paper explains the role of ethics and social responsibility when developing a strategic plan, and includes considering stakeholder needs and agendas during this process. This paper uses an example of a company overstepping ethical boundaries for stakeholder agendas, and what types of preventative measures could be taken to avoid this type of situation. Essay: Success is a common goal of almost all businesses in society today. Success does not come over night and with that being said it is important for management teams to develop a strategic plan in order to grow and set the benchmark for other companies in the industry. While every company should have a strategic plan in order to grow; this plan should be developed and executed with ethics and a great social responsibility. In order to determine the future direction of a company, it is necessary to understand the company’s current position and the possible roads that it can take in order achieve its goals. For this reason a strategic plan is essential for the growth of a company. Every successful business has a plan and knows where it is heading in the future. A financial services business is no different. Taking the time periodically to review the company's past performance can help predict the future performance of the company. With having a prediction of the future gives the company...
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...the bankruptcy of this company. Was Arthur Anderson & Co deprived internal audit system, audit reports and financial advisement what that led to the collapse of this company? Other issues further explains that Enron had also abused the market-to- market accounting method for its long term contracts involving in various energy commodities, primarily natural gas and electricity. The intense use of special purpose entities (SPEs) by Enron allowed them to avoid debts wish further explained their financial inaccuracy. In fact SPEs provided large companies with a mechanism to raise needed financing for various purposes without being required to report debt in their balance sheets. Enron had created hundreds of these SPEs. A main factor that motivated Enron executive to window dress their company’s financial statement was the need for this company to sustain stock prices at a high level. The bonds were created but as a loan. This was used for capital investments and just to borrow money. This was hidden as it treated cash as revenues. Since they didn’t have to consolidate as it was off the book and balance sheets. This became an abuse to the SPEs rules. Arthur E. Anderson relied on a simple four word motto to serve as a guideline principle in making important personal and professional decisions “Think straight, talk straight”, so how can a company with such great ethical foundation had gone so far in erroneous audits. Public reports that Andersen earned approximately $52 million in...
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...dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Issue: Enron, once the countries seventh-largest company according to the Fortune 500, is a good example of how greed and the desire for success can transform into unethical behavior. Good ethics in business would be to compete fairly and honestly, to communicate truthfully and to not cause harm to others. These are things that Enron did not seem to display, which led to Enron’s operations file for bankruptcy in 2001. Enron’s scandal has become one of the most talked about forms of unethical business behaviors. The company’s collapse resulted from the disclosure that it had reported false profits, used accounting methods that failed to follow generally accepted procedures. Both internal and external controls failed to detect the financial losses disguised as profits for a number of years. Enron’s managers and executives retired or sold their company stock before its price went down. Enron employees lost their jobs and most of their retirement savings invested in Enron stock. Enron’s dishonesty and misleading business ethics unfolded when a Fortune article made people wonder whether Enron’s stock was overpriced. Enron’s executives were later charged with fraud, money laundering and conspiracy. Other companies, such as Arthur Anderson...
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...WHY THE SARBANES-OXLEY ACT CAME ABOUT OR HOW TO COOK THE BOOKS The Sarbanes-Oxley Act of 2002 (Sarbox, or SOX) was enacted on July 30, 2002, to protect the general public and shareholders from accounting errors, unethical behavior, and corporate scandal. There are 11 titles that include the requirements for reporting, retention period for records storage, management of electronic records, and standards for external auditors. The act is supervised by the Public Company Accounting Oversight Board, and administered by the Securities and Exchange Commission (SEC). Sarbox requires the CEO and CFO to certify and be liable for the annual and quarterly reports that are filed. If the financial reports are discovered to be untrue, such acts of noncompliance are fines, imprisonment, or both, depending on the severity. The Act was designed for publicly traded companies only, in reaction to scandals such as Enron, WorldCom, and Tyco. These scandals cost investors billions of dollars when the companies collapsed, or the stocks plummeted. These companies altered or destroyed records, defrauded shareholders, or “cooked the books”. When a company cooks the books, it means that incorrect information has been used to create their financial statements. They manipulate earnings and expenses to improve the bottom line, or earnings per share (EPS). This manipulation of information is used to bring in new investors, keep the shareholders happy, attain a bonus, and reach their...
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...Prescriptive Approaches to Ethics at Enron Enron was a global energy firm that filed for bankruptcy protection in 2001. The firm’s senior managers had engaged in fraud for an extended period through a scheme in which partnerships owned by the managers could receive payment for goods and services never provided to Enron. In addition, the firm’s external auditing firm, Arthur Andersen, was complicit in the fraud by knowingly certifying false financial statements as accurate. Arthur Anderson participated in the fraud because the firm did not want to risk losing lucrative consulting contracts from Enron, which created a conflict of interest situation (Miller, 2004). The events leading to the collapse of Enron can be analyzed using the ethical frameworks suggested by consequentialist theory, deontological theory, and virtue ethics. Such an analysis can provide an explanation of the failure of Enron’s directors, mangers, and auditors to adhere to their ethical duties to the shareholders, employees, customers and suppliers of the firm. Consequentialist theory suggests that an act is ethically wrong if it results in consequences deemed wrong or harmful by the majority of people in a society (Hooker, 2002). The consequentialist theory requires assessing the actual consequences of the act, which includes both direct and indirect consequences. It also requires using some type of evaluative norm for determining whether the consequence is beneficial or harmful. The theory is prescriptive...
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...catastrophic business failures was Enron. Unveiled in October 2001, this scandal involves the renowned energy company Enron in conjunction with the accounting, auditing and consultancy schemes of Arthur Andersen. Enron disgraces ultimately lead the organization to a scandal that resulted in the biggest economic failure in United States history (TIME Enron, 2001). The Enron scandal also destroyed one of the foremost accounting agencies in the world, Arthur Andersen. Enron’s downfall was the result of their choice of accounting practices, in particular target entities and poor financial reporting. Enron’s accounting structure had so many loopholes that it was unproblematic for Andrew Fastow, the organization’s chief financial officer, to mask billions in debt from failed transactions and schemes. Fastow and other main executives purposely misinformed the organization’s board of directors and audit commission. The U.S. Securities and Exchange Commission (SEC) began an investigation into Enron after the organization’s stock price began to plummet and Dynegy offered to purchase Enron at a price much lower than normal market price. When the Dynegy deal did not happen, Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code. Enron's auditor, Arthur Andersen, was responsible the shame of bankruptcy also. In light of the ambiguities, many began to point the finger at various key executives. Despite the fact that Enron’s shareholders...
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