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Ethics in Accounting and Auditing
What Did Arthur Andersen Contribute To The Enron Disaster
Ethics in Accounting and Auditing
Arthur Anderson was an accounting professor who was a co-founder of Arthur Anderson LLP (AA). It was one of largest and most respected firms providing professional services in the world. It focused on quality rather than revenue, and this was why it prospered for so many years. It had two divisions, an auditing arm and a consultation arm. The consultation arm, however, brought in more revenue than the auditing arm. In a bid to attain more control and maximize their profits, they decided to split from Arthur Anderson. After the split, they converted their name to Accenture (Toffler & Reingold, 2003). The auditing firm retained their original name, but their revenue was rather low. This made them pay more attention to increasing their revenues, as opposed to providing the high quality services that made them renowned. Their auditing practices changed to less time consuming methods that made them not pay attention to the details.
1. One of the most prominent failures of the Arthur Andersen auditing firm was the Enron disaster. Arthur Andersen contributed to the Enron disaster in several ways. One of AA’s errors was that it ignored the Generally Accepted Accounting Principle (GAAP). This principle forbids recording of issued shares due to an increase in the equity of the shareholders’ unless they are allotted as cash. AA’s auditors ignored this aspect during the audit period and contributed to the company’s downfall. During the audit, AA did not realize the special purpose entities used to hide losses and generate false profits. The shareholders in Enron lost about 67 billion due to this. The Enron disaster also occurred because AA did not warn Enron that their CFO Andrew Fastow and his helpers had conflicted ideas and could not manage them appropriately. The audit report also did not inform Enron that their internal control and policies were not suitable to protect the interests of the shareholders. These failures caused the irreparable Enron disaster in December 2001 (Sterling, 2002).
2. An auditor should make decisions in the public interest rather than in the interest of the current shareholders or the management. This is because the auditors should portray the company’s records transparently. The main purpose of an audit is to show the financial position of a company as at a given time. If the auditors favored the management, the audit report will be inconsistent and will not show the true net worth of the company. For this reason, the auditors should consider the public interest instead of the management or shareholders (Newton, 2006).
3. The Arthur Andersen partners responsible for quality control did not stop the flawed decisions of the audit partners. This is because the AA partner in charge of the Enron account (Duncan) fired a partner in AA’s Professional Group (Bass) because he opposed the setting up of an LIM partnership since it was not necessary (Amara, 2007). Duncan disagreed with him and subsequently fired Bass. This was inappropriate since Duncan should not have had the power to overrule a quality control partner by himself. This happened because AA was focused in revenues only and not in quality.
4. Arthur Andersen should not have suffered because of fewer than 100 people. The people who should have been prosecuted should have been those concerned with the Enron account. This is because they are ones who were directly associated with all the failures reported. The rest of the firm was not to blame since they did not take part in the Enron scandal.
5. Audit firms should never shred or destroy audit working papers except in special circumstances. When it is a court directive, the files may be destroyed. In the case of investigative cases, the files should be destroyed after 20 years. For all other correspondence, the files should be destroyed after 8 years. Project control files are destroyed 1 year after the completion of the project. Study files are destroyed when the completed study is at least 5 years old.
1. The corporation originated in 1776. The formerly controlled English controlled corporations gained local control, and they developed over the years. Elements of the contradictory status of the corporation in contemporary society have both positive and negative effects. Contemporary corporations are locally owned and have fewer constrictions. Early capitalist corporations were English owned and had strict rules.
2. The current sources of corporate power include positional, expert, legitimate, coercive and referent power (Coll, 2012). These sources have changed over time since initially the main source was position, but over time, new aspects have been included.
3. Large firms initially seek power, but after they are properly established, the power grows around them. This is because their financial portfolio is quite large and this guarantees their continued power and respect.
4. The motor industries like Maruti have been proven to have the worst records of corporate violence. This has been attributed to the availability of tools that may injure people. This causes an unhealthy working relationship between people.
5. Religious crime is difficult to process and prosecute because the different religions vary and there is no particular set of rules governing religion. It may be legal in one religion to perform an act but illegal in another.
6. The benefit is that any crimes committed by a person in the said occupation are punishable by law. Its drawback is that it does not specify what is considered as an occupation in the law. Most occupational crimes include corruption and money laundering.
7. Occupational crime may leverage up to corporate crime. One such example is money laundering, during the audit process, this can become a corporate crime.
8. Not entirely since every time it occurs, the corporation will try to hide it in order to maintain its image.
9. The small businesses taking part in unethical activities involve dry cleaners, for example. This occurs because the authorities do not pay attention to their activities as they do in the larger companies.
10. This legislation has not reduced corporate fraud as intended. The perpetrators have just been forced to reshape or else they may lose their jobs.
Amara, E. (2007). The Enron scandal. New York, NY: Filmakers Library.
Coll, S. (2012). Private empire: ExxonMobil and American power. New York: Penguin Press.
Newton, L. H. (2006). Permission to steal: Revealing the roots of corporate scandal : an address to my fellow citizens. Malden, MA: Blackwell Pub.
Sterling, T. F. (2002). The Enron scandal. New York: Nova Science Publishers.
Toffler, B. L., & Reingold, J. (2003). Final accounting: Ambition, greed, and the fall of Arthur Andersen. New York: Broadway Books.