Arthur Anderson Case Study

Introduction

One of the critical problems regarding Anderson's company was a question of ethics. The executives were not ethically for conducting daily. In particular, the organization placed its staff in a complicated position by directing them to be both auditors and consultants. As such, the employees were at crossroads between balancing the consulting business and at the same time auditing objectively (C-span, 2005). The organization was oriented towards making more profits, rather than ensuring that the practices were ethical. The corporate tradition made employees think more about amassing more profits to the extent of discarding vital documents meant to assist the clients. Besides, the company did not respond accordingly to the memos delivered by the quality control department as well as challenging manipulative structures and practices at Enron (Opel, 2007).

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Anderson Company adopting the Enron account as an auditor and at the same time as the consultant was a significant ethical mistake. The notion of consulting Anderson's company to affirm that operations are run efficiently, while on the other hand asking the same company to audit Enron accounts raised integrity issues. In scenarios where discrepancies emerged, they were downplayed or omitted before completing the audit process. This is because the Enron account was highly profitable; consequently, enticing Anderson's employees to be lenient with regulations (Parrino, 2013). Profitability became the principal focus of the organization, subsequently, compromising the high integrity and values that were instilled in the organization since 1918. For instance, instead of championing for the stakeholders and public interest, who relied on the financial reports provided, the company defended its selfish interest. The aftermath of these integrity issues and unethical conducts led to the collapse of the company since they lost the majority of the clients to other accounting organizations (Opel, 2007).

Legal and Ethical Issues Surrounding Andersen’s Auditing of Companies Accused of Accounting Improprieties

Legal and ethical issues of a company correlate greatly therefore without proper operation management, the risk of being involved to both legal and ethical issues is high (C-span, 2005).

Ethical issue- the Arthur Andersen company in the leadership period of Leonard Spacek identified ways of using a shorter period for depreciation. For example, compared to before, computer systems depreciated after ten years before but at this time it would depreciate after five years. On top of it, the company asked its clients to use shorter time depreciation approach too for this, the process of request follow up was very expensive to any client. If any company client could not afford the shorter time depreciation approach, the company auditors would give out to that client bad evaluations. Other legal issues include the severe competition among employees which is unethical as it created an extreme and stressful working environment and also the promoting and appreciating of employees who brought in huge profits to the company only.

Legal issue- an example of the legal issue within the Andersen company is the approval of wrong financial statements of BFA (Baptist Foundation of Arizona) and also the hiding of Sunbeam financial statements and failed at all cost to address the accounting error in spite of many accounting improprieties of Sunbeam

Evidence That Andersen’s Cooperate Culture Contributed to Its Downfall

There are various internal factors apart from the external ones mostly the cooperate culture which contributed and develop a pathway leading to Arthur Andersen collapse. Most of those factors/aspects contributed significantly in the case (C-span, 2005). These factors are;

The effects of audit independence after the opening of the Andersen consulting branch. Both the services of auditing and consulting as sold to the same customers.

Too much concentration on acquiring more profit after the consulting service was opened. On this account, appreciation lies mostly on employees bringing considerable gains to the company which was unfair to the company auditors who toiled every day honestly and making accurate and reliable auditing. Consequently, coordination difficulties among the company employees arise.

Unqualified and inexperienced auditors- the inexperienced auditors used to work in the company caused auditing faults in its client's financial statements as well as destruction and loss of auditing documents for example in Enron case.

Competition among employees within the company due to incentives of who will bring in much profit irrespective of unethical approaches especially unethically decisions.

Also, the company had a bad and unethical habit of hiding the wrong accounting error of the client after negotiating to gain from its customers like Waste management and Enron for "kickback money."

How can the provisions of the Sarbanes-Oxley Act help minimize the likelihood of auditors failing to identify accounting irregularities?

The Sarbanes-Oxley Act was enacted to combat accounting and securities fraud. It includes most things for example higher standard of cooperate governance, stiffer penalties for violators and provisions of the new accounting oversight board. The Congress in response passed the 2002 Sarbanes-Oxley Act that established and enforced new direction and guidelines for co-operating. Basing on its implemented provisions, the likelihood of the Act minimizing the auditor's failure to identify and determine accounting irregularities is at a high level. For example, section 104 the Act calls for inspection of registered public accounting firms. This means it will assess the firms' financial statement to verify its accuracy thus preventing the use of accounting practices that are questionable. Section 201 (restricts auditors mainly to their functionalities) therefore this will limit the company auditors to only auditing activities. On this account, this section will prevent greatly fostering of unessential relationships among employees and also cut down the probability of compromising proper audit for more profit/revenue.

References

C-span. 2005. Arthur Anderson and Enron. Washington Journal. Retrieved from, www. c-spanvideo.org/program/168280

Oppel, R., 2007. The Overview: Arthur Andersen Fires an Executive for Enron orders. New York Times. January 17.

Parrino, R., and Bates, T., (2013) Fundamentals of Corporate Finance. Chicago.