CASE 2

Case 2

Arthur Andersen: Questionable Accounting Practices

Arthur Andersen is perhaps best known as an accountant and consultant that served Enron, among many other major firms. Many students today probably only known Arthur Andersen in a negative context, but before becoming entangled with Enron and going out of business it was one of the “Big Five” accounting firms, and was highly respected. In addition to profiling the firm’s lengthy history, the case goes into details over its dealings with major clients. The case also describes some of the trials and tribulations the firm experienced in its final years, particularly as it placed increasing weight on its consulting service—even positioning it to compete with its more well-established accounting unit. This case provides details of some of Arthur Andersen’s court cases that led up to the firm’s demise, as well as aspects of the company’s corporate culture that allowed for misconduct to occur. Some of the problems with its corporate culture involved being excessively focused at gaining high-profile clients at all costs, and providing an employee incentive system that inadvertently encouraged misconduct.

The case also considers the ramifications of the firm’s actions on various stakeholders, including its contribution to the passage of the Sarbanes-Oxley Act of 2002. The firm placed excessive weight on growth and profits at all costs, even at the expense of its stakeholders and clients. Arthur Andersen also endowed inexperienced employees with too much power, allowing them to make decisions that were beyond their skill set. Andersen was convicted of obstruction of justice, after having been caught shredding Enron documents, and was fined $500,000. However, the brand name was tainted and had lost most of its value. The accounting firm was spun off under the name Accenture, which has distanced itself from the Andersen name and remains in business (however is nowhere near as large as Andersen was). In 2005, the Supreme Court overturned the obstruction of justice ruling on the technicality that some language and been too loosely defined in the original court documents. However, the damage to the Arthur Andersen name had long since been done. Andersen’s questionable accounting practices resulted in the loss of millions of dollars and tens of thousands of jobs.

Discussion

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

2. What evidence is there that Andersen’s corporate culture contributed to its down­fall?

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