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What evidence is there that andersen s corporate culture contributed to its downfall

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Arthur Andersen and Enron: Positive Influence on the Accounting Industry Todd Stinson Arthur Andersen and Enron - two names that will forever live in infamy because of the events leading up to and including the debacle of December 2001, when Enron filled for bankruptcy.

These two giants in the utility and accounting industries, and known throughout the world, took advantage of not only investors, but also the government and public as a whole, just so that those individuals involved could illegally increase their personal wealth. How could the backlash from the actions of the management of these two organizations have a positive influence in the accounting industry as a whole? However, this thesis will show how these changes actually are positive for the industry.

In order to do this safety measures that were in place at the time of the debacle will be shown, the actual events leading up to the downfall of Enron and Arthur Andersen will be discussed, the changes that have occurred since the fall through the present day will be given, the changes that appear to be on the horizon for the accounting industry will be shown, and finally how all of this what evidence is there that andersen s corporate culture contributed to its downfall impact the accounting industry as a whole in a positive fashion will be made clear.

Safety Measures in place Prior to the events. Prior to the fall of Enron and their accountants, Arthur Andersen, there were many different types of safety measures in place to help protect the investors and the public as a whole. The use of GAAP by accountants is standard protocol.

An accountant follows these principles as a matter of daily routine. If they are not, then the business must show why they are not, and present rationale to demonstrate that what they are doing is both ethical and appropriate in their specific situation. This leaves the field open to interpretations of what is appropriate for different situations. Since interpretations are quite subjective, the American Institute of Certified Public Accountants AICPAadded the stipulation that the treatment must also be applied consistently over time.

These rules are in place to make financial statements as accurate and reliable as possible. Enron took these rules and circumvented them to allow certain individuals within the company to make money from the increased investments from stockholders. Since these partnerships were, in most cases, wholly owned subsidiaries or partnerships, they should have been shown on the consolidated financial statements with Enron.

While GAAP guidelines relate to how financial statements are presented, GAAS, on the other hand, are standards set down specifically for the audit cycle of a company. Auditors, according to GAAS, are to remain independent in both fact and appearance. Meaning that even if an auditor appears to have a connection with their client, even though they may not have, they should drop the audit immediately.

They did not execute their duties independently because of the amount of revenue that Enron was providing them, not only in audit fees, but also in consulting fees. SAS constitute the third important safety measure. These statements on auditing standards are produced to address current issues in the business of auditing. The one that played a predominant role in this incident is SAS 82.

This statement also included the duty to find out if any of the management knew of any fraud being committed against the company, and added new fraud terminology to the representation letter produced by management. This SAS was the first to clearly state that auditors had any responsibility to look for fraud.

Up until 1997 it was expected that an auditor would report fraud if they happened upon it, but they had no responsibility to actively look for it. This one SAS along with all the others were supposed to protect the public interest. However, in lieu of the lucrative fees being collected by Andersen from Enron these were also overlooked.

In spite of all of these safety measures the wrongdoings at Enron went undetected for a long period of time.

The major problem was that of collusion. Therefore, when events like these transpire, changes are required in an attempt to prevent similar occurrences. History Chronology of Events The events that led up to the bankruptcy filing in December of 2001, started long before anyone began to suspect fraud at Enron.

Andersen had two major audit failures just a few years apart and just a short time before Enron filed bankruptcy. This information came out in an SEC investigation, and led to Waste Management selling out to another company.

In 1997 Sunbeam was found by the SEC to be using accounting tricks to create false sales and profits, Andersen signed off on these financial statements even after a partner flagged them. Sunbeam would later file for bankruptcy Weber. These two major audit failures should have put Andersen on their guard against another client failure, however the worst was yet to come. Internal memos at Andersen showed that there were conflicts between the auditors and the audit committee of Enron.

Also included in these memos are several e-mails expressing concerns: However, the leading partner on the audit, David B. Duncan, overturned these concerns. In doing this they were trying to rebuild the consumer confidence in their accounting firm. While Andersen was attempting to pick up the pieces of their business, Paul Volcker, former Federal Reserve Chairman, presented a plan for a restructuring of Andersen so that they would have a chance of surviving this incident.

Andersen did eventually agree to the restructuring, but it was too late to save the firm as a whole Alexander. Anderson still exists as a company, although their only reason for doing so is to complete all the litigation against the firm. They are no longer auditing or consulting. Anderson was the major accounting influence in this incident, however what evidence is there that andersen s corporate culture contributed to its downfall were not the main player.

Enron became more and more arrogant as time passed. Most of the debts and tangible assets of the company were on the balance sheets of partnerships that were run by high-ranking officials within the corporation Zellner. With this kind of strategy for business the company quickly began to falter. Finally on December 2, 2001 Enron filed for bankruptcy Zellner.

In the end Enron fared no better than other companies that perpetrate this kind of activity. This description is what really happened, but how these events were displayed to the public is a different story. In early 2001 Jim Chanos, the person who runs Kynikos Associates, was the first to say what everyone can now see -- Enron had absolutely no way to earn money.

The parent company had become nothing but a hedging entity for all of its subsidiaries and affiliates. This kind of a decrease in one year is unheard of in the utilities industry. Chanos went on to point out how Enron was still aggressively selling stock, even though management understood that there was very little to back up the shares that they were selling.

Chanos was also the first person to take notice of and publicly identify the partnerships where Enron was hiding some of its debt McLean.

  • This is an act that has little moral value from the perspective of virtue ethics;
  • Another big change that came from the Enron bankruptcy filing was a new push to separate auditing services from consulting services;
  • In addition, when Enron cam under investigation from the Federal authorities, Arthur Andersen shredded documents related to Enron;
  • The separation of auditing and consulting will move the accounting industry forward a great distance toward increased credibility;
  • They are transactions that are actually written out in a list, each one pertaining to one specific situation.

Thanks to Jim Chanos the public was made aware of what was going on, and actions have been taken to implement changes to prevent a similar instance in the future. Changes Since these events have taken place, see exhibit 1, many changes have come about within the accounting industry.

Still other changes have come from the government and government agencies or have just naturally evolved with time. SAS 96 became effective January of 2002 and dealt with the record retention policies of accounting firms. Also several new regulations were added. SAS 96 contains a list of factors that auditors should consider when attempting to determine the nature and extent of documentation for a particular audit area and procedure.

It also requires auditors to document all decisions or judgments that are of a significant degree SAS 96. For example, a decision of a significant degree would be an auditor approving a client not using GAAP for a portion of their financial statements. These changes appear to be a direct result of the paper shredding that went on at Arthur Andersen immediately after the Enron bankruptcy. SAS 98 makes a lot of revisions and amendments to previous statements. All of these changes would appear to be related to problems that were discovered in the Andersen audit of Enron.

  • These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal;
  • The parent company had become nothing but a hedging entity for all of its subsidiaries and affiliates;
  • Only by this continued striving can the industry be good enough to function effectively and even thrive;
  • This cloud of doubt also extended to companies that Andersen gave qualified audit reports or consulting advice to;
  • This kind of a decrease in one year is unheard of in the utilities industry.

Many accounting firms and independent CPAs reacted to these events and implemented changes in procedure voluntarily. These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal. This distancing was also due to the major changes mandated to Andersen as a way to get back on their feet after the scandal broke, and the other firms were afraid that these changes would be forced on them as well Schroeder.

This scandal also caused many major companies who had used Andersen as their auditor in past years to hire auditors to go over past years audits double checking all of the audit work that could be double checked.

This cloud of doubt also extended to companies that Andersen gave qualified audit reports or consulting advice to. Leaders of many blue-chip firms were very concerned by this scandal, and they met to discuss plans for future changes.

At the end of these meetings, it was decided that a new oversight committee should be proposed and that these companies were the people to propose such an idea.

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This idea would set up a committee sponsored completely by the SEC. The members of this committee were to be completely independent of the public accounting firms Bryan-Low. The oversight committee mentioned was never instated because the current public oversight committee dissolved itself only a short time after this proposal was made, as they felt they had let down the community and the industry. The government reacted aggressively when they became aware of the Enron scandal, and a flurry of legislation and proposals emanated from Congress and the SEC about how best to deal with this situation.

President Bush even announced one post-Enron plan. This plan would also include higher levels of financial responsibility for CEOs and accountants. By far the biggest change brought about is the Sarbanes-Oxley Act Ditman. Sarbanes-Oxley also brought with it new requirements for disclosures. These requirements included reporting of transactions called reportable transactions.

Arthur Andersen Questionable Accounting Practices

These transactions are broken down into several categories, which impact every aspect of a business. One of these categories is listed transactions-which are by far the worst. They are transactions that are actually written out in a list, each one pertaining to one specific situation. Another is transactions with a book-to-tax difference of more than ten million dollars.

  • These changes, some implemented by accounting companies and agencies, some by the government and governmental agencies, and others by outside sources, will require more work from accountants, but will in the long run improve many factors within the industry;
  • If the internal audit is functioning effectively, it cuts down on the volume of work that the auditors have to do, thus making it easier for auditors to do audits.

There are several others, however these two will have the greatest effect. Accompanying these requirements are strict penalties if these transactions are not reported and discovered later. This act will mean significant additional work for accountants over the next several years.

One such meeting had David Walker, Comptroller of the United States, discussing his beliefs as to where serious problems existed. The four major areas outlined in his discussion were corporate governance, independent audit of financial statements, oversight of the accounting profession, and accounting and financial reporting issues GAO-02-483T.

This discussion sparked the bringing several GAO accountants and heads of business into Congress committees for advice and to get feedback for proposed ideas.

The other large meeting was held to discuss the Sarbanes-Oxley act that was put before Congress. These were the two main changes emanating from the Government Accounting Office. Another big change that came from the Enron bankruptcy filing was a new push to separate auditing services from consulting services.

This last effort was to sell off their consulting service.