Business Ethics Assignment

Arthur Andersen

Arthur Andersen was one of the big five largest accounting firms in the U.S due to its professional, reliable and ethics, and culture for investor of the first founder. However, His Empire and its reputation cannot prevent the downfall in lately 20 century and early 21 century with the scandal of Enron. The reason for this collapsed lied on the direction of management that lead to wrong decisions. The first problem came from the adoption of consulting section which led to the booming of Andersen in 70s-80s and also from the change in corporation culture which focused on high profit from consulting. It led to the unfair treatment between two sections, and also created the infighting competition between them even when they were split. All of these actions discouraged team spirit and instead fostered secrecy and selfishness which prevent them from quickly responds to crises. In fact, this problem played essential role of Arthur Andersen collapse: On the Andersens downfall, Baptist foundation of Arizona was the first marker. On this case, Andersen issued false and misleading approvals of BFAs financial statements, even when they were warned by BFAs employees. Sunbeam cases, once again auditors failed to address serious accounting errors that eventually led to lawsuit. Phillip Harlow, one of Andersen employees, was provided unqualified opinion on statements of 1996-1997. Waste management, Andersen was accused for having aided the fraud of WM by repeatedly giving unqualified opinion. More seriously, the auditors knew the problems but still gave wrong decision because of some kickback and closed-door agreement. Enron, due to the huge profit (fee) and partner spin-off from this client, Arthur Andersen has been given wrong opinion on Enrons financial statements, and also destroyed eventually a number of documents concerning its auditing of Enron. Moreover, the main person who was corrupt persuader is still remaining innocent that brought Andersen guilty of obstruction of justice. WorldCom, Global Crossing and Qwest communications, On those cases, Andersen were related the same ways as Enron fraud, used unqualified and unclear opinion from Andersen auditing. If at WorldCom, it failed to find the accounting irregularities, at the heart of two following cases, Andersen supported fake asset swaps method, in order to show large gain and attract investors. What led to Andersens failure? As can be notice at the beginning, the corporate culture played important role in Andersens downfall. Firstly, it focused on profit rather than where the profit comes from. It also gave up the first culture of the independent auditors, focus on some spin-off structure in order to maximize profit. Secondly, the culture motivate corporation to send out inexperienced business consultants and untrained auditors to client sites. Then, the limited oversight over auditors also contributed to the destruction. However, the unfair treatment and unclear separation between consulting and auditing create some bad competition within, decrease the company sensitive with ethical problems and other bad decision. The scandals of Andersen and its clients were the bell rang for ethical in auditing. In order to prevent events like Andersen, Sarbanes- Oxley Act was passed by congress which provides new guidelines and direction for corporate and accounting responsibility. With this act, some section covers the situation of Andersen that might help other firms in their business.

Business Ethics Assignment Part A. Answer the questions

Arthur Andersen

Question 1: describe the legal and ethical issues surrounding Andersens auditing of companies accused of accounting improprieties Legal issue: 1st: Andersen did not follow the guild of AICPA about independent auditing when provided services. It combined auditing and consulting as a package of service so that lead to lead to wrong activities. In other word, the company policy is opposite to the general rules. For example, Andersen provided both consulting and auditing to Enron that controlled this corporation reports. More seriously, some Andersen executives even accepted jobs with the energy trader. 2nd: Andersen provided unqualified opinion on some firms statements such as BFA, Sunbeam, and Waste Management. It was not provide trustful opinion about financial statements that led to misunderstanding, and a lot of investors suffered. It was not follow the law that stated about the fairness of auditors opinion. 3rd: Aided the fraud of Waste Management, on this case, Andersen Auditors knew about the problems in financial reports. But instead of disclose them to the board; they had some closed-door arrangement with the WM. It can be charged lying and inside trading or bribery. Telecommunication firm: aided the fake assets swap by providing low quality opinion that led to misunderstanding, led the clients to 4rd: on Enron case, Andersen was related to criminal action when destroying a number of documents concerning its auditing of Enron, which led to an indictment for obstruction of justice on March 14, 2002. Other issue is the corrupt persuader, she was convinced others to destroy or modify the documents related to Enron. Andersen was related to criminal rather than normal mistakes To conclude: on the legal side, Andersen failed to be an independent auditing, issuing fraud that led to misunderstanding, closed-door deal, aided wrong action of clients for kickback, and destroy the related documents in order to be innocent. Ethical side: 1st: provided low quality auditors who cared about company rather than investors. Because of Andersen culture, which led to unfair treatment between consulting and auditing, employees wanted to be consultants rather than auditors. As the result, Auditing section consisted of low quality people who might not be able to notice the errors. And in the case of WorldCom, Andersen failed to find the accounting irregularities or in the case of Sunbeam, it failed to address serious accounting errors that eventually led to a class-action lawsuit. 2nd: issuing fraud opinion about financial statements, provide wrong information led to misunderstanding on BFA case, Sunbeam. On the BFA case, auditor could not find the wrong method that use money from new creditor to pay the old, or the method bill and hold of Sunbeam. Due to low quality auditors, the opinion of Andersen might not clear and qualified enough. However, because of its reputation, this auditing firm was reliable for investors. 3rd: working with clients manager for kickback. Auditor must report directly to investors, but on this case, Those Auditor reported to CEO of WM. The auditor firstly prepared improper accounting practices

Business Ethics Assignment

Arthur Andersen

and presented them to WM (Proposed Adjusting Journal Entries)-which pointed out some in need changes to avoid understanding. However, they came to closed-door agreement to write off all the error instead of correction. Or in the Enron case, Auditor forgave the problem due to high salaries. 4rd: Aided wrong action of clients (Waste management, Global Crossing and Qwest communication). The auditors in all three cases were able to find the errors. But they choose another way to work which is support the clients to fool investors. They agreed to write off the errors on MW case while supported fake asset swaps of Global Crossing and Qwest Communications. More seriously, Andersen consultant also supported Enron to use special purpose entities to make fake financial statements. Conclusion: on ethical side, Andersen Corporation and employees, while faced ethical issues, they were not be able to make good decision. The reason will be uncovered at question 2. Question 2: What evidence is there that Andersens corporate culture contributed to its downfall?

Firstly, on the culture that make growth becomes the priority, it cares about profit rather than the sources of those Dollars. Seeing the big return on consulting services, Andersen jumped in and forgot about the independent auditing. For seeking profit, this firm also sold two services at one which mean providing consult activities for the company whose use Andersen auditing. This can lead to conflict of interest between two departments or even the auditor- who did not know his clear role (auditor or consultant). Such as in Waste Management, the auditor works with the manager of WM as a consultant. Furthermore, due to profit from consultants, the corporation did care about training the auditors, so that a lot of low qualified decision was made such as in BFA, Sunbeam, and WorldCom and telecommunication firm cases. Forgetting about independent auditor role, Andersen even helped Enron by destroying thousands pieces of documents in order to save the $1 million a week. The other evidence is the limited oversight over auditing team. Because of concentrating on consulting, Andersen might not pay attention on auditors so that led to this departments errors and even unethical actions. As can be seen, in Waste Management cases, Auditor was work with clients leader for kickback, or due to large revenue from client Enron, Auditor aided this energy corporation to make fraud financial statements with unqualified opinion. By creating bad competition between consultants and auditors, Andersen culture played essential role in auditors fraud. Firstly, because of profit chasing culture, auditors might do anything in order to make more profit than consultants. And these actions led to scandals of Waste Management, Enron or other cases. And also because of the competition between the two departments, on the case Enron or other case of spin-off model, two sections may have conflict of interest and led to crises.

Business Ethics Assignment

Arthur Andersen

Question 3: How can the provisions of the Sarbanes-Oxley Act help minimize the likelihood of

auditors failing to identify accounting irregularities? I, Effects on auditing The provisions of Sarbanes-Oxley Act help minimize the likelihood of auditor failing to identify accounting irregularities are the requirement that the auditor should be independent. It shows the list of must and must-not actions. In more details, an accounting firm cannot sell both consulting activities and auditing activities for the same client or, an auditor must report the result to his commitment, not the clients managers. Next, It is required that every comment related to internal control of the firm must be disclosed. Furthermore, financial responsibilities and criminal responsibilities are also listed very clear and detailed in order to prevent stakeholders from illegal, unethical actions and increase the auditor concentration on his works. Finally, it concerns about frequently change of auditing clients in order to remove the in-depth relationships between firms. II, Effects on Accounting With the existence of SOA, a higher standard for financial reporting and accountability for the validity of those financial statements was built up to act as guidelines and direction. For example, every transaction must be recorded as quickly as the bill was set, or in other words, the bill and hold of Sunbeam will be prohibited. Moreover, SOA focuses on corporate governance by imposing new level of responsibilities and liabilities on higher executive such as CEOs, CFOs and Boards of Directors. By this act, SOA increases the responsible consideration among managers, in order to prevent wrong actions of lower employees. Last but not least, by imposing a lot of penalties which involves very detailed financial and criminal sentences, the Act might prevent stakeholders from doing the wrong things.
Part B: Arthur Andersen Culture 1. Profit chasing and unethical decision of Andersen The culture of Andersen was the culture of profit chasing. With Andersen, Growth was everything. This culture led to the jump of the accounting firm on consulting sections. Moreover, it led to the decision of linking up the two departments in order to serve clients more efficiency or separate them later to increase competition. However, this culture and those actions harmed the independent role of an auditing firm and it responsibility. Andersen sells both consulting and auditing services for its customers. The corporation, in this case, focused on profit and its responsibility for its own investor, but not the customers (or we can

Business Ethics Assignment

Arthur Andersen

say: clients investors). Because of this culture, Andersen tried to satisfy the clients such as Sunbeam, Waste Management and Enron in order to gain the huge moneys from those companies. And also due to this culture, Andersen destroyed thousands pieces of information related to Enron in order to save this company but also the giant profit. On the other effect, because of profit,