ACCG100 Accounting in Society Essay Example

Accounting in Society – A Case Study of Arthur Andersen

This essay examines the scandal that led to the collapse of Arthur Andersen back in 2002. Prior to the collapse, Arthur Andersen was one of the leading internal audit and consultancy firms in the world (Haig 154). However, the company suffered a major reputation and legal crisis following revelations that it had been intricately involved in fraudulent accounting practices that had led to the collapse of Enron, a leading energy company at the time (Sterling 18).

Prior to its involvement with Enron and the eventual collapse, Arthur Andersen was an established name in auditing practice (Doorley and Garcia 55). Together with other firms such as Ernst & Young and others, Arthur Andersen was one of the firms that we referred to as the Big Five, given their size and level of operation (Haig 154). Essentially, Arthur Andersen used to audit the financial records of leading companies in the world (Sterling 18). The auditing business of the company had been built on the foundation of ethical practices and devotion to quality editing procedures (Doorley and Garcia 55). Thus, the company managed to grow and attract major corporations in several countries of the world long before it got involved with Enron. Apart from the auditing business, Arthur Andersen had a relatively successful consultancy arm. The consultancy business of the company entailed providing expert financial opinion on complex corporate transactions such as those related to mergers and acquisitions and other deals (Yuhao 40).

Arthur Andersen had been handling the auditing work for Enron for years before the collapse of Enron late in 2001 (Doorley and Garcia 57). Moreover, Arthur Andersen had been doing consulting work for Enron for years before the latter firm collapsed (Yuhao 39). Because of the complex nature of these two lines of work, Arthur Andersen was forced, on numerous occasions, to make decisions that were inappropriate. For example, it was revealed that Enron had been hiding loans and losses running into millions of shillings by cleverly using special purpose vehicles in its accounting practices (Yuhao 41).

Moreover, it emerged that Enron was deliberately overstating its earnings to deceive the public, regulators and its other stakeholders (Smith 101). Because Arthur Andersen was consulting for Enron, it was found to have been complicit to the fraudulent accounting practices that Enron had been using for years (Smith 101). Moreover, Arthur Andersen had approved all the fraudulent transactions that Enron had been using to hide its debt and state false earnings (Edelman and Nicholson 6). Thus, Arthur Andersen faced an ethical dilemma because it had to audit accounts of transactions which it had earlier approved.

Various stakeholders were affected by the revelation that Arthur Andersen had been complicit to the Enron scandal and that the auditing firm had deliberately attempted to destroy tonnes of documents related to the work that it had been doing for Enron earlier. For example, the management of Arthur Andersen was adversely affected by the events in that the CEO and other senior managers of the company were forced to appear before a special senate committee that was investigating the fall of Enron (Smith and Quirk 158). Subsequently, the CEO of the company was forced to resign. As a result, the public lost its faith in auditing firms in general because of the scandal (Smith and Quirk 156).

As a result of the Arthur Andersen scandal, many people believed that auditing firms could not be trusted as independent watchdogs that work to protect the interests of shareholders and the public when they audit the financial records of big public companies (Smith and Quirk 156). Besides, many other companies in the industry faced a reputation crisis because clients, regulators and the public felt that it was possible for auditing and consulting firms to connive with rogue executives of big public companies and deceive the public about the real performance of the companies.

The decisions made by Arthur Andersen were not ethical. The company chose to handle the consulting as well as auditing jobs from Enron. Clearly, this approach put Arthur Andersen in a difficult situation because it was required to audit accounts that involved transactions it had earlier approved. Moreover, the company chose to approve the use of some controversial accounting procedures and processes such as mark-to-market accounting and special purpose vehicles. Also, when the Arthur Andersen management realised that the U.S. Securities and Exchange Commission had launched a special investigation into the affairs of Enron, it decided to shred tonnes of documents as a way of destroying evidence of the company’s fraudulent dealings with Enron. These actions of Arthur Andersen had a negative impact on its business. For example, the official opinion of the authorities was that Arthur Andersen had been deliberately involved in the Enron scandal.

Also, many people believed that the executives of the company deliberately advised Enron to use controversial accounting tools (Edelman and Nicholson 5). Thus, it was difficult for the executives of the company to convince the authorities and the public that Arthur Andersen had acted in good faith and that it had not been aware of the fraudulent nature of activities that Enron was involved in.

Initially, I considered ethics as an important aspect of business. I believed that businesses needed to be ethical to meet the requirements of authorities and their clients. In other words, I considered business ethics as source of additional value for businesses. I did not consider business ethics as an issue that could cause the failure of large corporations. However, after attending lectures and completing this case study assignment, my view of business ethics has drastically changed. For example, I now understand that business ethics is as important as any other aspect of a company such as its finances and products. This means that just as a company can fail if it does not get its products or finances right, a company may fail if it ignores its ethical aspects. Therefore, I now understand that ethics does not merely enhance the success of companies; rather, it is one of the key determinants of whether a company can succeed.

Works Cited

Doorley, John and Helio Fred Garcia. Reputation Management: The Key to Successful Public Relations and Corporate Communications. Taylor & Francis, London. 2007.

Edelman, Daniel and Ashley Nicholson. “Arthur Andersen Auditors and Enron: What Happened to their Texas CPA Licenses?” Journal of Finance and Accountancy. http://www.aabri.com/manuscripts/11899.pdf

Haig, Matt. Brand Failures: The Truth about the 100 Biggest Branding Mistakes of All Time. Kogan Page, London. 2005.

Smith, Craig and Michelle Quirk. “From Grace to Disgrace: The Rise & Fall of Arthur Andersen.” Journal of Business Ethics Education, 1:1, pp. 91-130. 2004. Web. http://www.neilsonjournals.com/JBEE/sSmith.pdf

Sterling, Theodore F. The Enron Scandal. Nova Publishers. New York. 2002.

Yuhao, Li. “The Case Analysis of the Scandal of Enron.” International Journal of Business and Management, 5:10, pp. 37-41. Web. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.663.9418&rep=rep1&type=pdf