In 1913, Arthur Andersen LLP was found in Chicago, developed to become one of the “big five” largest accounting firm in the US. In 2003, after 90 years of business, the Chicago-based accounting firm was forced to close its doors because of accounting scandal I. The advent of consulting
In the 1950s, Andersen began providing consulting services and over the next 30 years, Andersen’s consulting business became more profitable. With quick development of consulting sector, in 1999, Andersen separated its business into 2 parts: consulting unit and auditing one. II. The collapse of Andersen
1. Baptist Foundation of Arizona: BFA invested in estate, financial sectors to raise money for church. However, they lost; as a consequence, they sold properties for entities who had borrowed their money before at inflated prices and took money from new investors to pay off existing investors to solve problems. In 1999, the schemes were investigated. In 2000, Andersen are accused for issuing false, misleading approvals of BFA’s financial statements and ignoring the warning of possible fraudulent activity by some BFA employees. 2. Sunbeam: In 1998, Andersen’s audits failed to address serious accounting errors happened at Sunbeam. Sunbeam was accused of inflating earning through fraudulent accounting strategies. Phillip Halow (the partner at Arthur Andersen) was accused of authorizing “unqualified” opinions on Sunbeam’s 1996, 1997 financial statements, even though he was aware of mistakes of Sunbeam’s accounting 3. Waste Management: Waste Management overstated earnings $1.4 billion, perpetrated a massive financial fraud over of more than 5 years. Andersen repeatedly issued unqualified audit opinions. Furthermore, Waste Management advised Andersen that it could earn additional fees through “special work’. Hence, Andersen wrote off the accumulated errors over 10 year period and changed its underlying accounting practices. 4. Enron: Enron was big client of Andersen. In 2001, Enron filed for bankruptcy. Besides, Andersen admitted to destroying a number of documents concerning its auditing of Enron. It was considered an indictment for obstruction of. As a result, in 2002, the company agreed to stop. 5. Telecommunication Firm: WorldCom is the largest customers of Andersen. WC had improperly accounted for nearly $3.9 billion of expenses and had overstated earnings in 2001 and in the first part of 2002, thus, it went bankrupt. Andersen blamed WC for not disclosing the expense irregularities to its. While WC blamed A for failing to find the accounting irregularities. In addition, both Global Crossing and Qwest Communications had been issued unqualified opinions on audit by Andersen III. Corporate culture and ethical ramifications
From 1950s, Andersen was more concern about its own revenue growth, its independence as an auditor had been compromised. Numerous inexperienced business consultants and untrained auditors were sent to clients sites that were largely ignorant of companies’ policies. As the company grew, the number of partners stagnated, while the managers of Andersen had limited oversight over its audit team. IV. Implications for regulation and consulting ethics:
The Sarbanes-Oxley Act of 2002 was passes to establish new guidelines and direction for corporate and accounting responsibility. The act was enacted to combat securities, accounting fraud and provisions for a new accounting oversight, to emphasize auditor independence and quality, restrict accounting firms’ ability to provide both nonaudit for the same client, require periodic reviews of audit firms. B. Answer the questions in the textbooks
Question 1: Describe the legal and ethical issues surrounding Andersen’s auditing of company accused of accounting improprieties. I. The legal issues:
1. The Baptist Foundation of Arizons (BFA), which was the customer of Andersen and Andersen perpetuated the accounting...