Arthur Andersen Case 1

Topics: Enron, Internal control, Auditing Pages: 2 (606 words) Published: May 9, 2012
1. Three decisions made by Arthur Andersen that contribute to Enron demise As an auditor, Arthur Andersen (AA) had massive contribution to Enron. Unfortunately, the decisions made by AA did not give absolute advantages to Enron. There were several decisions that eventually led to Enron disaster. First, the flaw in AA internal control conduced to failures of Enron audit. AA allowed the partner in charge of the audit to override a ruling of the quality control partner. In other words, the person who was most implicated with the possibility loss of revenue from the client, and who was most likely to be subject to the influence of the client will take the most sensitive decisions. David Duncan, the AA partner in charge of the Enron account overturned the concern about the accounting practices used by Enron which actually hid debts and pumped up earnings. Duncan also removed Carl Bass who was disliked by Enron management because Duncan fears of losing Enron. Second, the decision to shred Enron audit documents was a huge mistake since AA used it as a reason to follow the document retention policy. In fact, in jury’s point of view, shredding was part of a broad conspiracy. AA wanted to destroy the audit evidence related to the share rights transferred to SPEs. Third, AA has approved Special Purpose Entities (SPE) that were used to hide losses, create false profits, keep financing off Enron’s consolidated financial statement, and failed to meet the required outsider 3 percent equity-at-risk, and decision control criteria for nonconsolidation. Consequently, it led to magnitude of losses in its SPEs that had not been accounted for. 2. Why an auditor should make decisions in the public interest There are two reasons an auditor should make decisions in the public interest. One of the reason, it is an auditor’s responsibilities. An auditor is required to act with integrity, professional, objective, and independent in the way that will serve public interest. However, an...
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