Arthur Andersen Case

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1. What did Arthur Anderson contribute to the Enron disaster? Arthur Andersen (AA) contributed to the Enron disaster when AA consulting became its own separate entity, named Accenture. Revenues from consulting services surpassed revenue from auditing services. A natural competitiveness grew between the two rivals and this is where the problems began to start. Management held maximinizing revenues as their primary focus of success and promotions/bonuses were based on this factor. The CEO of AA, Joe Berardino, was an extremely aggressive pursuer of revenue. This set a negative culture at the top of the company and partners were expected to comply and atttain that demand. In addition, AA recognized the retention of audit clients as imperative and a loss of a client would be detrimental to an auditor’s career. This is where the issue in regards to auditors standing up to management and the client became unclear. AA was the only firm to allow the partner in charge of the audit to override a ruling of the quality control partner. The auditor had a fiduciary duty to the shareholders of the company being audited not to the company itself. Another major contributing factor was AA’s approval of Special Purpose Entities (SPE) that was used to generate false profits, hide losses and keep any undesirable information off Enron’s financial statements.

2. Which Arthur Andersen decisions were faulty?
AA made many decisions in regards to the Enron audit which led to their ultimate downfall. Briefly discussed below are some decisions made by AA that failed to adhere to GAAP. AA approved the structure of many Special Purpose Entities (SPE) that were used to generate false profits, hide losses, keep financing off Enron’s consolidated financial statements, and failed to meet the required outsider 3 percent equity at risk, and decision control criteria for non consolidation. In addition, various transactions between Enron and the SPEs were not in the interest of Enron shareholders since: * Enron profits and cash flows were manipulated and grossly inflated which mislead investors and falsely boosted management bonus. * Extraordinarily overgenerous deals, fees, and liquidation arrangements were made by Fastow, or under his influence, with SPEs owned by Fastow, his family, and Kopper, who was also an employee of Enron. AA failed to recognize GAAP by allowing Enron to record shares issued as an increase in shareholders equity even though they were issued for notes receivable and not cash. It did not find significant audit evidence, or did not act upon evidence found, related to erroneous valuation of shares or share rights transferred to SPEs. Furthermore, AA did not act upon evidence found in regards to side deals between Enron and banks removing the banks’ risk from transactions such as: * Numerous prepay deals for energy futures even though AA made a presentation to Enron on the GAAP and AA requirements that prohibited such arrangements. AA failed to inform Enron’s audit committee that Andrew Fastow (Enron’s CFO), and his assistants were involved in significant conflict of interest situations without appropriate alternative means of managing these conflicts. The decision to allow the partner in charge of the Enron’s audit (David Duncan) to override a ruling of the quality control partner (Carl Bass) was a faulty decision by AA. The final disintegration of AA was caused by its decision to shred Enron audit documents and the conviction on the charge of obstruction of justice that resulted. AA tried to argue that it was company policy to destroy extraneous and redundant material and that they were simply trying to get organized . However, this argument backfired against AA once Duncan testified against AA. 3. What was the prime motivation behind the decisions of Arthur Andersen’s audit partners on the Enron, Worldcom, Waste Management, and Sunbeam audits: the public interest or something else? Cite examples that reveal this...
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