Arthur Andersen: Failure to Report Accurately

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Enron Corporation has been accused of cooking the books and overstating company profits in its financial reports. In addition, Enron’s trading business adopted mark-to-market accounting, which meant that once a long-term contract was signed, income was estimated as the present value of net future cash flows, even though in some cases there were serious questions about the viability of these contracts and their associated costs. Author Andersen provided both consulting and auditing services which created an inherent conflict of interest. On one hand, Andersen was auditing an Enron financial recording system and strategy based for the most part on the advice of its own consultants. Evidence eventually surfaced that some internal conflicts had arisen within Andersen about some of the “aggressive” accounting practices introduces by the Chief Financial Officer, Andrew Fastow and Jeffery Skilling. As an audit firm, Author Andersen compromised itself as a professional audit firm when it failed to validate and make public the soundness of the financial reports of the Enron Corporation. "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron’s financial statements, or its obligation to bring to the attention of Enron’s Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related-party transactions.” Bratton, William W. (May 2002). Although Andersen was equipped with internal controls to protect against conflicted incentives with their partners, they failed to prevent conflict of interest and failed to follow a number of leads presented by its own tax staff regarding Enron. The Arthur Andersen’s Dual Role at Enron case study also indicated that the larger accounting firms earns over three-times more in fees from consulting than accounting, which blurred the lines when it came to down to thinking about cutting off the hand that feeds you....
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