Case 5: Arthur Andersen: Questionable Accounting Practices

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Case 5: Arthur Andersen:
Questionable Accounting Practices
April 28, 2012

Case 5: Arthur Andersen:
Questionable Accounting Practices
Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties.
Arthur Andersen LLP (Andersen) was involved with several legal and ethical issues regarding several of their clients being accused of accounting improprieties. Andersen may not have been directly involved with most of these improprieties; but their failure to report and their assistance with concealing their findings makes them an accessory and just as guilty. At the time Andersen combined their consulting business with their auditing business, it was not illegal but was considered unethical. This joint venture posed an ethical conflict of interest when Andersen’s partners began discovering some of the largest clients were conducting some questionable accounting practices (Ferrell, Fraedrich, & Ferrell, 2011). Andersen’s knowledge of issuing false and misleading approvals of financial statements for several of their clients was deemed as fraudulent. These illegal activities they were involved in consist of their clients inflating earnings, shredding of incriminating documents, accounting for future sales in the present quarter, and reporting inaccurate expenses and net income. Most, if not all, of these activities would be considered unethical as well as illegal. As a gatekeeper, Andersen was expected to operate within the professional code of ethics and criminal law. Because many failed to do so, the company eventually dissolved and their illegal accounting practices were punishable by law.

What evidence is there that Andersen’s corporate culture contributed to its downfall?
As Andersen grew, its corporate culture changed from providing quality and independent audits to recruiting and retaining the largest clients (Ferrell, et al, 2011). Other factors regarding the shift in its corporate culture...
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