Questionable Accounting Practices
Name: Wen Jiangshan
Part I. Summary of the case
Case 2 mainly introduces how Arthur Andersen, who used to be one of the “Big Five” largest accounting firms in the United States, strayed away from accepted policies and stuck in a string of accounting scandals, finally closed its doors after 90 years of business. The firm’s name was synonymous with trust, integrity and ethics during a long period of time, however, Andersen failed to withstand the pressure from the competition of consulting service. Thus, it leaded to a negative influence on Andersen's corporate culture, which enabled Andersen to be more interested in its own revenue growth through ethical and legal misconducts, such as accounting irregularities and fraud. More seriously, it developed a number of lawsuits from1997 to 2005, which impelled the SEC to keep a close watch on, from its client such as Baptist Foundation of Arizona, Sunbeam, Waste Management, Enron, WorldCom, Global Crossing, and Qwest Communications. Especially Enron’s bankruptcy was a deadly strike of Andersen. Andersen’s collapses made an effect on the regulation on accounting ethics, for instance, the Sarbanes-Oxley Act passed by the congress in 2002. Part II. Answers of case questions
1. Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties. The legal issues that surrounded Andersen's audition were that there was conflict of interest and there was lack of independence on the part of Andersen. In this context, Andersen took up lucrative management consultancy projects for the clients of whom it was the auditor. From the deontological ethical perspective Andersen had the duty to report frauds committed by its clients, but it failed to do. The following chart describes Andersen’s legal and ethical issues with five of its biggest clients in detail: Baptist Foundation of Arizona (BFA), Sunbeam, Waste Management, Enron and WorldCom. | |Case Descriptions | | |2 Parties |What they have done |Results | |1 | |Concealed losses from investors by selling | | | | |some properties at inflated prices to entities| | | | |that had borrowed money from the foundation; | | | |BFA |took money from new investors to pay off |133 employees were laid off | | | |existing investors in order to keep cash |$640 million debts | | | |flowing |Bankruptcy protection | | | |Was accused of issuing false and misleading | | | |Arthur |approvals of BFA’s financial statements, which|Agreed to pay $217 million to settle the | | |Andersen |allow the foundation to perpetuate the fraud |shareholder lawsuit | | | |Was accused by the SEC of inflating earnings |Was forced to restate six quarters of | | | |through fraudulent accounting strategies and |financial statements | | |Sunbeam |using improper “bill and hold” transactions |$4.4 billion losses to shareholders | |2 | |...