Until its involvement as Enron’s auditor, Arthur Andersen was recognized as one of the most respected CPA firms in the world. Arthur Andersen, as did other large CPA firms, operated as a limited liability corporation, or LLC. At the time that its involvement as Enron’s auditor was making news every day, an article in The Wall Street Journal stated that it wasn’t clear whether the LLC form of organization was going to offer Andersen’s partners protection from creditors’ lawsuits or whether creditors would be able to take the personal assets of Andersen’s partners. Assume that Andersen had 2,000 partners and that creditor claims in the Enron case totaled $50 billion.
1. If Arthur Andersen had been a corporation, how would you have expected creditor litigation to have been reported in the financial statements?
2. Would failure to report the litigation constitute financial statement fraud?