Case Study

Questionable Accounting Practices

Arthur Andersen is most known for his work as an accountant and consultant for Enron and other major corporations. Many students nowadays are likely only familiar with Arthur Andersen in a negative light, yet before becoming connected with Enron and going out of business, it was one of the "Big Five" accounting companies and was well-respected. The case goes into depth about the firm's contacts with important clients, in addition to detailing its long history. The case also details some of the firm's struggles in its latter years, notably when it began to place greater emphasis on its consulting business, even positioning it to compete with its more well-established accounting division. This case highlights some of Arthur Andersen's legal proceedings leading up to the firm's bankruptcy, as well as parts of the company's corporate culture that permitted wrongdoing. Some of the issues with its company culture included an overabundance of concentration on obtaining high-profile clients at all costs, as well as an employee reward scheme that unintentionally encouraged wrongdoing.

The case also addresses the impact of the company's conduct on numerous stakeholders, such as its role in the creation of the Sarbanes-Oxley Act of 2002. The company put a disproportionate amount of emphasis on expansion and profitability at any costs, even if it meant putting its stakeholders and clients at risk. Inexperienced personnel were also given too much power by Arthur Andersen, allowing them to make decisions that were above their skill set. After being caught destroying Enron documents, Andersen was found guilty of obstruction of justice and fined $500,000. The brand name, on the other hand, was polluted and had lost most of its value. Accenture, which has separated itself from the Andersen name and is still in business, was spun off from Andersen (however is nowhere near as large as Andersen was). The Supreme Court overturned the obstruction of justice ruling in 2005 on the technicality that some terminology in the original court records was too narrowly defined. However, the harm to Arthur Andersen's reputation had already been done. Andersen's unethical accounting methods cost the company tens of millions of dollars and thousands of jobs.

1. Explain the legal and ethical considerations that arise when Andersen audits companies accused of accounting fraud.

2. Is there any evidence that Andersen's business culture played a role in its downfall?

3. How may the SarbanesOxley Act's provisions help to reduce the chances of auditors missing accounting irregularities?