Question

Evaluate how one of the AICPA ethical codes applies to the Arthur Anderson fraud case.

Answer 1

The case examines the emergence of Arthur Andersen as one of the leading auditing and consulting firms in the world, on the basis of its emphasis on integrity and ethics in business. The case explains the factors that led to deterioration in the firm's culture during the 1990s. It examines Andersen's role in accounting fraud at Enron, one of its major clients. The case also examines the criminal charges faced by the firm in the Enron case and how the Enron case eventually led to the closure of Andersen. The unethical practices of audit firms in the 1990s are also discussed. The case also takes a look at the various initiatives taken by the government and other regulatory authorities, such as SEC and AICPA, to restore the trust of investors in corporate firms and audit firms in the US.

Issues:-

Evolution of a large organization on the basis of integrity and adherence to professional standards

The importance of ethics, integrity and professional standards in the audit business. The need to balance economic and social benefits in corporate decision making

Keywords:-

Arthur Andersen, auditing, consulting, ethics, deterioration, culture, 1990, accounting fraud, Enron, clients, closure of Andersen, unethical practices, audit firms, 1990, government, regulatory authorities, SEC, AICPA

Grace To DisGrace:-

In March 2002, Andersen (previously Arthur Andersen), one of the world's leading audit firms, was indicted by the US Department of Justice (DOJ) on charges of obstructing the course of justice in the Enron (one of Andersen's clients) case. DOJ claimed that Andersen shredded many Enron-related documents, while Enron was being probed by the Securities and Exchange Commission (SEC).

Enron, which had filed for bankruptcy in December 2001, was being investigated for illegal accounting practices. DOJ had begun a criminal investigation into Andersen in January 2002 in connection with the Enron case. All along, the media and Andersen employees had expected the firm to reach out of court settlement with DOJ. However, such a settlement did not materialize. DOJ's investigation revealed that Andersen had deliberately destroyed crucial documents relating to Enron during October-November 2001. This revelation and the fact that the firm had been embroiled in many controversies during the late 1990s destroyed all chances of an outside court settlement and led to the indictment.

Through the late-1990s, Andersen's name had figured prominently in various instances of business fraud by its clients, namely, Sunbeam, Waste Management Inc., Quest Communication, Global Crossing, and Baptist Foundation of Arizona.² The firm faced civil charges for its supposed misrepresentation of accounts in most of these cases. The audit partners, who were involved in the audit of these companies were indicted and penalized by the SEC.

In many of these cases, Andersen had settled investor claims, without acknowledging any fraud on its part (Refer Exhibit I for the settlements). Following the indictment by the DOJ, many of Andersen's clients as well as employees left; the remaining employees took to the streets, protesting the DOJ's decision. They said that punishing the whole firm and its thousands of employees for the wrongdoings of a handful of corrupt partners was not justified. As negative publicity for Andersen mounted, it seemed certain that the firm would never be able to do business the way it had for over eight decades. Industry observers remarked that it was indeed painful watching the accounting firm that had set the standard for honest and law-abiding accounting in the US fall from grace.