Question

Case 4.21 Arthur Anderson: a Fallen Giant

1. With regard to the destruction of the documents, was there a difference between what was legally obstruction of justice and what was ethical in terms of understanding what was happening at Enron? When the U.S. Supreme Court reversed the Andersen decision, the Wall Street Journal noted that the Andersen case was a bad legal case and a poor prosecutorial decision on the part of the Bush administration. Why do you think the prosecutors took the case forward? What changes under SOX would make the case easier to pursue today?

2. David Duncan was active in his church, a father of three young daughters, and a respected alumnus of Texas A&M. Mr. Duncan’s pastor talked with the New York Times following Enron’s collapse and Duncan’s indictment, and discussed with the reporter what a truly decent human being Duncan was. What can we learn about the nature of   those who commit these missteps? What can you add to your credo as a result of Duncan’s experience? Was the multimillion-dollar compensation he received a factor in his decision-making processes? Can you develop a decision tree on Duncan’s thought processes from the time of the first SPE until the shredding? Using the models you learned in Units 1 and 2, what can you see that he missed in his analysis?

3. In 2000, a full two years before WorldCom’s collapse, Steven Brabbs, WorldCom’s director of international finance and control, who was based in London, raised objections when he discovered after he had completed his division’s books for the year that $33.6 million in line costs had been dropped from his books through a journal entry. He was told that the changes were made pursuant to orders from CFO Scott Sullivan. He next suggested that the treatment be cleared with Arthur Andersen. When there was no response to his suggestion that the external auditor be consulted, Mr. Brabbs again raised his bjections in a meeting with internal financial executives a few months later. Following the meeting, Mr. Brabbs was chastised by WorldCom’s controller for raising the issue again. The following quarter, Mr. Brabbs received orders from WorldCom headquarters to make another similar change, but to do so at his level rather than having it done from corporate headquarters via journal entry. Unwilling to have the entries generate from his division, he created another entity and transferred the costs to it. He voiced his concerns again and was told that there was no choice because the accounting was a“Scott Sullivan directive.” Mr. Brabbs also had a meeting with Arthur Andersen auditors to discuss his concerns. Following the meeting he received e-mail from WorldCom’s controller, David Myers, which directed that Mr. Brabbs was“not [to] have any more meetings with AA for any reason.” When WorldCom’s internal audit staff began to raise questions about the reserves and the capitalization of ordinary expenses, they were prohibited from doing further work and, for the most part, worked nights and weekends to untangle the accounting nightmare they had first discovered with a simple question about receipts for some   capitalized expenses. CFO Scott Sullivan asked the audit staff to wait at least another quarter before continuing with their investigation. Andersen auditors reported any internal audit inquiries to Sullivan and did not follow through on questions and concerns raised. What controls were missing? Why the reporting lines to Sullivan?

4. One of the tragic ironies to emerge from the collapse of Arthur Andersen, following its audit work for Sunbeam, WorldCom, and Enron, was that it had survived the 1980s savings-and-loan scandals unscathed. In Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, the following poignant description appears: “The savings and-loan crisis, when it came, ensnared almost every one of the Big 8. But Arthur Andersen skated away virtually clean, because it had made the decision, years earlier[,] to resign all of its clients in the industry. S&Ls for years had taken advantage of a loophole that allowed them to boost earnings by recording the value of deferred taxes. Arthur Andersen accountants thought the rule was misleading and tried to convince their clients to change their accounting. When they refused, Andersen did what it felt it had to: It resigned all of its accounts rather than stand behind accounting that it felt to be wrong.” What takes a company from the gold standard to indictment and conviction?  

Answer 1

Enron's organisation structure was the core a reason of the fall. Their organisational structure allowed them to misrepresent earnings as well as to modify their balance sheet for providing information to the shareholders about favourable performances. This type of approach directly points towards creating an organisational culture which is made for scanning. This is specific process lead to the bankruptcy of the company and this is a direct effect of actions of Kenneth lay, rebecca mark as well as jeffrey skilling.
If an individual inside the organisation have lower standards of ethics then it would definitely affect the overall working structure at his personal level. Bing dishonest to your organisation can lead to several implications as well as problems including many critical situations where employee has to be fired from the organisation for betterment. In this the specific case many ethical standards inside the organisation were totally different and this type of approach lead to the fall of the organisation rather than being focused at any individual. This to separate different type of ethical levels are highly influential and can leave very bad impact on the organisational level.

Mission of a lousy code of conduct was the main reason of such a specific practices in enron, if the code of conduct should have been implemented a strictly from the very beginning this is specific type of situation have not been occurred for the organisation as it directly decrease the overall available opportunities and increase the chances of scam and scandal. This type of approach also reduced the level of control over the organisational efforts as the top management was also involved in the specific scamming process.
Lax has proven to be one of the best companies with a great ethical culture which involves a strong code of ethics and conduct in Operation. Lax and company has definitely been a role model for many other companies operating in the similar environment. If enron has adopted such a specific strategy then the processes including wrong approach for modifying the balance sheets and other factors involved in the specific scandal.

Reason of an electronic monitoring system as well as transparency in the organisation using high standards in code of conduct and ethics would have saved enron from this specific scandal. This type of approach would have also created more intuitive working platform for the employees saving enron from such a specific scandal.

P.S.- Please use separate threads to ask multiple questions at a time.