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?  

Related samples t-test:

Test whether semester GPA significantly changes during a semester abroad program. Use a related (dependent) samples t-test and alpha = .05 with a nondirectional test. The data are presented below.

Answer the following questions. You can use SPSS, but if you do this problem “by hand” be sure to show your work.

1.       What are the null & alternative hypotheses?
2.       What are the degrees of freedom?
3.       What is the critical value of t?
4.       What is the observed value of t?
5.       What is your decision about the null hypothesis/why?
6.        If appropriate, calculate Cohen’s d and report its value.
7.       Write the t statistic using appropriate APA style.
8.       How would you interpret your findings?    

          Before program                             During program

                   2.94                                        3.03

                   2.22                                        1.79

                   3.12                                        3.13

                   1.99                                        2.97

                   3.43                                        3.75

                   3.08                                        3.11

                   2.81                                        2.98

                   3.72                                        3.92

                   2.18                                         2.03

                   3.60                                        3.52

Name: Date: Exp 1: Observations of Chemical Changes Lab Section: Data Tables: Part 1: Chemicals Well No. Observations of the Reaction A. NaHCO3 + HCl B. HCl + BTB C. NH3 + BTB D. HCl + blue dye E. Blue dye + NaOCl with the 1 drop of HCl F. NaOCl + KI with 1 drop of starch G. KI + Pb(NO3)2 H. NaOH + phenolphthalein I. HCl + phenolphthalein J. NaOH + AgNO3 K. AgNO3 + NH3 after exposure to bright light L. NH3 and CuSO4 Part F: Testing of Various Foods with the NaOCl + KI solution Foods Presence or Absence of Starch Part 2: Household Chemicals with Bromthymol Blue Use the empty pipet in the Auxiliary Supplies Bag to test several (at least 3) household items including household cleaning products with bromothymol blue. Rinse the pipet well before using it on the next household chemical. When finished with this experiment rinse the pipet well and return it to the Auxiliary Bag for use in future experiments. Name the items tested and record their results. Household Chemicals Well No. Observations of the Reaction Conclusion: Questions and Problems: A. Suppose a household product label says it contains sodium hydrogen carbonate (sodium bicarbonate, NaHCO3). How would you test this material for the presence of sodium bicarbonate? B. Looking at the household chemicals you tested with bromthymol blue, what can you deduce from the test results for each of the household chemicals? C. You found a sample of a solution that you think might be vinegar which is acidic. You are verifying that it is indeed vinegar and you add a few drops of phenolphthalein. The sample turns pink. What does that tell you about this sample? D. You suspect dissolved silver ions in a solution. How would you test this solution to confirm the p

Problem 3-24B Assessing simultaneous changes in CVP relationships using the equation method

Milton Company sells tennis racquets; variable costs for each are $45, and each is sold for $135. Milton incurs $540,000 of fixed operating expenses annually.

Required

Determine the sales volume in units and dollars required to attain a $270,000 profit. Verify your answer by preparing an income statement using the contribution margin format.

Milton is considering establishing a quality improvement program that will require a $15 increase in the variable cost per unit. To inform its customers of the quality improvements, the company plans to spend an additional $150,000 for advertising. Assuming that the improvement program will increase sales to a level that is 5,000 units above the amount computed in Requirement a, should Milton proceed with plans to improve product quality? Support your answer by preparing a budgeted income statement.

Determine the new break-even point and the margin of safety percentage, assuming Milton adopts the quality improvement program. Round your figures to two decimal points.

Prepare a break-even graph using the cost and price assumptions outlined in Requirement c.