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Arthur Andersen Essay

4672 words - 19 pages

Ethics Case: Arthur Andersen’s Troubles
Once the largest professional services firm in the world, and arguably the most respected, Arthur Andersen LLP (AA) has disappeared. The Big 5 accounting firms are now the Big 4. Why did this happen? How did it happen? What are the lessons to be learned?
Arthur Andersen, a twenty-eight-year-old Northwestern University accounting professor, co-founded the firm in 1913. Tales of his integrity are legendary, and the culture of the firm was very much in his image. For example, “Just months after [Andersen] set up shop in Chicago, the president of a local railroad insisted that he approve a transaction that would have inflated earnings. Andersen told the ...view middle of the document...

Even after the consulting and audit operations split, both continued to use the facility.
Ironically, AA was the first firm to recognize the need for professional accountants to study business and professional accounting formally. In the late 1980s, AA undertook a number of programs to stimulate that formal education, including the development of ethics cases, the creation of an approach to the resolution of professional ethical problems, and the hosting of groups of 100 accounting academics to get them started in the area. Most had no formal ethics training and were uncertain how to begin ethics teaching, or even if they should. It is likely that AA’s farsighted policies are responsible for the genesis of much of the professional ethics education and research in accounting that is going on today.
TABLE 1: Arthur Andersen’s Problem Audits
|WorldCom |$4.3 billion overstatement of |$179.3 billion |17,000 |N.A. |
| |earnings announced on June 25, | | | |
| |2002 | | | |
|Enron |Inflation of income, assets, etc.,|$66.4 billion | 6,100 |$5 million (for |
| |bankrupt Dec. 2, 2001 | | |shredding) |
|Global Crossing |Candidate for bankruptcy |$26.6 billion | 8,700 |  |
|Waste Management* |Overstatement of income by $1.1 |$20.5 billion |11,000 |$7 million |
| |billion, 1992–1996 | | | |
|Sunbeam* |Overstatement of 1997 income by |$4.4 billion | 1,700 |  |
| |$71.1 million, then bankruptcy | | | |
|Baptist Foundation of |Books cooked, largest nonprofit |$570 million |   165 |  |
|Arizona |bankruptcy ever | | | |
|Source: “Fall from Grace,” Business Week, August 12, 2002, 54. |

What happened to the AA culture that focused on integrity and technical competence? What changed that would account for AA’s involvement in the following major financial scandals as the audit firm that failed to discover the underlying problems?
Some observers have...

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