Accounting: Ethics and Andersen’s Case Essay

Submitted By pink1222
Words: 1054
Pages: 5

ARTHUR ANDERSEN: QUESTIONABLE ACCOUNTING PRACTICES Every entity or institution comprises of standards and guidelines in performing work in the most proficient, legal, and ethical manner. Whether it’s a compulsion of a parent to be held accountable for their child’s safety or a lawyer’s duty to abide by the rules of confidentiality pertaining to its client; we are constantly obligated and expected to act and behave in a certain manner. Hence, in the state of civilization every human is responsible to a form or being in some way or the other. Failure to meet or coincide with laws of civilization can result in deterioration of one-self and those around you. Precisely, there have been quite a few scandals which have taken place within the business arena. One such incident occurred with Arthur Anderson. Arthur Anderson was an accounting firm which began in 1913 and was acknowledged for “trust, integrity, and ethics” for a period of almost ninety years. It wasn’t until the early twenty first century, when Arthur Andersen was alleged for accounting misrepresentations. The following report will discuss the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties, contribution of Andersen’s corporate culture to its downfall, and finally ways in which the Sarbanes-Oxley Act can help minimize the likelihood of auditors failing to identify accounting irregularities. The legal and ethical issues which spurred around Andersen’s auditing of companies accused of accounting improprieties include, issuing false and misleading approvals of financial statements and authorizing unqualified opinions of such statements for achieving benefits related to self-interest within the company. Andersen repeatedly overlooked the consequences of its deceptive actions by compromising its world-wide recognition as an auditor. Initially, Andersen was accused of sympathetic deeds performed to its clients in the form of falsification of financial statements beginning with BFA, Sunbeam and had settled a lawsuit with its investors without admitting fault or liability. Consequently, Andersen had again violated the laws by providing misleading information to Waste Management’s investors due to a sentiment for greed. Despite the charges paid to the investor lawsuits and Securities Exchange Commissions, Andersen yet again dragged itself into a deeper hole of self-indulgence with Enron-one of its biggest clients. It was later shut down when the investigation by U.S Justice Department began a criminal investigation and was convicted for obstruction of justice due to destroying essential documents in relation to its auditing of Enron. The preceding criterion allows one to understand the consequences of failing to comply with the legal system. According to, “Auditing: An International Approach” by Wally Smieliauskas and Kathryn Bewley, public accountants have a responsibility to disclose any information once they are aware of them. For instance, in regards to Waste Management, Andersen soon discovered the unacceptable accounting practices pertaining to understating Waste Management’s expenses and overstating its earnings. Nevertheless, Andersen decided to neglect this fact and engaged in unethical and egocentric behaviour. This incident along with Andersen’s past wrongdoings contributed to its ultimate collapse as it disobeyed the legal responsibilities of an auditor which derive from law of negligence, which is also a part of the common law acknowledged as the law of torts. Negligence occurs when one fails to execute a responsibility with indispensable care. Andersen’s auditing practices came to an end as they were found to be materially misleading and allied with the elements of negligence.
1) There must be a legal duty of care to the plaintiff: Andersen was obligated to perform a legal duty to the third parties (investors).
2) There must be a breach in that duty: Arthur Andersen failed to follow the legal