Business Ethics: of Arthur Andersen - Case Study Example

Business Ethics: Case of Arthur Andersen Arthur Andersen and Clarence Delaney were the co-founders of Arthur Andersen (Fernando 242). The audit firm was founded in 1913 in Chicago. Originally, it was known as Andersen, Delaney & Co. Arthur Anderson was offering accounting services to many companies. In 1918, Andersen, Delaney & Co changed its name to Arthur Andersen and over the next 89 years the firm gained reputation and joined other top accounting firms in the United States. By 1990, Arthur Andersen had “1800 partners and 85,000 employees in over 84 countries” (Fernando 242). During this period, Arthur Andersen was competing with top audit firms such as PricewaterhouseCoopers. Arthur Andersons’ unethical and fraudulent dealings with companies such as Enron, WorldCom, Dynegy, and Sunbeam led to its indictment on 15th March 2002. The Rise and Fall of Arthur Andersen Arthur Andersen reputation in auditing and accounting then was unmatched by any other company due to its unrivaled commitment of its founder. Arthur Andersen preferred to lose a client rather than change the audits to reflect false information. Boyd sarcastically quotes the words of Arthur, who once told a customer “There is not enough money in the Chicago to induce me to change that report” (583). The company lost that customer due to of Arthur Anderson’s moral stand. Arthur’s motto was “Think straight, Talk straight” (Boyd 583). When Andersen was the CEO of the Arthur Andersen, “Arthur Andersen was a place where integrity mattered more than fees” (583). Boyd in his review of the book, Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, quotes words of Arthur in his 1932 speech: “If the confidence of the public is the integrity of accountants’ report is shaken, their value is gone. To preserve the integrity of his accounting reports, an accountant must insist upon absolute independence judgment and action....preserving his position of independence indicates certain standards of conduct.” (583). Arthur Anderson died in 1947, and he was succeeded by Leonard Spacey as the CEO. Fernando states that Spacey adopted the same culture of honesty, integrity, and ethical practices until Arthur Andersen was accorded the honors of being elected to the Accounting Hall of Fame of Ohio University in 1953. Despite its reputation that had taken years of commitment to build, Arthur Andersen found itself under a series of unending unethical scandals. These scandals involved companies such as Waste Management (1997), Sunbeam (1998), Baptist Foundation (1999), and Enron (2001). During the 1990s, while almost all the corporations were reaping greatly and realizing huge profits, Arthur Anderson was recording low incomes despite the firm having more than 1800 partners worldwide. Arthur Anderson audit partners were forced to involve themselves in illegal accounting activities. Fernando states that these partners were forced to accept clients with tainted reputations to boost their incomes (242). Clients such as WorldCom, Enron, Waste Management, and Global Crossing cooked their books by manipulating their accounts. Arthur Andersen ignored these accounting irregularities despite being the audit firm of choice for these companies. The scandals at Arthur Anderson came in quick succession starting with Waste Management and ending with the collapse of Enron. Fernando points out that after the scandalous accounting irregularities at Enron; Arthur Andersen was indicted by SEC on 15th March 2002 for obstruction of justice (243). Squires extensively explored the events at Enron that may as well explain why Arthur Anderson failed (6). Arthur Andersen was Enron’s auditor and received wide criticism for approving the accounting treatment of many questionable transactions. Salter points out that Arthur Andersen’s employees had raised the alarm over the many discrepancies that reflected in Enron’s financial structures (190). Arthur Anderson played a significant role in the collapse of Enron. Enron’s Collapse One of the major events that took place in United States in mid-1980s was the union of two gas pipeline firms namely; Inter-North and Houston Natural Gas (Squires 6). The major challenge that would later face Enron that year was the new regulations by U.S. federal government issued in support of the marketing pricing system in the natural gas industry. The regulations were based on supply and demand. However, for Ken Lay, this was his opportunity to earn through making Enron a brokerage firm. Salter terms Ken Lay as a “free-market advocate” and “an outspoken lobbyist for deregulation” (6). Jeffery Skilling became Lay’s successor at Enron. Skilling brought with him innovations such as “a Gas Bank”, made Enron act as a middleman between the producers and the consumers (Salter 6). This made Enron be the only company that was commanding the gas industry in United States. In 1994, Enron expanded its operations to trading wholesale electricity. The company exploited the tax rules and Security and Exchange Commission (SEC) rules, but its gambles did little to satisfy its appetite for cash. This prompted the company to dispose of some of its assets. This was the starting point of Enron’s failure because the company’s hedges were unreal. Hedges are normally used in contracts with the outside parties, but Enron was using its partnership companies. The obligations of falling stocks and investments could not be met by the partner companies because Enron had already hedged itself (Salter 8). The risks at Enron became uncontrollable. The decline in Enron’s stocks in 2001 prompted killing to quit as the Company’s C.E.O. Salter pointed out that, Arthur Salter explored all these events that led, Lay to announce “a $544 million charge against earnings, and $1.2 billion write-down in shareholders’ equity” (9). The misconduct and negligence led Enron to be declared bankrupt. It seems that Skilling quit after Lay defrauded Enron $173 million from the sales of stock. Federal prosecutors point an accusing finger to Enron as the ones who manipulated the off-balance entities to increase its published earnings by approximately $1 billion between 2000 and 2001. Additionally, Raptors did not have the credibility of becoming an independent entity. Salter extensively explores the role of Raptors in the collapse of Enron (9). Had their balance sheet been prepared according to accepted accounting principles (GAAP) by 31st December 2001, Enron report would have recorded $5 billion write-downs on impaired investments and hedges that were uneconomical. All the institutions that had partnered or associated themselves with Enron paid dearly for their collusion. Salter points out that the shareholders at Enron failed to charge the board members with a legal breach of their fiduciary duties even after realizing that it (9). Five banks paid approximately $ 7.5 billion to shareholders and SEC for colluding with illegal activities of Enron. However, the greatest loser in Enron’s was Arthur Andersen, which was ordered closed by the federal jury for obstruction of justice in Enron case. The case of WorldCom On June 25, 2002, WorldCom which was the second largest telecommunication company in United States made a revelation that it had it had “overstated its cash flow by $3.8 billion” (Romero and Berenson 1). This announcement came after Enron became bankrupt in the previous year. Again, Arthur Anderson was WorldCom’s editor. Accounting irregularities were unhidden types of fraud. The major expenses and line costs at WorldCom were watered down by an overstatement of cash flow and incomes. There were cases where the expenses such as line costs were offset by being charged against the capital accounts and capital transfers. Creation of surplus provisions and reserves for future operating costs which were reduced later, resulting to additional incomes was the order of the day. In the stock market, WorldCom shares dropped from 76% to 20% per share. After halting its shares sales for three sessions, in the fourth session, the stock market dumped more that1.5 billion WorldCom shares, an event that sent the share price down from 20 cents to 6 cents (Jennings 305). This downfall went down into the record books as the highest selling frenzy with over 1 billion shares traded in a day’s time. Jennings states that WorldCom was “delisted from the NASDAQ on July 5, 2002 (305). The announcement made their bonds to fall from 79 cents to 13 cents. WorldCom was later sued by SEC with fraud charges. SEC was seeking an explanation of WorldComs financial treatments. In its explanation, WorldCom admitted “an additional $3.3 billion in earnings misstatements, from 2000, with portions from 1999” (Jennings 306). Jennings declares it to be “the largest bankruptcy in the U.S. history” (306). Shortly after, the federal government indicted the WorldCom officials with charges of fraud and conspiracy. Conclusion Fernando states that Arthur Anderson was indicted in March 2002 for corruptly persuading its staff to withhold information from the government proceedings by destroying Enron-related documents (247). Unethical practices of leaders who are interested in getting huge payments from their clients at the expense of the investors may bring down organizations. The above case of Arthur Andersen involves lack of integrity and transparency. Unethical engagements of Arthur Andersen in audit services as well non-audit ones brought a conflict of interest. The auditors in Arthur Andersen manipulated the other companies’ accounts by their demands thus compromising the issue of ethics. For example, Andersen colluded with Enron and WorldCom, who offered huge remunerations for these services. In the end all these companies suffered, and others collapsed due to their unethical behaviors. Works Cited Boyd, Colin. Review of Final Accounting: Ambition, Greed and the Fall of Arthur Andersen. Business Ethics Quarterly 14.3 (2004): 581-592. Print. Fernando, A.C. Corporate Governance: Principles, Policies and Practices. New Delhi: Pearson Education, 2006. Print. Jennings, Marianne, Business Ethics: Case Studies and Selected Readings. Mason: Cengage Learning, 2011. Print. Romero, Simon and Berenson, Alex, WorldCom says it hid expenses, inflating cash flow $3.8 billion,” New York Times, 26 June 2002. Web. Squires, Susan. Inside Arthur Andersen: Shifting Values, Unexpected Consequences. New Jersey: Prentice Hall, 2003. Print. Salter, Malcolm. Innovation Corrupted: The Origins and Legacy of Enrons Collapse. Massachusetts: Harvard University Press. 2008. Print. Read More