Questionable Accounting Practices - Essay Example

Arthur Andersen: Questionable Accounting Practices Arthur Andersen: Questionable Accounting Practices Arthur Andersen was the external auditor for Enron. It helped to ensure that the financial reports of Enron were correct. Its input was important in informing the decisions of both Enron’s potential and existing investors. It became a major business partner for Enron and allowed some of its executives to work for Enron. It was charged in court for obstructing justice during the investigation of Enron fraud in 2002 leading to its closure. The Arthur Andersen case left important lessons to be learnt on questionable accounting practices. Mandated requirement that apply to Arthur Anderson’s case The mandated requirement that applies to the Arthur Andersen’s case is the requirement of the laws protecting consumers. This mandated requirement provides that businesses should serve their consumers with truthful information about their products and services, and observe safety standards. As Enron’s auditor, Arthur Andersen was supposed to scrutinize the company’s bookkeeping and financial statements noting any anomaly about which it should have sought clarification with Enron. Enron’s investors were counting on Arthur Andersen to look out for their welfare. Arthur Andersen would have indicated that it was looking out for the welfare of Enron’s investors by accurately reporting its accurate financial statements to its stakeholders. This would have helped potential investors make informed decisions on whether or not to invest their money in Enron and existing investors to make the decision of whether to leave or stay with the company (Cross & Miller, 2012). For forfeiting this duty, Arthur Andersen could have been rightly convicted of contravening the Wheeler-Lea Act of 1938, which forbids businesses from engaging in unfair and deceptive actions even if doing this would discredit their competitiveness. This Act could have convicted Arthur Andersen because of colluding with Enron to hide its untruthful dealings. The FTC Improvement Act of 1975 is the other legislation in the mandated requirement of laws protecting consumers under which Arthur Andersen could have been convicted. This is because the Act empowered the Federal Trade Commission to forbid industries from employing unjust practices. It was unjust for an accounting firm of the status of Arthur Andersen not to be independent in its audit services to Enron. It got too involved when some of its auditors accepted the jobs they were offered in the company (Zakhem & Palmer, 2012). The likely scenario of the Arthur Anderson case if the Sarbanes-Oxley Act had been enacted in 1999 If the Sarbanes-Oxley Act had been enacted in 1999, Arthur Andersen would have been convicted of covering up fraudulent dealings within Enron. The act was signed into law in 2002 and Enron’s case was one of the cases that led to its adoption. This act underscored the need for external auditors to be independent, absolutely, and as such, if the act had been enacted in 1999, Enron would not have survived its implementation. The Public Company Accounting Oversight Board (PCAOB) that was created by the Act was charged with oversight, regulatory, inspection, and disciplinary roles over accounting firms. The action of Arthur Andersen overlooking and hiding the unscrupulous motives of Enron executives in devising the off-balance-sheet partnerships to help them defraud Enron investors would have warranted disciplinary action (Hamington & Sander-Staudt, 2011). The other element that would have made the Sarbanes-Oxley Act to convict Arthur Andersen in 1999 was its dual relationship with Enron. Arthur Andersen was supposed to be only an external auditor to Enron. Instead, Arthur Andersen went ahead to become a major business partner with Enron. This dual relationship of Arthur Andersen with Enron played a key role in it compromising on its objectivity and accountability towards its services. The act would have imposed more severe penalties on Arthur Andersen for the act of destroying the evidence of Enron’s auditing flaws when the Securities and Exchange Commission (SEC) came calling investigating Arthur Andersen’s involvement in Enron’s fraud case. The Sarbanes-Oxley Act would have mandated Arthur Andersen’s audit reports while assessing whether internal controls were observed when preparing and disclosing financial reports. The Act’s clause on corporate responsibility would have helped detect the flawed interaction between Arthur Andersen’s external auditors and Enron’s internal audit committee (Cross & Miller, 2012). The elements of the framework for ethical decision making in business that played the biggest role in the Arthur Andersen case Opportunity was one of the elements of the framework for ethical decision making in business that play the biggest role in the Arthur Andersen case. Arthur Andersen considered Enron executives’ invitation to collude in the shady deals of the off-balance-sheet arrangements as an opportunity to make extra income. This must have been of course with the belief that they will not be discovered. Another thing in Arthur Andersen framework for ethical decision making that appeared as an opportunity was the irresistible offer to become a major business partner of Enron. This provided a chance for Arthur Andersen to make millions of money and it seized the moment. The gullibility of Enron’s investors that made it easy for them to believe the lies that Arthur Andersen fabricated was an opportunity that might have featured in Arthur Andersen’s decision to partake in the fraud case (Zakhem & Palmer, 2012). The other element of Arthur Andersen’s framework of ethical decision making that played a big role in its case is organization factors. The Arthur Andersen case suggests that one of its organizational factors that could have led to its involvement in Enron’s fraud is a flawed organizational character. Clearly, Arthur Andersen’s organizational character was flawed because it did not emphasize honesty and accountability. Arthur Andersen’s organizational leadership was not responsible because it could have steered the company away from engaging in criminal dealings. Individual factors also played a big role in Arthur Andersen case. This is seen in the decision of its auditors to take up jobs that they were offered by Enron. Individual factors can be blamed for the decision of some Arthur Andersen’s auditors to get actively involved in the company’s business partnership with Enron (Hamington & Sander-Staudt, 2011). How the Arthur Andersen case would have played out had its senior management displayed the habits of strong ethical leaders If the senior management had displayed the habit of strong ethical leaders they would have exhibited consideration for stakeholders’ interests. For example, considering stakeholders’ interests would have made Arthur Andersen senior management to question Enron’s use of shady dealings especially their use of off-balance-sheet partnerships. This would also have led to them reporting Enron’s fraud plans to the investors in order to protect them from being conned. If Arthur Andersen’s senior management had displayed the habits of strong ethical leaders, they would have been proactive. If they were proactive, they would not have for example let the unduly large amounts that they received from Enron to make them overlook the mistakes they detected in Enron’s financial reports. In fact, being proactive would have made Arthur Andersen’s senior management to report these mistakes to the Securities and Exchange Commission for proper disciplinary actions (Cross & Miller, 2012). If Arthur Andersen’s senior management displayed the habits of strong ethical leaders, they would have exuded passion to do right. For example, the passion to do what is right would have made the management to adhere to the requirement of staying independent because Arthur Andersen was an external auditor for Enron. Another element displayed by strong ethical leaders that Arthur Andersen’s senior management is competence. They would have displayed competence by for instance, ensuring that they are not lured into engaging in the criminal dealings of Enron with the aim of securing the continuity of the company (Zakhem & Palmer, 2012). In conclusion, the mandated requirement for compliance that applies to the Arthur Andersen case is the laws protecting consumers. If the Sarbanes-Oxley Act had been enacted in 1999, Arthur Andersen would not have made it to 2002 because it would have been convicted for conniving with Enron in its fraud. Opportunity, organizational factors, and individual factors are some of the elements of the framework for ethical decision making that played a big role in the Arthur Andersen case. If Arthur Andersen’s senior management had displayed the habits of strong ethical leaders such as consideration for the interests of the stakeholders, they would not have been involved in criminal dealings with Enron. References Cross, F. & Miller, R. (2012). The legal environment of business: text and cases: ethical, regulatory, global, and corporate issues.Mason, OH: South-Western Cengage Learning. Hamington, M. & Sander-Staudt, M. (2011). Applying care ethics to business. London, UK: Springer. Zakhem, A. & Palmer, D. (2012). Managing for ethical-organizational integrity: principles and processes for promoting good, right, and virtuous conduct. New York, NY: Business Expert Press. Read More