Arthur Andersen: Questionable Accounting Practices 1

Arthur Andersen: Questionable Accounting Practices Arthur Andersen, one of the largest accounting firms in the United States, “a name that was synonymous with trust, integrity, and ethics” (Ferrell, Fraedrich, & Ferrell, 2011, p. 348), through a loss of its founder Arthur Andersen, and change in its corporate culture resulting in many unethical business transactions that affected multitudes of primary stakeholders had to close its doors in 2002 after 90 years of business. In this report I am going to discuss the legal and ethical issues surrounding Arthur Andersen’s auditing of companies accused of accounting improprieties, the evidence proving that Arthur Andersen’s corporate culture contributed to its downfall, and how the provisions of the Sarbanes-Oxley Act of 2002 could have helped to minimize the likelihood of Arthur Andersen’s auditors failing to identify accounting irregularities. The legal issues that surrounded Arthur Andersen’s auditing of companies accused of accounting improprieties revolved around the firm having a conflict of interest and a lack of independence when auditing a client’s financial statements. A conflict of interest exists when an individual must choose whether to advance his or her own interests, those of the organization, or those of some other group” (Ferrell, Fraedrich, & Ferrell, 2011, p. 68). An auditor is deemed to have independence when auditing a company’s financial statements. Independence requires integrity and an objective approach to the audit process. The concept of independence allows the auditor to carry out his or her work freely and in an objective manner. This even means independence is needed from individuals that would have an interest in the results published in financial statements of a company. A lack of independence through the addition of Arthur Andersen’s consulting services division created a serious conflict of interest. Arthur Anderson would not only audit a company’s financial