Arthur Anderson Ethical Case Study

There were several internal control issues with Arthur Andersen (AA) that contributed to the Enron disaster. Firstly, AA gave Enron nonaudit services as well as audit services, meaning that AA could advise the structuring of transactions for desired disclosure outcomes and other work and later give an audit opinion on these transactions. This resulted in a blatant conflict of interest issue that many audit professionals did not recognize. Secondly, the “tone at the top” of AA did not encourage ethics or quality of work. Joe Berardino, CEO, made it clear that success was tantamount with revenue. He was noted by one former partner as the “most aggressive pursuer of revenue” that she had ever met. AA failed to recognize how angry the public became at the lack of quality audit work that resulted from this revenue-driven focus and continued to use poor judgment when auditing Enron. Thirdly, AA allowed the partner in charge of the audit of Enron to override a quality control partner’s ruling. The quality control partner objected to creating one of Enron’s Special Purpose Entities because it had “no substance”, but the partner in charge of Enron’s audit disagreed and responded by having the quality control partner removed from Enron audit oversight. Lastly, AA ordered the auditors on the Enron assignment to destroy any “erroneous” documents after the SEC began an informal probe into Enron. AA contended that this was usual procedure, but it could not prove that the documents were erroneous after they had been shredded. The SEC gave a good summary of how AA contributed to the Enron disaster: “…not only did Andersen knowingly and recklessly issue materially false and misleading statements, it failed to enforce its own guidelines to bring the company in line with minimally accepted accounting standards.” Arthur Andersen made a number of mistakes as auditors and consultants to Enron. These mistakes include the following issues:
• AA, acting and collecting fees as auditors