Arthur Andersen and Enron
Arthur Andersen was thus seen as complimenting Enron's financial between the two partied as the primary auditor, Arthur Andersen, and Enron. . Establishing Proactive Auditor Responsibilities in Relation to Fraud: The. But Andersen was hooked on a relationship that it found simply too The closeness between Andersen and Enron--the firm's $58 million .. "It was a balance sheet error that Arthur Andersen didn't correct," Neuhausen said. Arthur Andersen fired its partner in charge of auditing the Enron Corporation . Among the main officials the law firm interviewed to reach those.
For many years, Andersen's motto was "Think straight, talk straight. Being among the first to identify a possible sub-prime bust, Arthur Andersen dissociated itself from a number of clients in the s.
Later, with the emergence of stock options as a form of compensation, Arthur Andersen was the first of the major accountancy firms to propose to the FASB that stock options should be included on expense reports, thus impacting on net profit just as cash compensation would.
By the s, standards throughout the industry fell as accountancy firms struggled to balance their commitment to audit independence against the desire to grow their burgeoning consultancy practices. Having established a reputation for IT consultancy in the s, Arthur Andersen was no exception.
The firm rapidly expanded its consultancy practice to the point where the bulk of its revenues were derived from such engagements, while audit partners were continually encouraged to seek out opportunities for consulting fees from existing audit clients.
By the lates, Arthur Andersen had succeeded in tripling the per-share revenues of its partners. Predictably, Arthur Andersen struggled to balance the need to maintain its faithfulness to accounting standards with its clients' desire to maximize profits, particularly in the era of quarterly earnings reports.
This disproportionate growth, and the consulting division partners' belief that they were not garnering their fair share of firm profits, created increasing friction between the two divisions. Arthur Andersen increased its use of accounting services as a springboard to sign up clients for Andersen Consulting's more lucrative business. The two businesses spent most of the s in a bitter dispute. Andersen Consulting saw a huge surge in profits during the decade.
The consultants, however, continued to resent transfer payments they were required to make to Arthur Andersen. Industry analysts and business school professors alike viewed the event as a complete victory for Andersen Consulting.
AABC grew quickly, most notably its healthcare and technology practices. The Powers Committee appointed by Enron's board to look into the firm's accounting in October came to the following assessment: Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm.
Nancy Temple in the firm's legal department and David Duncan lead partner for the Enron account were cited as the responsible managers in this scandal because they ordered subordinates to shred relevant documents.
Securities and Exchange Commission will not accept audits from convicted felons, the firm agreed to surrender its CPA licenses and its right to practice before the SEC on August 31, —effectively putting the firm out of business. It had already started winding down its American operations after the indictment, and many of its accountants joined other firms. The damage to Andersen's reputation also destroyed the firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms.
Changes Since these events have taken place, see exhibit 1, many changes have come about within the accounting industry.
Still other changes have come from the government and government agencies or have just naturally evolved with time. SAS 96 became effective January of and dealt with the record retention policies of accounting firms.
Also several new regulations were added. SAS 96 contains a list of factors that auditors should consider when attempting to determine the nature and extent of documentation for a particular audit area and procedure. It also requires auditors to document all decisions or judgments that are of a significant degree SAS For example, a decision of a significant degree would be an auditor approving a client not using GAAP for a portion of their financial statements. These changes appear to be a direct result of the paper shredding that went on at Arthur Andersen immediately after the Enron bankruptcy.
SAS 98 makes a lot of revisions and amendments to previous statements. All of these changes would appear to be related to problems that were discovered in the Andersen audit of Enron.
Many accounting firms and independent CPAs reacted to these events and implemented changes in procedure voluntarily. These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal.
This distancing was also due to the major changes mandated to Andersen as a way to get back on their feet after the scandal broke, and the other firms were afraid that these changes would be forced on them as well Schroeder. This scandal also caused many major companies who had used Andersen as their auditor in past years to hire auditors to go over past years audits double checking all of the audit work that could be double checked.
This cloud of doubt also extended to companies that Andersen gave qualified audit reports or consulting advice to. Leaders of many blue-chip firms were very concerned by this scandal, and they met to discuss plans for future changes. At the end of these meetings, it was decided that a new oversight committee should be proposed and that these companies were the people to propose such an idea. This idea would set up a committee sponsored completely by the SEC.
The members of this committee were to be completely independent of the public accounting firms Bryan-Low. The oversight committee mentioned was never instated because the current public oversight committee dissolved itself only a short time after this proposal was made, as they felt they had let down the community and the industry. The government reacted aggressively when they became aware of the Enron scandal, and a flurry of legislation and proposals emanated from Congress and the SEC about how best to deal with this situation.
President Bush even announced one post-Enron plan. This plan would also include higher levels of financial responsibility for CEOs and accountants. By far the biggest change brought about is the Sarbanes-Oxley Act Ditman. Sarbanes-Oxley also brought with it new requirements for disclosures. These requirements included reporting of transactions called reportable transactions.
These transactions are broken down into several categories, which impact every aspect of a business. One of these categories is listed transactions-which are by far the worst. They are transactions that are actually written out in a list, each one pertaining to one specific situation. Another is transactions with a book-to-tax difference of more than ten million dollars. There are several others, however these two will have the greatest effect.
Accompanying these requirements are strict penalties if these transactions are not reported and discovered later. This act will mean significant additional work for accountants over the next several years. One such meeting had David Walker, Comptroller of the United States, discussing his beliefs as to where serious problems existed. The four major areas outlined in his discussion were corporate governance, independent audit of financial statements, oversight of the accounting profession, and accounting and financial reporting issues GAOT.
This discussion sparked the bringing several GAO accountants and heads of business into Congress committees for advice and to get feedback for proposed ideas.
The other large meeting was held to discuss the Sarbanes-Oxley act that was put before Congress. These were the two main changes emanating from the Government Accounting Office. Another big change that came from the Enron bankruptcy filing was a new push to separate auditing services from consulting services.
This last effort was to sell off their consulting service.
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Concordantly, the consulting arm was relatively new to the company. Realistically, few think that the big firms will be able to dissuade the SEC from actually implementing such a rule Brown. Many companies who use auditors believe that this is not the answer, because of the fact that it will cause them to hire one firm to do auditing work, and another to do non-audit work like taxes and other filings Solomon. In an attempt to not get damaged by any imminent government action, many business-including Disney and Apple Computer Inc-have already begun splitting their audit and non-audit work between different firms.
Harvey Pitt, current SEC Chairman, does not believe that such a drastic change is called for, and instead is pushing for not allowing external auditors to perform internal audits for companies, and that all other non-audit work be approved by the SEC and board audit committees before the work is done Byrnes. This controversy has long outlasted both companies involved in the actual debacle, and will continue until specific actions are taken. These events have also allowed the world of academia to make many influential changes to curriculums, without adding or dropping classes.
These changes include a new emphasis on accounting ethics and on special purpose entities. Ethics have always played an important role in the accounting industry. However, in recent years ethics education within accounting classes had fallen by the wayside as audit failures continue to stack up, and accountants are viewed as at least partially to blame. Several professors of accounting at several different colleges across the United States have redoubled their efforts to include ethics in their teachings at every level, from principles to advanced.
Special purpose entities are not something that have been highly discussed in many accounting classes up to this point in time. However, in light of the tax shelter abuse perpetrated by Enron, many professors are now finding it necessary to begin to explain these entities and their uses to their students. In Singapore, there has been a push to have banks and other lenders rotate their auditors.
The controlling government agency, Monetary Authority of Singapore MASis attempting to make it necessary for all listed companies to rotate their auditors every five years. Several other countries where the remaining big four practice are now also looking into such restrictions and changes to protect their citizens.
The effects of the debacle are not merely restricted to the United States; indeed they are felt throughout the business world. Positive Nature of the Changes The changes that have been made, are being made, and will be made, all will have a positive impact on the accounting industry. These changes, some implemented by accounting companies and agencies, some by the government and governmental agencies, and others by outside sources, will require more work from accountants, but will in the long run improve many factors within the industry.
The changes implemented by accounting companies and different accounting agencies will affect only the companies making the changes and the American companies, and subsidiaries.
The three new SAS presented earlier will help to expose fraud and deception where it exists in a company. They not only make the auditor work harder to demonstrate more fully that no material misrepresentation exists, but also require the company to take a more proactive role in their audits and accounting.
This allows the public to see that companies do care that they do not misrepresent their position to the public. It also creates more work for the accounting industry, which creates job security for accountants.
These changes allow companies to show that even though their auditors were corrupt; the company itself was fine, thereby restoring public confidence in publicly traded companies. The plan that President Bush announced would make the penalties stiffer and would make the culpable, high-level management employees responsible for the workings of the company, something not yet established in American law.
This gives the management of a company a new impetus to make sure that everything is absolutely correct. Which in turn means that financial statements should be more reliable than ever before.
The Sarbanes-Oxley Act will drastically improve the accounting industry in two ways. First it creates a lot more work for many of the public companies. This additional work means more job opportunities for many accountants and job opportunity means freedom to tell a client when they are wrong, which in turn makes audits more reliable. The second way is that it requires tougher restrictions on internal audits and in judging how well the internal audit is conducted.
If the internal audit is functioning effectively, it cuts down on the volume of work that the auditors have to do, thus making it easier for auditors to do audits. As well as increasing reliability on the internal audit, these changes increase the reliability on the financial statements produced by the companies as well. The other changes will have varied levels of effect on the accounting industry, but will all be positive in nature.Enron - Arthur Andersen Dramatization by Professor Boz
The separation of auditing and consulting will move the accounting industry forward a great distance toward increased credibility.