After the Enron scandal, it came out that the accounting firm, Arthur Andersen,

Question

After the Enron scandal, it came out that the accounting firm, Arthur Andersen, had been a participant in covering up Enron’s crimes. Arthur Andersen had a mixed reputation for integrity. While its founder stressed ethics, Andersen was also engaged in accounting scandals involving Sunbeam Corp. and Waste Management Inc.

Arthur Andersen was eventually convicted for their role in Enron’s collapse. The U.S. Supreme Court reversed their conviction in 2005, but the damage had already been done. Arthur Andersen went out of business, leaving thousands of Andersen employees out of a job.

Discuss the role of the independent auditor, and whether Arthur Andersen and its employees was treated appropriately by the courts.

Explanation / Answer

It is usually seen that accounting firms police themselves.

The collapse of Enron and the role that its auditing firm Andersen & Company played in this collapse has raised a question on this practice once again.

Billions of dollars have dwindled and almost disappeared in this debacle.

Concerns are growing about the fact that accounting firms rely more on consulting work rather than on traditional audits for their revenues, raising questions about bookkeeping. In 2000, Andersen received more than $25 million for consulting work in the Enron's case.

Andersen has acknowledged that Enron was one of its biggest and most desirable clients and for a client that huge, one is tempted to overlook client’s problems. This is truer for companies that hire former auditors, as the relationships are closer. This was true in the case of Enron and Andersen as well.

Another challenge in suing accountants has become even more difficult because of new laws governing securities class-action lawsuits, and a Supreme Court decision has made it harder for shareholders and others to sue a company's auditors.

A peer review conducted by Deloitte & Touche has given a clean bill of health to ensure Andersen. Although this is a powerful tough, this might not be enough. The industry may need a new independent body to address problems like Enron, to get existing rules enforced.

Arthur Andersen and its employees were treated appropriately by the courts.

Let us consider the fact that Enron was not Andersen’s only crisis. A few months prior to the Enron scandal, Andersen had to settle a dispute with the Securities and Exchange Commission regarding its accounting and auditing work of Waste Management Corporation. Also in July 2001, five officers of Sunbeam Corporation and the lead Andersen collaborates were sued by the SEC.

Also, it transpired that Arthur Andersen employees were indeed instructed to delete Enron-related files. However, Arthur Andersen maintains that these actions were within their document retention policy. , but those actions were within their document retention policy. The court instructions allowed the jury to convict Andersen without proving that the firm knew it had broken the law. As per Rehnquist, the instructions were vague and "simply failed to convey the requisite consciousness of wrongdoing".

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