Executive Summary

The Arthur Andersen case sequentially describes the events that were responsible for the rise and fall of an accounting firm (hereinafter referred to as “the firm”). It was evident from the case that organizations do not exist independently or in an isolated homeostatic environment rather it remains immensely affected by certain internal and external factors which can be regarded as risks and challenges. It was quite obvious from the case that if such risks are not mitigated to an acceptable low level can give rise to severe harmful repercussions which had eventually caused the demise of the firm. The internal factors however include the firm’s internal specific risks which include set of ethical values such as independence and avoidance of any conflict of interest, integrity and objectivity, professional skepticism and due care, competency and professional behavior when rendering professional services to the clients. It also includes the firm’s internal quality control policies and procedures such as recruitment of competent and professional staff, providing on job-trainings and providing necessary skills and expertise to the engagement team, adherence towards the professional and industry regulations and pronouncements of professional bodies such as promulgated by Financial Accounting Standards Board (FASB) particularly Generally Accepted Accounting Principles (GAAPs). In contrast, the external factors include the environment within which the organization operates includes not only the stakeholders whose interest is directly affected by the activities of the organization such as investors including banks and stock holders of a listed client but also compliance towards legal and regulatory environment thereto such as the directives issued by the Securities and Exchange Commission (SEC), securities act, and other corporate laws that are being in force such as Sarbanes Oxley Act, 2002. Furthermore, although growth and expansion is regarded as success of the business such widespread of operations across international boundaries also give rise to certain risks such as lack of control on overseas branches and communication gaps, political, economical and legal risks, and arousal of conflicts due to diversification. Therefore, due-diligence is also required on the part of its partners as strategic planners to keep up with the consistency of the services it provides to its client and continual adaptation with the environment. Hence, this capitulates that change is inevitable. The firm needs adaptability in accordance with situation.

Case Analysis and Insights

Arthur Andersen, the firm was founded by Arthur E. Andersen in 1907 who laid the foundation on the solely on the principles of integrity which is regarded as a key business reputation of the firm in the profession’s industry. However, as we see, with the passage of time as new laws enacted and significant developments made in the economy gave rise to certain challenges for the industry and particularly the firm as well. After World War – II; there had been repaid growth of the United States economy as a result of which the firm had expanded its operations across worldwide regions. This in turn necessitates more staffing, compliance with local laws within territorial jurisdiction, better coordination and communication, due care in performing professional work with skeptic attitude as the firm is held accountable for the opinion it provides on the financial statements by signing off.

However, we can see the firm has been suffering with the internal crisis due to unethical culture and conflict of interest of its newly inducted partners which consequently resulted in the demise of many growing companies. As we know, the audit profession is very sensitive in terms of the word “ethics”. Such ethics however include integrity and honesty, objectivity, professional competence and due care, confidentiality and professional behavior. The firm does not only provide its services to the client but it also serves the interest of so many entities which are regarded as stakeholders which include the investors who hold stock in the companies, banks who have provided loans and financing to the organization, suppliers who have advanced goods/services on credit, and the local regulatory authorities such as Securities and Exchange Commission (SEC) and compliance with the local laws thereto.

However, the firm and its partners have had exploited the repute of firm for the sake of undue money as bribery by compromising the authenticity of the work and signing off on the financial statements as those were giving true and fair view. It resulted in several law suits and penalties which had also harmed the reputation of the firm in the industry as the firm also lost its credibility and trust of stakeholders on all the reports it issued. One reason for this is associated with the fact that the firm has not incorporated any quality control systems, policies and procedures to hold check for the engagement partner and the team as a whole. Such quality control policies and procedures could identify and evaluate whether the firm and its personnel are in compliance with the ethical principles and whether their independence is not impaired whether they possess necessary technical skills and competence to perform the work, whether their work was properly supervised, reviewed and documented and whether there adequate procedures for retention of audit documentation. As in case of Enron, David Duncan had unlawfully destroyed the accounting records after the subpoena from SEC. However, if the firm had adequate control and restricted access to the completed audit documentation; he might not be able to do this. Moreover, the firm and its partners also remain negligent and did not exhibit professional skepticism in performing audits as in the case of WorldCom whereby a $ 3.8 billion accounting error costs shareholders $ 110 million which was considered a big loss to the company and the economy at large.

Furthermore, as mentioned in the case, there were also instances where the partners had been involved in false illegitimate collusion with the top management in manipulating accounting records and gaining unlawful advantage resulting in the demise of the client’s business. This can be truly considered as a fraudulent activity and if the senior partners might have reviewed the work of that partner such unfavorable incident might not have occurred.

Conclusion

As mentioned in the case the series of events truly prescribe that firm has been facing significant internal risks due to newly inducted partners in the firm who had exploited the culture of honesty and integrity. The partners and staff members were exhibiting improper and unprofessional behavior, violating the professional standards by committing such fraudulent activities. Obviously, the auditor’s independence is impaired when it has conflict of interest towards the client when providing financial services. It also indicates lack of transparency in the audit process and has resulted in loss of credibility of the audited financial statements thus harming the confidence of the investors.

Recommendations for all stakeholders and Implementation Plans

There is a need to inculcate a strong emphasis on the firm’s set of ethical values primarily focusing on independence and integrity. The firm should review its quality control policies and procedures by recruiting competent professional staff which should avoid any bias or conflict of interest when providing financial services and have skeptic approach. The senior partners should act as leaders and set values as commitment towards competence and integrity. There should be independence checks inside the firm’s staff and necessary trainings workshops must be conducted on timely basis. The engagement partner must ensure whether the team has necessary skills and expertise to perform the engagement. The firm and the engagement team comply with all the local laws and regulations including professional standards and industry regulations. For all SEC clients, there should be rotation among the engagement partners to avoid any issue caused due to familiarity or relationship threat.