Oversimplifying the case of Enron and Arthur Andersen, Enron was using some accounting practices that were questionable. Because Arthur Andersen was an independent auditor, they were responsible for reporting any questionable accounting practices might be risky to the shareholders of Enron. The Security and Exchange Commission was responsible for requiring and publishing accurate information about Enron’s accounting information. In the end, a few Enron employees went to jail, and Arthur Andersen stopped doing business under that name.
Identify what you consider any conflicts of interest in the case of Enron and Arthur Andersen.
- What could have been done to avoid the conflicts of interest you identified?
- How would you change the laws to correct the problems that came up in the Enron and Arthur Andersen case?
- Explore how Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures.
Enron was Andersen’s one of biggest clients and the firm was generating $1 million in audit fees along with other fees to Andersen’s consulting firm, Accenture. Since Enron was a client, Andersen managed 80% of Oil and gas industry companies to sign up as clients.
In 1998 when Andersen implemented their “2X” strategy to double there revenue, Andersen started doing more than one a year external audit and they hired 40 of Enron’s entire internal audit team, added their own and open a office in Enron’s headquarters. Andersen used to attend Enron meetings and helped shape new businesses while doing audit of their books. This was clear case if conflicts of interest.
What could have been done to avoid the conflicts of interest you identified?
Arthur Andersen should not have become a partner of Enron. From another aspect, they turned in to internet audit team. A report by Enron’s law firm, who were investigating an employee’s allegations of improper accounting, concluded that Andersen auditors reviewed and approved of transactions by Enron-related partnerships that contributed to the company’s collapse (Eichenwald, Oppel, 2002). These transactions and partnership deals helped Enron inflate the stock price. While the Enron audits were handled in the accounting firm’s Houston office, the report also makes clear the involvement of Andersen executives at the firm’s Chicago headquarters (Eichenwald, Oppel, 2002). That essentially means that although Andersen was a decentralized corporation, but the work they did for Enron was known to the Andersen’s headquarters.
Enron should not have consented Andersen to hire it’s 40 internal auditors and, open an office and start the whole onsite operation that they did, and Andersen should have done just once a year auditing like what they were supposed to do, to check Enron’s books to find issues and fix them. Instead of finding problems in auditing Andersen became partner in crime with Enron.
But then Andersen should not have pursued the opportunity either, or should have maintained their professional integrity and do what they were expected to do by the SEC and the investors of Enron. But, we can see how it worked out, the partner had pressure to double the revenue from the account, and Andersen made a deal with Enron to help them with their accounting to boost revenue. While doing that they helped Enron with the transactions and partnerships that caused Enron to finally go bankrupt.
How would you change the laws to correct the problems that came up in the Enron and Arthur Andersen case?
The laws should have held Enron management responsible and accountable for all deals and transactions they do, and they should have disclosed all the details of transactions and partnership information to their external auditors for accounting purposes. The management should have skin in the game too, they should not be allowed to sell your stocks before company went bankrupt, or even if they sell, by law the money should be recovered from them, if the company does not go bankrupt for legitimate reasons.
Law should have prohibited Andersen to participate in Enron’s meetings, transactions etc. Andersen being auditors should have been an external watchdog. And auditors should be liable for verifying information they get from management of client and then doing the accounting and reporting numbers. Any mistake should cause heavy fines and sanctions.
According to Lynn Turner, former chief accountant of the Securities and Exchange Commission “Sarbanes-Oxley was legislation passed by Congress in the summer of 2002 and then signed by President Bush. In it, about half of the language deals with setting up a new regulator for the accounting profession called the Public Companies Accounting Oversight Board that oversees the audit firms. The rest of the legislation deals with some important things like ensuring that management is held accountable for the financial reports that they file with the SEC. It improves the independence of corporate boards, as well as the independence of the auditors, and it increased some of the penalties for those who shred documents or violate the security laws (Norris, 2005).”
Explore how Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures.
In a capitalistic society competition between firms is inevitable. Both Enron and Andersen wanted to grow. As we could see how their management forced employees to generate more revenue. And management team of Enron and Andersen have amazing amount of confidence that they thought they would continue what they were doing without getting caught. When the management of any corporation is corrupt it is hard to do anything to change grown men or women. But since, we are exploring what might have been encouraged Enron and Andersen to act ethically other than laws, would be organization policies built around organizational values and professional integrity.
Both Enron and Andersen were for Profit Corporation, no one expected them to act like not for profit organizations, but they should have had policies for each employee, reminding what their corporations stand for, their vision, their mission and ode of conducts. Especially Andersen employees should have had reminded of their professional responsibilities, and the fact that how many people’s future depended on their shoulders though 401k and retirement accounts. And the policies should have had the basic point, that there is no short cut to success, of course in more professional language.
Oppel, R , Eichenwald, K(Jan,2002). ENRON’S COLLAPSE: THE OVERVIEW; ARTHUR ANDERSEN FIRES AN EXECUTIVE FOR ENRON ORDERS. Retrieved from https://www.nytimes.com/2002/01/16/business/enron-s-collapse-overview-arthur-andersen-fires-executive-for-enron-orders.html
Norris , M(May,2005). Has Accounting World Changed Since Enron? Retrieved from https://www.npr.org/templates/story/story.php?storyId=4673933