Question 4: Case Study
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto (complete) dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Enron's auditor firm, Arthur Andersen, was accused of applying reckless standards in its audits because of a conflict of interest over the significant consulting fees generated by Enron. During 2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees from Enron. Enron hired numerous Certified Public Accountants as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board. The accountants searched for new ways to save the company money, including capitalizing on loopholes found in Generally Accepted Accounting Principles and International Accounting Standards. Andersen's auditors were pressured by Enron's management. Arthur Andersen was charged with and found guilty of obstruction (creating hindrances) of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. Although only a small number of Arthur Andersen's employees were involved with the scandal, the firm was effectively put out of business. The company surrendered its CPA license on August 31, 2002, and 85,000 employees lost their jobs.
- List down the reasons which forced Enron’s auditors to adopt unethical practices.
- List down some of the unethical practices of Arthur Anderson.
- What do these abbreviations stand for: FASB, CPA, GAAP and IAS?
