Introduction: Arthur Andersen Company was a CPA firm that failed to detect fraud

Introduction: Arthur Andersen Company was a CPA firm that failed to detect fraudulent financial activities in audits of several companies including Sunbeam, Waste Management, Enron and WorldCom. Andersen firm increasing revenues from audit and no-audit services did not necessarily indicate the quality of the work the firm did.  In early 2002, many companies announced that they would no longer retain Andersen as their auditor.
The fact that Andersen CPA firm accepted that Enron company could not produce a balance sheet should have made the firm and all other parties (Chase, Citibank) involved suspicious.  According to the book “The Smartest Guys in the Room” written by two reporters, Bethany Mclean and Peter Elkind, Jeffrey Skilling, Enron CEO, claimed that the company’s earnings were so complex that Enron could not produce a balance sheet. The book in-depth research found out that as long as all parties involved were getting paid large sums, not too many questions were asked. Andersen firm was one of these parties. When asked how Enron made money, Jeffrey Skilling laughed. How Anderson CPA could not find out what the research found that Enron revenue projections were recorded as facts. Revenues were fictitious while Enron was losing millions. When Enron’s stocks were increasing while other stocks were decreasing Anderson should have been suspicious. When things look too good to be true the audit firm must investigate. Anderson firm were happy to get paid and kept quiet.
Arthur Andersen LLP, the auditing company for Enron, was tried for obstruction of justice for the destruction of documents pertaining to Enron’s audit.
Factor 1: Document retention policy
Main witness for prosecution was David Duncan, former partner in charge of the Enron audit. Duncan pleaded guilty to obstruction of justice and received a reduced sentence.Main dilemma – Intent to obstruct investigation: Did Duncan act illegally on his own? vs. Did Duncan act illegally by the direction of Andersen’s management?Documents pertaining to Enron’s audit were destroyed prior to company being subpoenaed in November 2001.
Andersen’s document retention policy was revised in 2000. This allowed the elimination of unnecessary documents, which they deemed was normal audit procedure.The policy revision caused the destruction of documents that would have been of interest to federal investigators.
Policy revision was performed by an Andersen partner who was being disciplined by the SEC.Duncan admitted to destroying documents to keep them out of the investigation.Duncan stated his actions were under the direction of Andersen’s management. Enron case lead to creation of the Sarbanes-Oxley Act 2002.
SOX – “Strengthen corporate financial reporting by assessing harsher criminal penalties for white-collar crimes, increasing management accountability, and enhancing public accounting firm independence”
Factor 2: Many people came to the conclusion that the CPA Firm of Arthur Andersen was aware and involved in the illegal activities that caused Enron Corporation to create fraud and swindle millions of shareholders out of their life savings.  The firm approved several accounting measurements that was in clear violation of the accounting Principles.  Much of the improper accounting done at Enron involved an improper accounting method called (SPE) Special Purpose entities.  Some companies normally use this method to isolate the firm from financial risk, but Enron used the SPE to carry on business activities by using assets transferred from the company and then borrowing directly from outside lenders.  The outside lending is the financing that is now off the balance sheet.  Some of Enron outside auditors failed in their audit responsibilities with respect to some of the SPE, and that led Enron to overstate reported earnings.  There was several violations of accounting principles the first being the lack of support to internal controls. It was very important that Enron’s usage of the SPE be monitored and assured that the proper controls were in place, but Arthur Andersen failed in their review of whether proper protocol was being followed, even though internal controls is a core part of an audit.  Another violation of controls was the potential conflict of two executives that was negotiating the use of SPE, but under company guidelines negotiation was only to be made by the Chairman or the CEO, which neither one was aware of the or approved of the transaction, which caused these executives to gain a substantial amount of money.   Further determination proved that in the engagement letter between the Auditors and Enron they agreed that they would examine management assertion that the system of internal control of Enron was “adequate to provide reasonable assurance as to the reliability of the financial statements”.  Auditors supposedly examined Enron’s Internal controls but did not identify or bring to the committee any flaws identified in the internal controls.  Lack of Adequate Related-Party Disclosure –Enron like any publicly traded companies is required to describe its related-party transaction to shareholders and investors in several different disclosure documents either by financial statement footnotes or filings with the SEC.  There was no disclosure of the two executive’s compensation from the SPEs. The auditors permitted the inadequate disclosures
Factor 3: Another critical factor we would like to discuss is technicality. Andersen was originally convicted to obstruction of justice, but because jury instructions provided by the judge was too vague, Andersen appealed and the conviction  was overturned. The appeal argued that Andersen did not get a fair verdict based on the improper use of legal definitions.
As a matter of fact, in Andersen’s appeal, the main issue was wording and interpretation.  It has to be broken down as: “knowingly” and “corruptly persuade”. Both sides’ prosecution and defense believe that there should be a detailed explanation of these words to the jurors because; it’s a specific language terms which most people would not be familiar with.
“Knowingly” and “corruptly persuade” should have been interpreted as conscious of wrongdoing with criminal/evil intent.
In my opinion Andersen should be responsible of wrongdoing even though the judge caused a misinterpretation of the unjust acts committed by Anderson. In fact, in the first round of testimony the jury convicted Andersen for obstruction of justice. The case was addressed to the Supreme Court and in the second round on May 31, 2005 the verdict had been overturned towards Anderson’s side due to vague description created by the judge when describing Anderson’s felony’s to the grand jury.
1. Look up the term corrupt in the dictionary. What is its definition? Was corrupt appropriately applied to the actions of Arthur Andersen?According to the Cambridge Advanced Learners Dictionary, the term corrupt as an adjective means dishonestly using your position or power to get an advantage, especially for money. It also means morally bad in simple terms. As a verb, it means to make someone become dishonesty or immoral. It also means to change information on a computer so that it’s wrong and cannot be used. Based on the above definition and the way it’s applied in the context, the actions of Arthur Anderson are not regarded as corrupt since there is no money in exchange for the actions.2. The issues that overturned the Andersen verdict were based on faulty jury instructions, not on whether Andersen was in fact guilty or innocent. Based on the information in this case and other information you know, do you believe Andersen violated the law?Based on the information on this case, what Anderson had done is follow the policy which was already in use in his firm but not corrupt actions as the jury had stated. The reason as to why we can’t substantially say that Anderson is guilty is that the policy is following the auditing standards. For instance, the IACPA §1.400.210 If an auditor removes or takes files, original copies (in any format) from the firm’s client’s files without permission from the firm, that is considered as violation of the Acts of Discreditable Rule pursuant to §1.400.000. The rules also grant the retention policy for reasons of ensuring compliance with the independence rule. Then this policy had been revised and revoked in 2000 which meant that they were legally allowed to destroy those files. In any case, according to this paragraph as stated before, the client’s firm has copies of the original papers and generally, one is not allowed to access the working papers of an auditor. Under auditing standards, there are several reasons that can affect the auditor’s ability to detect fraud and errors.3. Do you believe that the Supreme Court’s opinion overturning the lower court’s decision was appropriate?The decision was well since the definition of the term corrupt had not been correctly applied by the jury in the case which meant that they would possibly not be eligible to give the correct verdict over the case.4. Should the SEC and the Department of Justice have tried Andersen as a firm or should they have targeted specific individuals who had engaged in acts the two bodies believed to be unlawful?The SEC and the Department of Justice under certain circumstance is allowed to perform what under legal terms is referred to as removing the corporate veil. This is allowed when it’s found that the people behind firm under investigation are actually the ones who should be liable. This is actually done under court order but when the court has not given the order as it may reject or accept, it’s the firm that is tried.5. Although Andersen’s conviction was overturned, do you believe that its employees acted in an ethical manner?If the firm had decided not to reveal the documents to evade investigation reasons, then we can’t find any unethical behaviors behind this. For instance, Duncan had acted in an ethical manner by pleading guilty for his actions. Under auditing rules, they have the rights to deny access of the files from third parties other than their client.6. Comment on the actions of David Duncan and Nancy Temple. Which of these parties do you believe was more responsible for the Andersen saga?David Duncan had not acted on his behalf in this case but had revealed the facts as they were. As for the case of Nancy Temple, she had advised that the investigation would be adverse if the documents were still there. Of the two, the actions of David Duncan are more responsible for the Anderson saga as they reveal the facts behind the whole case.7. The class action lawsuit against Andersen also named the Canadian Imperial Bank of Commerce, JPMorgan Chase, Citigroup, Merrill Lynch, and Credit Suisse Group as codefendants with Andersen. Why would the plaintiffs name so many entities in their lawsuit? Merrill Lynch and Credit Suisse asked a U.S. appeals court to rule that the complaint should not have been certified as a class action suit. Why would these entities make such a claim?The plaintiffs are naming several entities in their lawsuit in order to show that there is a possibility that the defendant had conspired with several firms in their fraudulent actions. This is so as to find grounds that what the firm was doing is to finds as many firms as possible so that to show that the defendant’s actions were based on desire for money, bribes. The reason as to why the firms as making the claim that the complaint should not have certified as a class action suit is because it would also raise questions on their finances and this would affect their business as well.Hi I need a conclusion for this speech around one page. ASAP

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