Relationship Between Andersen And Worldcom Essay

An implicit theme of this case that I want students to recognize is the contrast between the persistent and vigorous efforts of David Sokol to “get to the bottom” of the suspicious items he uncovered in JWP’s accounting records versus what Judge William Conner referred to as the “spinelessness” of JWP’s auditors. The JWP audits were similar to most problem audits in that the auditors encountered numerous red flags and questionable entries in the client’s accounting records but, for whatever reason, apparently failed to thoroughly investigate those items. On the other hand, Sokol refused to be deterred in his investigation of the troubling accounting issues that he discovered. The relationships that existed between members of JWP’s accounting staff and the Ernst & Young audit team apparently influenced the outcome of the JWP audits. Of course, the Sarbanes-Oxley Act of 2002

Arthur Anderson Limited Liability Partnership (LLP) was established in 1913 into the Accounting industry. They offered tax, consulting, and, auditing services to large corporations everywhere. Their headquarters were located in Chicago, Illinois and eventually had over 85,000 employees in 84 different countries (Collins, 2016). By the 1990’s Arthur Andersen had become one of the largest accounting firms, and was recognized as one of the “big five.” Along with being one of the largest accounting firms Arthur Andersen was also one of the most reputable. There were many factors that distinguished Arthur Andersen from other accounting firms, and the most notable were the honesty and integrity Arthur Andersen had established for the company (Moore & Crampton, 2000). Andersen set high standards which in turn resulted in the growth of their prestige. Many companies came to Arthur Andersen because of the trust it had established in the public and in the accounting Industry. One of the ways Arthur Andersen established their reputation was through their organizational structure and the culture of the company.

How much reliance should Enron’s corporate BOD have placed on the Andersen in understanding the company’s accounting decisions and policies?

Arthur Andersen (AA) contributed to the Enron disaster when it has failed to the management by failing to have Enron establish and enforce its own internal control. There has been flaws to AA‘s internal control. There has been assumption that AA partners were too motivated by revenue recognition thus, overlooking several criteria when providing their services to Enron. Additionally, AA also recognised the retention of audit clients as vital and a loss of any clients would be disadvantaged to an auditor’s career. In AA internal control, the person who is able to make most of the decisions is the person who is most concerned about the revenue or losses of the client’s company.

Andersen – Although Enron committed the fraud, Andersen allowed Enron to get away with it. An audit firm has to be independent from their client and act in the best interest of the public. For this reason, I think that Andersen was the most responsible for the Enron crisis. Andersen could have declined continuing their relationship with Enron as their client, considering some Andersen representatives did not agree with Enron’s “aggressive” accounting and financial reporting decisions in the early months of 2001. Andersen also assisted Enron in restructuring some of the SPEs so they would still be considered unconsolidated entities. Andersen not only audited Enron, but they also went beyond the scope of what the quality audit should entail. It was also telling when personnel in the Houston office destroyed documents related to Enron and

Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.

Due to these criminal activities, many top executives were convicted fraud and sentenced to spend time in prison. WorldCom activities did not align with the company's overall mission and goals. The actions taken by management were not in the best interest of the customer instead they were consumed with acquisitions and increasing the value of WorldCom Shares. The management also should have considered general accounting practices during their strategic planning. Furthermore, create procedures that protect all stakeholders within the firm.

The WMI accounting fraud case described a financial fraud committed by senior management of WMI, with the help of Arthur Andersen the external auditors. The case depicts the effort of several years to inflate profits at WMI, employing aggressive accounting practices which enabled the WMI to conceal $1.7 billion in form of expenses (Riley and Rezaee, 12). By eliminating or deferring expenses, WMI managed to meet earnings targets and improve

In 1913, the company Arthur Andersen started by Arthur Andersen and Clarence Delany by the name of Andersen, Delany, & Co. In 1918, it was given the name Arthur Andersen & Co. The company supplied tax, consulting services and auditing for the large business, and itself had a position in the "Big Five" accounting firms. In 2002, this firm was found guilty for auditing an energy corporation, Enron and it surrendered back its rights of auditing. This led to Enron 's bankruptcy and loss of 85,000 jobs.

Field Work Standard #2 : The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures (AICPA). Enron had no procedure for internal controls. Therefore, Anderson could not have sufficient understanding of the internal controls.

Everyone is responsible for implementing and maintaining internal controls. Arthur Andersen, LLP is partly responsible for the internal controls since they need reviewing during an audit. WorldCom needs to establish relations with a reputable auditing firm and to hire an executive team who understands the important of workplace ethics. WorldCom management needs to communicate their expectations to employees and introduce fraud awareness training. Fraud awarness training includes an ethics hotline that employees can call into when an incident occurs. One of WorldCom’s weaknesses is its segregation of duties. WorldCom needs to establish an effective segregation of duties that combats the opportunity for fraud to be committed. Multiple employees need to be tasked within the same financial process to ensure that not one employee has two similar tasks. WorldCom never fully implemented its vacation policy, so it is in the company’s best interest to see that through. More employees taking vacation time will reduce the opportunity to commit fraudulent activities (Draz 2011).

Enron and Arthur Anderson were both giants in their own industry. Enron, a Texas based company in the energy trading business, was expanding rapidly in both domestic and global markets. Arthur Anderson, LLC. (Anderson), based out of Chicago, was well established as one of the big five accounting firms. But the means by which they achieved this status became questionable and eventually contributed to their demise. Enron used what if often referred to as “creative” accounting methods, this resulted in them posting record breaking earnings. Anderson, who earned substantial audit and consultation fees from Enron, failed to comply with the auditing standards required in their line of work. Investigations and reports have resulted in finger

There were many issues in this case but one of the main issues that stood out was the fact that Andersen there was a conflict of interest because Andersen was the auditor and consultant for Enron. There are positive attributes when auditing and consulting at the same time for a client such as building a relationship with the client and promotes business; allows the auditor to become familiar with the clients’ business environment, and reduces the overall cost of the client. However, when a firm audits and consults for their client, the audit/consulting firm works so closely to the client that it makes ethical decisions very difficult to make and the auditors lose objectivity and become partial due to the conflict of interest.

WorldCom acquired Arthur Andersen as the independent external auditing for the company. As WorldCom grew after the merger with MCI, Andersen began to invoice less than they should have. The charges were defended as an opportunity to prolong business with WorldCom. (Kaplan and Kiron, 2007). This is an immediate red flag for a company. Where were the ethical practices of the independent auditor? If the auditor has no ethics, how can one possibly be assured that the company is performing its intended function appropriately? The board of directors should have immediately been informed of Andersen’s practices and made a decision to confront Andersen’s practices and possibly obtain new independent auditors.

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.