The Most Notorious Audit Firm Failures Exhibited Similar Characteristics

These crises along with their claim that their problem with the Enron audit was due to a few “bad partners” was merely the result of an unsound organizational structure along with policies and practices that the firm implemented. The unsound organizational structure of Arthur Andersen changed the motivation of employees within the firm and changes within the firm over the years one of which was the compensation of partners did not allow for integrity when work was being done for these public companies.

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.

The internal auditing has vastly changed since the Archer Daniels Midland Company price fixing scandal, the Enron deceit or implementation of Sarbanes-Oxley Act of 2002. Both of these corporations had two things in common greed and faulty internal auditing accounting practices. In fact, since the time of both scandals Hollywood has made two movies, “Dick and Jane” played Jim Cary, who was executive that highlighted the debauchery of Enron not mention the second movie “The Informant” played

Audited by Arthur Andersen, WorldCom went under investigation by the SEC for accounting fraud. Not only was cash flows overstated by booking $3.8 billion in operating expenses as capital expenses, $400 million was given to Bernard Ebbers, the CEO, in off-the-book loans. WorldCom stunned Wall Street with additional improperly booked funds total to $3.4 billion bringing a total restatement of $7.2 billion. WorldCom was prosecuted by DOJ, SEC, US Attorney's Office for the Southern District of New York and various congressional committees.

Enron scandal which aroused in 2001 was one of the most famous events in the area of fraud audit. As the auditor company of Enron, Arthur Andersen failed to prepare true and fair auditing reports. They both suffered lethal loss at that time. The following paragraphs will discuss this fraud event, including the organization history, the organization’s event, the fraud issue in the event, the consequence of the main stakeholders, auditors in the event and their roles, and the current situation of people who are responsible.

The reason of Enron Corporation downfall for audit failure is conflict of interest and accounting fraud. This is because it has been suggested that conflicts of interest and a lack of independent oversight of management by Enron's board contributed to the firm's collapse. Some have suggested that Enron's compensation policies engendered a short-sighted focus on earnings growth and stock price. In addition, recent regulatory changes have focused on enhancing the accounting and strengthening internal accounting and control systems. In these issues, it begin with Enron's board. The conflict of interest between the two roles played by Arthur Andersen, as an auditor, he also as a consultant to Enron Corporation. While investigations continue, Enron Corporation has sought to salvage its business by spinning off various assets. As that, Arthur Andersen actually has admitted some

Ever since the bankruptcy, many concluded before facts were available to form a reasonable judgment that Andersen was responsible for their actions resulting Enron going bankrupt. "Facts show that Enron officers committed fraud within off-balance sheet partnerships with the active assistance of many prominent financial institutions" (Morrison, Mary Ashby). Evidence indicates that Andersen personnel destroyed duplicate copies of old memos, magazines, and requests for charitable contributions before the U.S. Securities and Exchange Commission issued or discussed any subpoena to the firm. In difference, the Department of Justice gave misleading testimony, engaged in escapes, allegedly threatening observers and acknowledged in court that it had failed to review the most crucial evidence, the firms audit papers. Auditors are

Enron was formed in 1986 by Ken Lay (“Enron Case Study”, n.d). It was an energy and service company based in Houston. “The early years of Enron were modest, and despite suffering financial woes and tremendous debt for several years, Enron survived.” (Rafraf & Haug, 2013). Enron was the 7th largest company on the Fortune 500 in the year 2000 with assets of $65 billion and revenue of over $100 billion (“Enron: Quality Assurance”, 2016, p 17). Despite of revenues in 2000, Enron filed for bankruptcy in 2001 affecting billions of shareholders. The Enron collapsed despite of being audited by one of the “Big Five” accounting firms called Arthur Anderson. What caused the Enron failure? What was Arthur Anderson’s role in Enron’s failure? Enron had

The auditing firm Arthur Andersen colluded with Enron management to cover up some facts about the company’s finacial statement. Also it was performing consulting services rather than its oversight function of

The Auditors: Arthur Andersen, LLP, was responsible for ensuring the accuracy of Enron’s financial statements and internal bookkeeping. Potential investors used Andersen’s repots to judge Enron’s financial soundness and future potential before they decided whether to invest. These investors expected that Andersen be independent and without any conflict of interest. If Andersen’s repots were in error, inventors could be seriously misled. However, Andersen was found guilty of obstruction of justice for destroying Enron-related auditing

The pressure on Andersen partners to generate fees was intense. Whenever an AA employee would voice concerns about suspected unethical accounting practices going on at Enron, they were reassigned to a different account. Eventually, the AA employees assigned to the Enron account knew not to ‘rock the boat’ because no one wanted to jeopardize losing the Enron account, or their job.

Over the years, the role of auditors become increasingly important especially in a capitalist economy as the process of wealth creation and political stability depends heavily upon confidence in processes of accountability and how well the expected roles are being fulfilled. An auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing. The most frequently debated areas amongst auditors, politicians, media, regulators and the public is where the fraud is coming from and by whom. This disagreement has been especially tinted by the collapse of big corporations like Enron and

Following the multitude of fraud scandals in the early 2000’s, such as Enron and WorldCom, many accounting firms found themselves as part of a thorough investigation to determine what exactly caused the sudden outburst of accounting fraud. As investors and creditors pursued their lost money from the these business failures, accounting firms began to garner attention for not fulfilling their due process during the audit to detect the fraud before it grew to the extent in which it did. In the case of the Enron scandal, it ultimately turned into the indictment and conviction of Arthur Anderson, one of

Numerous surveys in the 1980s have served to underline the significance and extent of fraudulent activities in the corporate sector (Humphrey and Turley, 1993, pp. 39-62). “The auditor has a duty to search for fraud and is expected to detect fraud by the exercise of professional skill and care” (Rittenberg and Schwieger, 2005).

Several years after Enron and its subsequent landmark regulation Sarbanes-Oxley, significant frauds in the corporate environment are still occurring. Throughout all of the major corporate frauds committed over the past 15 years, the underlying red flags and symptoms are the same. Internal controls are being overridden without regard, CEOs are manipulating the financial statements to meet analyst financial metrics and corporate cash coffers are being raided for personal use. Well respected audit and oversight firms are jeopardizing their reputations by consistently missing the obvious while C-level perpetrators are escaping harsh prosecution.