Enron and Arthur Andersen: The Case of the Crooked E and the Fallen A. 29 . relations and national defense, many persons outside the US assume the federal Regulation of financial reporting and auditing in the US falls into three areas. The demise of Arthur Andersen and Enron was significant. Thousands of relationship would become the demise of the firm and its client, Enron. Enron was . Arthur Andersen LLP, based in Chicago, was an American holding company. Formerly one of By the s, standards throughout the industry fell as accountancy firms struggled to balance their commitment professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring.
While Andersen was attempting to pick up the pieces of their business, Paul Volcker, former Federal Reserve Chairman, presented a plan for a restructuring of Andersen so that they would have a chance of surviving this incident. Andersen did eventually agree to the restructuring, but it was too late to save the firm as a whole Alexander. Anderson still exists as a company, although their only reason for doing so is to complete all the litigation against the firm.
How The Arthur Anderson And Enron Fraud Changed Accounting Forever | Benzinga
They are no longer auditing or consulting. Anderson was the major accounting influence in this incident, however they were not the main player. Enron became more and more arrogant as time passed. Most of the debts and tangible assets of the company were on the balance sheets of partnerships that were run by high-ranking officials within the corporation Zellner.
With this kind of strategy for business the company quickly began to falter. Finally on December 2, Enron filed for bankruptcy Zellner. In the end Enron fared no better than other companies that perpetrate this kind of activity. This description is what really happened, but how these events were displayed to the public is a different story.
In early Jim Chanos, the person who runs Kynikos Associates, was the first to say what everyone can now see -- Enron had absolutely no way to earn money. The parent company had become nothing but a hedging entity for all of its subsidiaries and affiliates. This kind of a decrease in one year is unheard of in the utilities industry. Chanos went on to point out how Enron was still aggressively selling stock, even though management understood that there was very little to back up the shares that they were selling.
Chanos was also the first person to take notice of and publicly identify the partnerships where Enron was hiding some of its debt McLean. Thanks to Jim Chanos the public was made aware of what was going on, and actions have been taken to implement changes to prevent a similar instance in the future.
Changes Since these events have taken place, see exhibit 1, many changes have come about within the accounting industry. Still other changes have come from the government and government agencies or have just naturally evolved with time.
SAS 96 became effective January of and dealt with the record retention policies of accounting firms. Also several new regulations were added.
SAS 96 contains a list of factors that auditors should consider when attempting to determine the nature and extent of documentation for a particular audit area and procedure. It also requires auditors to document all decisions or judgments that are of a significant degree SAS For example, a decision of a significant degree would be an auditor approving a client not using GAAP for a portion of their financial statements.
These changes appear to be a direct result of the paper shredding that went on at Arthur Andersen immediately after the Enron bankruptcy. SAS 98 makes a lot of revisions and amendments to previous statements.
All of these changes would appear to be related to problems that were discovered in the Andersen audit of Enron. Many accounting firms and independent CPAs reacted to these events and implemented changes in procedure voluntarily. These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal.
This distancing was also due to the major changes mandated to Andersen as a way to get back on their feet after the scandal broke, and the other firms were afraid that these changes would be forced on them as well Schroeder. This scandal also caused many major companies who had used Andersen as their auditor in past years to hire auditors to go over past years audits double checking all of the audit work that could be double checked. This cloud of doubt also extended to companies that Andersen gave qualified audit reports or consulting advice to.
Leaders of many blue-chip firms were very concerned by this scandal, and they met to discuss plans for future changes. At the end of these meetings, it was decided that a new oversight committee should be proposed and that these companies were the people to propose such an idea. This idea would set up a committee sponsored completely by the SEC. The members of this committee were to be completely independent of the public accounting firms Bryan-Low.
The oversight committee mentioned was never instated because the current public oversight committee dissolved itself only a short time after this proposal was made, as they felt they had let down the community and the industry.
The government reacted aggressively when they became aware of the Enron scandal, and a flurry of legislation and proposals emanated from Congress and the SEC about how best to deal with this situation. President Bush even announced one post-Enron plan. This plan would also include higher levels of financial responsibility for CEOs and accountants.
By far the biggest change brought about is the Sarbanes-Oxley Act Ditman. Sarbanes-Oxley also brought with it new requirements for disclosures. These requirements included reporting of transactions called reportable transactions.
These transactions are broken down into several categories, which impact every aspect of a business. One of these categories is listed transactions-which are by far the worst. They are transactions that are actually written out in a list, each one pertaining to one specific situation. Another is transactions with a book-to-tax difference of more than ten million dollars. There are several others, however these two will have the greatest effect.
Accompanying these requirements are strict penalties if these transactions are not reported and discovered later. This act will mean significant additional work for accountants over the next several years. One such meeting had David Walker, Comptroller of the United States, discussing his beliefs as to where serious problems existed. The four major areas outlined in his discussion were corporate governance, independent audit of financial statements, oversight of the accounting profession, and accounting and financial reporting issues GAOT.
This discussion sparked the bringing several GAO accountants and heads of business into Congress committees for advice and to get feedback for proposed ideas.
The other large meeting was held to discuss the Sarbanes-Oxley act that was put before Congress. These were the two main changes emanating from the Government Accounting Office. Another big change that came from the Enron bankruptcy filing was a new push to separate auditing services from consulting services. This last effort was to sell off their consulting service.
Concordantly, the consulting arm was relatively new to the company. Realistically, few think that the big firms will be able to dissuade the SEC from actually implementing such a rule Brown.Bigger than Enron
Many companies who use auditors believe that this is not the answer, because of the fact that it will cause them to hire one firm to do auditing work, and another to do non-audit work like taxes and other filings Solomon.
In an attempt to not get damaged by any imminent government action, many business-including Disney and Apple Computer Inc-have already begun splitting their audit and non-audit work between different firms. Harvey Pitt, current SEC Chairman, does not believe that such a drastic change is called for, and instead is pushing for not allowing external auditors to perform internal audits for companies, and that all other non-audit work be approved by the SEC and board audit committees before the work is done Byrnes.
This controversy has long outlasted both companies involved in the actual debacle, and will continue until specific actions are taken. These events have also allowed the world of academia to make many influential changes to curriculums, without adding or dropping classes.
These changes include a new emphasis on accounting ethics and on special purpose entities.
Arthur Andersen and Enron
Ethics have always played an important role in the accounting industry. However, in recent years ethics education within accounting classes had fallen by the wayside as audit failures continue to stack up, and accountants are viewed as at least partially to blame.
Several professors of accounting at several different colleges across the United States have redoubled their efforts to include ethics in their teachings at every level, from principles to advanced. Special purpose entities are not something that have been highly discussed in many accounting classes up to this point in time. However, in light of the tax shelter abuse perpetrated by Enron, many professors are now finding it necessary to begin to explain these entities and their uses to their students.
In Singapore, there has been a push to have banks and other lenders rotate their auditors. The controlling government agency, Monetary Authority of Singapore MASis attempting to make it necessary for all listed companies to rotate their auditors every five years. Several other countries where the remaining big four practice are now also looking into such restrictions and changes to protect their citizens.
The effects of the debacle are not merely restricted to the United States; indeed they are felt throughout the business world. Positive Nature of the Changes The changes that have been made, are being made, and will be made, all will have a positive impact on the accounting industry. These changes, some implemented by accounting companies and agencies, some by the government and governmental agencies, and others by outside sources, will require more work from accountants, but will in the long run improve many factors within the industry.
Andersen Consulting saw a huge surge in profits during the decade. The consultants, however, continued to resent transfer payments they were required to make to Arthur Andersen. Industry analysts and business school professors alike viewed the event as a complete victory for Andersen Consulting. AABC grew quickly, most notably its healthcare and technology practices.
The Powers Committee appointed by Enron's board to look into the firm's accounting in October came to the following assessment: Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm.
Nancy Temple in the firm's legal department and David Duncan lead partner for the Enron account were cited as the responsible managers in this scandal because they ordered subordinates to shred relevant documents.
Securities and Exchange Commission will not accept audits from convicted felons, the firm agreed to surrender its CPA licenses and its right to practice before the SEC on August 31, —effectively putting the firm out of business. It had already started winding down its American operations after the indictment, and many of its accountants joined other firms.
The damage to Andersen's reputation also destroyed the firm's international practices.
How The Arthur Anderson And Enron Fraud Changed Accounting Forever
Most of them were taken over by the local firms of the other major international accounting firms. The indictment also put a spotlight on the firm's faulty audits of other companies, most notably Waste ManagementSunbeamthe Baptist Foundation of Arizona and WorldCom.
The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the biggest bankruptcy in history and has since been passed by the bankruptcies of Lehman Brothers and WaMu in the financial crisis led to a domino effect of accounting and corporate scandals. United Statesthe Supreme Court of the United States unanimously reversed Andersen's conviction because of serious errors in the trial judge's jury instructions.
The court found that the instructions were worded in such a way that Andersen could have been convicted without any proof that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The opinion, written by Chief Justice William Rehnquistalso expressed skepticism of the government's concept of "corrupt persuasion"—persuading someone to engage in an act with an improper purpose without knowing that the act is unlawful.
Demise[ edit ] The ruling theoretically left Andersen free to resume operations. However, CNN reported that by then, Andersen was "nearly defunct," with about employees remaining from a high of 28, in Ownership of the partnership has been ceded to four limited liability corporations named Omega Management I through IV. Charles, Illinoisuntil day-to-day management was turned over to Dolce Hotels and Resorts inbut Andersen retains ownership.
Migration of partners and local offices to new firms[ edit ] Many partners formed new companies or were acquired by other consulting firms. Perot Systems which absorbed six partners in the East Protiviti hired approximately former workers SMART Business Advisory and Consulting which absorbed some of the Philadelphia office jcba Limited which was founded by a partner from the aviation practice   Grant Thornton International which absorbed the North Carolina, South Carolina, and Tulsa offices.