Accounting Ethics a Sad Tale: The Demise

Accounting Ethics

A Sad Tale: The Demise of Arthur Andersen

Arthur Anderson was once a major accounting firm. The failure of the firm in 2002 may be attributed to bad ethical decisions which ultimately came to a head with the Enron scandal,. This scandal resulted not only in the loss of many clients prior to the SEC talking action against the firm, but the firm facing and being convicted of a felony. This was the end of the firm; even if the firm was able to survive, it is unlikely any companies would want to be associated with an accounting firm that demonstrated such significant failures.

When examining the failures at Arthur Andersen it may be argued the problems were well established and embedded in the culture, a failure which can ultimately be attributed to the organization's leadership. A major ethical issue for any auditing company is the requirement for independence. It is well established within legislation that despite being employed by the company board of directors, and auditors' principal responsibility is to the investors and creditors (Elliott and Elliott, 2011). Professional regulations have been put into place in order to prevent a conflict of interest, and ensure the independence of auditors and their ability to report on the financial condition of the firms that they audit. The importance of independence is difficult to overstate, where auditing firms are too close to the Board of Directors there may be undue influence which will impact on the way auditing and the subsequent reporting takes place. It appears that a core aspect of the ethical problems at Arthur Andersen was a systematic and potentially long-term failure to protect and maintain independence.

The problems did not occur suddenly, there were warning signs over a decade before the Enron Scandal. In the 1980's as the market for accounting advice and services became more complex, and there was an increase in the level of consultancy services, the firm started to face a conflict of interests; the clash between consulting services and auditing services. Even if there were effective Chinese walls in place, it is apparent that a firm providing auditing services may be compromised if the results of the audit may endanger significant constancy fees. The firm had increased the consultancy fees to the extent there were internal conflict regarding the split of profits; the focus was on revenue creation and profit with ethical issues remaining unacknowledged.

When the consulting arm of the firm split off, becoming Accenture, Arthur Andersen had the potential to return to the core activity and avoid potential conflicts of interest. However, the lure of profits from consulting were too great, not only did the firm start to pursue constancy work, they were even excepting partners to promote the consultancy services; a task they felt uncomfortable with. Despite this, the strategy was pursued.

There were further warning signs with both the Colonial Reality and Sunbeam Waste Management scandals of the 1990's. However, looking at some of the issues associated with Enron, it appears that no lessons were learned.

There is little doubt that Arthur Andersen become too close to Enron, leading to the compromising of the auditing services. Enron were a major consulting client, they produced $56 million in revenues for Arthur Andersen, 50% of these were from consulting. The issue was not only the level of involvement, but the proximity of the Arthur Andersen staff; all 100 staff, and their team leader, all worked out of Enron's Huston office. In addition to this many former Anderson employees now worked at Enron; approximately 300 in number. This created an almost incestuous relationship, where there was a skewing of the culture, reflecting the closeness that had developed in a relationship where there was meant to be independence.

There was the opportunity for Andersen to prevent this situation arising. It may be argued that the first opportunity was in the way that the consulting services were set up. It may be naive to argue the company should not have re-established consulting services due to potential conflicts of interest, as there was a desire to increase profits. However, it maybe argued that the way in which the consulting services were pursued, with the expectation of the accounting partners to effectively act as salespeople, which started to create a foundation for compromised ethics (Jickling, 2002). As even before there was a conflict of interests, partners were being asked to compromise their own ethics; this ongoing issue demonstrated that the senior partners were not listening to those who worked for them.