Arthur Anderson: Questionable Accounting Parctices Arthur Anderson:

Arthur Anderson: Questionable Accounting Parctices

Arthur Anderson: Questionable Accounting Practices

Arthur Andersen LLP was founded in 1913, and for over 90 years, the company would have become one of the "Big Five" largest accounting and auditing firms in the United States with the same standard comparable to PricewaterhouseCoopers, Deloitte & Touche, KPMG and Ernst & Young. In the 80s, Arthur Anderson name was synonymous with integrity, trust, and ethics. Such values are critical to the success of firms charged with auditing and firms confirming a company's financial statement, whose accuracy of a company's financial statements generally influence investor's investment decision. (Ferrell, Linda, 2012).

In the 1990s, Arthur Anderson became one of the fastest growing accounting and auditing firms in the United States with huge financial success during the period. However, starting from 2001, the company faced several lawsuits for accounting irregularities. In May 2001, "the company paid $110 million to settle claims brought by Sunbeam shareholders for accounting irregularities and $100 million to settle Waste Management shareholders over similar charges a month later." (Ferrell, Linda, 2012 P. 365).

Objective of this report is to review mandated requirement for legal compliance and determines how the requirements apply to Arthur Anderson case.

1. Reviewing the Mandated Requirements for Legal Compliance

Among the mandated legal requirements are

Laws Regulating Competition

Laws Protecting Consumers

Laws Promoting Equity & Safety

Laws to Protect the Environment protection of consumer safety as well as environmental protection.

Protection of workers within an organization

Reduce risk and promote ethical culture within an organization.

Incentives to encourage organizational in respecting to compliance program.

One of the legal mandated requirements for legal compliance related to Arthur Anderson is the issue of laws for consumer protection. Laws relating to consumer protection require business to deliver accurate information about their products and services as well as following safety standards. For example, Consumer Product Safety Act, of 1972 "Created the Consumer Product Safety Commission to establish safety standards and regulations for consumer products" (Ferrell, Linda, 2012 P. 98).

However, Arthur Anderson failed to protect its consumers in relating to the accounting services delivered. In 2001, Sunbeam shareholders filed a case against Arthur Anderson for accounting irregularities, which forced the company to settle a claim of $110 million. A month later, the company settled $100 Million for shareholders of waste management over similar charge. With several cases files against Arthur Anderson, it was revealed that Arthur Anderson did not protect its consumer. (McGlynn, 2010).

A mandated legal requirement reveals that private and public organizations must prepare accounting and financial statements in accordance to GAAP (Generally Accepted Accounting Principles), and auditing and accounting firms must deliver objective expression of opinion on the fairness of an organization financial statements with respect to a company statement of income, balance sheet and statement of cash flow. An accounting firm should express its opinion whether its client financial statement conform to GAAP. (McGlynn, 2010).

However, Arthur Anderson failed to protect consumer interest and many of the Arthur Anderson business conducts were unethical leading to the collapse of the company. For example, Enron Corporation was one of the biggest client of Arthur Anderson and "on November 8, 2001, Enron was forced to restate five years' worth of financial statements that Andersen had signed off on, accounting for $586 million in losses. Within a month, Enron had ?led for bankruptcy." (Ferrell, Linda, 2012 P. 367).

2. Effect of Sarbanes-Oxley Act on Arthur Anderson Case

The U.S. government enacted Sarbanes-Oxley (SOX) Act in 2002 after the collapse of Enron, which shook the U.S. financial community. SOX act established a new direction and guideline that corporate community should follow with regard to corporate and accounting responsibility. The act was specially created to combat accounting and security frauds that rocked the U.S. Corporate community in early 2000s. If SOX Acts were created in 1999, it would have prevented Arthur Anderson from indulging in many of its unethical practices in the late 1990s and early 2000s. For example, Section 104 of SOX Act would have forced the Arthur Anderson to properly verify the accuracy of financial statements of its clients. Typically, Section I04 prevents illegal and questionable accounting practice, and Section 104 of SOX Act would have prevented Arthur Anderson from covering the improper financial statements of Enron Corporation, and other similar companies. By following the rules and regulations laid by SOX, Arthur Anderson would have avoided several cases that forced the company to pay for the damages running into several million of dollars. Moreover, SOX Section 204 would have prevented companies that Arthur Anderson audited their financial statements from publishing misleading financial statements.

3.Determination and Discussion of the which Elements of the Framework for Ethical

Decision

The elements of ethical decision making that that has a strong influence in the Arthur Anderson case are

"Ethical Leaders Have a Passion to Do Right"

"Ethical Leaders Are Proactive" and "Ethical Leaders Consider Stakeholders' Interests" (Ferrell, Linda, 2009 P. 141).

The passion to do right holds ethical concept together and courageous leaders are required to make right ethical decision at all times. Overview of the Arthur Anderson case revealed that the company did not have ethical leaders who had the passion to do the right things. Virtually all the leaders in Arthur Anderson were unethical who believed in unethical business behaviors.

Moreover, Arthur Anderson did not have pro-active ethical leaders. Pro-active ethical leaders will not allow ethical problem to escalate before they act. Ethical leaders plan, anticipate and act proactively to avoid ethical crisis. Finally, Arthur Anderson did not have ethical leaders who took the interest of stakeholders into considerations. The case of Arthur Anderson revealed that the leaders within the organization did not take the interest of stakeholders into considerations. Typically, the Arthur Anderson unethical deal with Enron had made thousand of shareholders to lose their money and several thousands of people to lose their jobs.

4.Discussion of the situations at Arthur Anderson if senior management had strong ethical leaders