Arthur Andersen Chapter Four of Our Text

Arthur Andersen

Chapter four of our text explains the mandated requirements for legal compliance. The following requirements apply to the Arthur Andersen case. Certainly, accountants are very important in this mix because they are the watchmen for the system, making sure that the books are correct and transparent so that there will be confidence in the system by all of the stakeholders. The tragedy of Arthur Anderson (as well as in the present recession) is that the watchers have falsified the books. In the view of the author, transparency is a major component of faith in the financial system for all stakeholders. When auditing agencies act illegally and unethically, it shakes faith in the system and prevents the normal operation of capitalism because such uncertainty makes it virtually impossible to have normal business planning and day-to-day functioning.

Laws and incentives are instituted by governments to set minimum standards for business conduct in order to preserve faith in the system and to ensure that everyone has a fair chance to make an honest profit. This is the reason for audit companies such as Arthur Andersen. They can detect when corruption creeps in due to irregularities in the books (Institutionalization of business ethics, 2010,, 95). Outside of the accounting system, the civil and criminal law systems provide venues for facilitating compliance. Civil law lays out rights and duties and are enforced by lawsuits while criminal law prohibits certain actions (such as fraud) and provides for punishment measures (such as prison) for violations (ibid., 96).

Ethics and their maintenance is really not the purview of the legal compliance. Law is more concerned about determining the appropriateness of situation. In other words, the laws lay the groundwork for responsible business activities. These fall into five basic categories: 1) regulation of competition, 2) consumer protection, 3) promotion of safety and equity, 4) environmental protection, 5) compliance encouragement (ibid. 97).

Probably, companies such as Enron and Arthur Andersen would not have committed more unethical and illegal behaviors that deceived their employees and stockholders, although they were already engaged in 1999 in the scandal. Sarbanes? Oxley Act requires that companies be much transparent. To accomplish this, companies have to be audited by externally, such as an accounting firm. Sarbanes-Oxley Act at the time renewed the confidence of investors, provided greater protection to employee retirement programs and greater penalties for senior management, board members and auditors. Also, the act gave employees whistle-blower protection which likely would have motivated employees of a public company to report unethical behaviors or practices ("Sarbanes-oxley essential information," 2006).

However, these speculations are essentially for 1999 through the early 2000s. The most recent recessionary episode has pointed out the problems with the act. While transparency was certainly improved, enforcement was not. Hardly anyone has went to jail and one wonders what the use of laws against fraud and corruption are worth if they are not enforced ("Sarbanes-oxley/enron/2008 crisis," 2011).

Certainly, fraud and the falsification and hiding of incriminating information was at the heart of the Arthur Anderson case. The question really boils down to who was accountable and when. While Enron may have perpetrated one of the largest corporate frauds in American history up that time, it was Arthur Andersen that covered the tracks for Enron. The heart of this coverup a memo to destroy most of the documentation of Enron's true financial situation four days before energy giant disclosed a $618 million loss for the third quarter of 2001. An Arthur Andersen Oct. 12 memo directed the auditing company's workers to destroy all of the audit materials save for the basic "work papers." This brought about the mass destruction of thousands of e-mails and electronic and paper files that would have shed more light on the financial hemorrhaging and fraud going on within Enron (Kadlec, 2002).

What is clear is that this was normal procedure at Arthur Andersen. None of this happened in a background but was rather a culture of corporate corruption where the auditing company colluded with its clients to hide incriminating financial data that would otherwise destroy the bottomline. This memo could not have been a secret because supervisors at Arthur Andersen kept repeatedly reminding the employees about the document-destruction memo in those weeks that led up to the first series of Security and Exchange Commission subpoenas on Nov. 8, 2001 While there are no firm rules as to how long accounting documents need to be kept, quid pro quo collusion was definitely happening between Enron and Arthur Andersen to cover up fraud and corruption and its complex web of shell companies. Most affected were Enron employees who lost much or all of their pension plans. Herein lies the central ethical issue -- the compromise of the transparency of the accounting system which is the bed rock of the capitalist system. Without it, the system can not function to bad faith between the various stakeholders (ibid., ).

In the best of all possible worlds, we would like to think that everything would have been better at Arthur Andersen if only the senior management would have displayed the habits of strong ethical leaders. However, considering the impact of major corporate bankruptcies that were contemporary such as that of Pacific Gas & Electric (PG&E) in April of 2001. When that company went bankrupt, why was the accounting committee not taken to task as Arthur Anderson had? It had the same devastating effects on the U.S. And California energy markets as Enron (and contemporaneously no doubt) ("21 famous corporate," 2009). Certainly, were not Arthur Andersen's senior management acting the same way to protect one of its largest clients? Had they acted differently and not destroyed the documents, would more people really have went to jail or would there have been some whistle-blowers that could not now find work in their fields?