...Arthur Andersen: Questionable Accounting Practices Steven Young Strayer University Business Ethics: Ethical Decision Making and Cases Dr. Mary Tranquillo November 13, 2012 Arthur Andersen: Questionable Accounting Practices p1 Arthur Andersen, one of the largest accounting firms in the United States, “a name that was synonymous with trust, integrity, and ethics” (Ferrell, Fraedrich, & Ferrell, 2011, p. 348), through a loss of its founder Arthur Andersen, and change in its corporate culture resulting in many unethical business transactions that affected multitudes of primary stakeholders had to close its doors in 2002 after 90 years of business. Review the mandated requirements for legal compliance (from chapter 4) and determine which requirements apply to the Arthur Andersen case. Explain your rationale After re-reading Chapter 4 there are five areas that separate the mandated requirements for legal compliance, and I feel the that two apply to the Arthur Andersen case; the protection of consumers, and incentives to encourage organizational compliance programs. In the laws that protect consumers they require businesses to provide accurate information protecting them from financial scams, unfair, fraudulent, or deceptive practices. There are “Gatekeepers” that are in charge of that such as lawyers, financial rating agencies, and financial reporting services that help enforce high ethical standards. This...
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...Halliburton A question of accounting policy and auditing responsibility I. Halliburton’s background After being founded in 1919, Halliburton has asserted its dominance over the oilfield services industry. It is one of the world’s largest providers of such products and services, and the company employs over 75,000 people. Its presence in the international market is supported by its locations in 80 countries and diverse workforce from 140 nationalities. Halliburton has one of the world’s largest selections of oilfield products and services due to its massive corporate size and healthy portfolio of subsidiary holding, construction, oilfield, and many other companies (Halliburton). Accountants at Halliburton have dealt with a plethora of judgment calls regarding how exactly to record transactional events. Issues like job order costing, prepaid assets, subcontracting, and future economic benefits from land only begin the list. Difficulties in accounting are inherent in massive conglomerate corporations with unprecedented situations. What executives may have overlooked is the importance of stringent and professional accounting. Not only are Halliburton’s financial statements relied upon by investors, but also the SEC and a number of other interested parties. II. Scandal From 1946 to 2002, the auditing firm Arthur Andersen, LLP provided a variety of attestation and consultation services to Halliburton. A major duty of Arthur Andersen was to audit published financial...
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...case of Arthur Andersen’s decent, compromises were made that in the end destined the accounting firm to cease to exist (Parrino, Kidwell, & Bates, 2012, Ethics Case). The learning team’s discussion surrounded the blatant conflict of interest, greed and the breach of fiduciary duties of the firm to provide objective evaluation of its accounting practices and independence from its clients. Greed Joe and Jeffery pointed in there reflections the change of the market during the 1980’s resulted in a boom of mergers and acquisitions, and additionally the consulting practice of the firm experienced an extreme growth. Andersen partners began realizing the potential in profits from consulting contracts as companies were on a spending spree. Eventually, its auditing services was no longer the main source of revenue for the firm Soon tension started between the two groups which lead to some of the auditors forming their own auditing firm. Auditors remaining with Anderson were now forced to sell consulting services to clients to gain market share in the consulting business through their audit clients. This and other tactics was the first of many decisions that contributed to unethical business strategies. One of Anderson’s largest accounts was Enron. $52 million in fees were received from Enron, 50% of which were for auditing, and 0% for consulting. Enron went bankrupt in 2001 after accounting regularities were discovered. The use of questionable accounting practices made the...
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...three hundred and eleven percent. It was a company to be a part of, making millions and owning a good majority of the United States, until October 2001. The company was using accounting limitations to misrepresent earnings and modify the balance sheet to make the company look like it was doing better than it actually was. Over the years of doing these fraudulent things was what brought the company crashing down! Enron’s accounting firm seem to have been reporting income and reported cash flow up, asset values inflated, and liabilities off the books, which later led to Enron filing bankruptcy. Enron always seemed to find ways to hide their debt, they would make up inventory that wasn’t there and accounts that they didn’t have. It was quite sad; I don’t understand how they were able to get away with it for so long. Enron had many fraud inquiries set-up for their employees and internal control to look for. They had a sophisticated financial risk management tools set-up, it was crucial to Enron because of its business plan. Enron’s aggressive accounting practices were not hidden from the board of directors. Enron’s auditor, Arthur Andersen, who was accused of applying reckless standards in their audits because of conflicts of interest over the significant consulting fees. Arthur Andersen firm,...
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...Company’s History WorldCom, a long distance discount telephone service, was founded by Bernard Ebbers in 1983. Bernard Ebbers became the CEO in 1985 and the company went public in 1989. Bernard Ebbers was also listed in Forbes as one of the richest men in the U.S. At its peak, WorldCom had about 20 million customers and 80,000 employees and was the second largest long distance carrier in the U.S. WorldCom grew largely by aggressively acquiring other telecommunication companies like MCI Communications. WorldCom also owned UUNET, who controls over 50% of the wires that internet service providers use to carry internet traffic all over the world. Even before the fraud began, the company was already going through financial difficulties due to a large amount of debt and declining revenue. Its $40 billion merger with MCI was the largest in history. They tried to merge with Sprint in mid-2000 but the U.S. Justice Department did not approve. How was the fraud perpetrated? The fraud was not perpetrated in lower levels of the organization. Upper management improperly booked $3.8 billion as capital expenditures, boosting cash flow and profit over 5 quarters, disguising an actual net loss for 2001 and the first quarter of 2002. WorldCom’s management did not account for expenses when it incurred them, instead hiding expenses by pushing them into the future. This made it seem as if they were spending less and making more money. This caused investor confidence to rise, and the stock...
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...Enron Corporation John and Mary Andersen immigrated to the United States from their native Norway in 1881. The young couple made their way to the small farming community of Plano, Illinois, some 40 miles southwest of downtown Chicago. Over the previous few decades, hundreds of Norwegian families had settled in Plano and surrounding communities. In fact, the aptly named Norway, Illinois, was located just a few miles away from the couple’s new hometown. In 1885, Arthur Edward Andersen was born. From an early age, the Andersens’ son had a fascination with numbers. Little did his parents realize that Arthur’s interest in numbers would become the driving force in his life. Less than one century after he was born, an accounting firm bearing Arthur Andersen’s name would become the world’s largest professional services organization with more than 1,000 partners and operations in dozens of countries scattered across the globe. Think Straight, Talk Straight Discipline, honesty, and a strong work ethic were three key traits that John and Mary Andersen instilled in their son. The Andersens also constantly impressed upon him the importance of obtaining an education. Unfortunately, Arthur’s parents did not survive to help him achieve that goal. Orphaned by the time he was a young teenager, Andersen was forced to take a fulltime job as a mail clerk and attend night classes to work his way through high school. After graduating from high school, Andersen attended the University of Illinois...
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...Enron Corporation John and Mary Andersen immigrated to the United States from their native Norway in 1881. The young couple made their way to the small farming community of Plano, Illinois, some 40 miles southwest of downtown Chicago. Over the previous few decades, hundreds of Norwegian families had settled in Plano and surrounding communities. In fact, the aptly named Norway, Illinois, was located just a few miles away from the couple’s new hometown. In 1885, Arthur Edward Andersen was born. From an early age, the Andersens’ son had a fascination with numbers. Little did his parents realize that Arthur’s interest in numbers would become the driving force in his life. Less than one century after he was born, an accounting firm bearing Arthur Andersen’s name would become the world’s largest professional services organization with more than 1,000 partners and operations in dozens of countries scattered across the globe. Think Straight, Talk Straight Discipline, honesty, and a strong work ethic were three key traits that John and Mary Andersen instilled in their son. The Andersens also constantly impressed upon him the importance of obtaining an education. Unfortunately, Arthur’s parents did not survive to help him achieve that goal. Orphaned by the time he was a young teenager, Andersen was forced to take a fulltime job as a mail clerk and attend night classes to work his way through high school. After graduating from high school, Andersen attended the University of Illinois...
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...enron corporation John and Mary Andersen immigrated to the United States from their native Nor-way in 1881. The young couple made their way to the small farming community of Piano, Illinois, some 40 miles southwest of downtown Chicago. Over the pre-vious few decades, hundreds of Norwegian families had settled in Piano and sur-rounding communities. In fact, the aptly named Norway, Illinois, was located just a few miles away from the couple's new hometown. In 1885, Arthur Edward An-dersen was born. From an early age, the Andersens' son had a fascination with numbers. Little did his parents realize that Arthur's interest in numbers would become the driving force in his life. Less than one century after he was born, an accounting firm bearing Arthur Andersen's name would become the world's largest professional services organization with more than 1,000 partners and op-erations in dozens of countries scattered across the globe. think straight, talk straight Discipline, honesty, and a strong work ethic were three key traits that John and Mary Andersen instilled in their son. The Andersens also constantly impressed upon him the importance of obtaining an education. Unfortunately, Arthur's par-ents did not survive to help him achieve that goal. Orphaned by the time he was a young teenager, Andersen was forced to take a full-time job as a mail clerk and attend night classes to work his way through high school. After graduating from high school, Andersen attended the University of Illinois...
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...Role in the Downfall Of Arthur Anderson LLC and Sunbeam Corporation Darrell V. Davis Grand Canyon University Bus 604 Business Ethics July 5, 2009 Abstract Corporate culture plays an extremely important role in the development of a company. Whether explicitly stated or not, the culture of a company reveals its attitude, motivation, and intentions. Arthur Andersen’s and Sunbeam’s cultures revealed that they were on the hunt for huge profits at the expense of independence and sound financial reporting, respectively. They instituted accounting practices that they knew pushed the envelope of, if not legality, acceptability. In fact, they were bedfellows in Sunbeams accounting methods. With each of the company’s histories, they had the resources to make better decisions regarding their actions. Yet, it appears they ignored their responsibility to the public in order to garner the highest gain. Arthur Andersen LLP Arthur Andersen LLP, with its ninety year history, for a long while stood as one of the most well respected, influential, high-earning, and ethical accounting firms in the world. Yet, with the rise of its consulting services, several apparent oversights, the demise of a number of its clients, and questions of the firms relationships with clients; the company came under attack from investors of its clients, regulators, and courts. Without a valid defense, based simply on its profession and who the company was suppose to defend, Andersen found itself answering...
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...* Enron Questionable Transactions Question 1 The question which segment of its operations got Enron into difficulties is simple to answer, everything. Almost every all segments of their operation were improper. First of all, they practice unethical and dishonest practices which victimized workers, consumers, taxpayers and stockholders. Enron created partnerships within their own organization which led to them creating new financial instruments, called SPE’s (special purpose entities) which was used to falsify the accounting. The improper financial reporting was to make the company look good, instead of assuring that the figures are accurate and reliable. Enron's legal department wrote up contracts that were irregular. Enron executives were so focused on the pursuit of profits, regardless of economic fundamentals. Enron had excesses of difficulties and they also cause their law firm and accounting firm to become involved in a web of dishonesty. Question 3 All of Enron’s directors were involved in the dishonest scheme and they understood how profits were not honorable. One of the directors, Andrew Fastow who was responsible in creating many of the partnerships such as JEDI, Chewco, Kopper & Dodson’s and Dodson Companies knew exactly how the profits were being made along with several other directors such as Ben F. Glisan, Jr., Jeffrey K. Skillings who was on the board of directors. These directors were all part of a financial scheme to continue to...
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...corporation after it went bankrupt. I believe that Kenneth Lay, former Enron CEO, and Jeffrey Skilling behaved in an unethical manner without any form of justification, but the whistleblower, former Enron vice president Sherron Watkins, acted in a way that upheld moral and ethical principles. There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. The senior executives believed Enron had to be the best at everything it did and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures What is legally permissible today, but morally questionable, may well become legally proscribed tomorrow. Thus, it is important for managers to proactively understand and attend to the multiple dimensions and moral antecedents of illegal activity (Paine 1994). Integrity capacity is the individual and collective capability for the repeated process alignment of moral awareness, deliberation, character, and conduct that demonstrates balanced judgment, enhances ongoing moral...
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...Nobody Won Michelle L Brown Oklahoma Wesleyan University Abstract When the Arthur Andersen LLP/Enron scandal surfaced in 2001, there was much confusion as to whom committed what crime and how many employees were actually involved. After the facts and criminal charges were final, the sequence of events makes sense; the union of two companies, the rise of the participating executives, and finally the end of the money ride. The leaders of both companies used dishonesty to make an abundant amount of money and gain power status (Thomas 2002). Christopher Bergland said it best when he wrote, “Karma is a boomerang and the long-term shame and anxiety of cheating will ultimately negate the short-term gains of victory,” (Bergland, 2012). This definitely held true for the employees who were disgraced at the conclusion of the legal proceedings; they may have had more money than they needed, but they ultimately lost in the end. The Beginning The joining between Arthur Andersen LLP and Enron was a marriage too good to be true (Thomas, 2002). The relationship started in 1986 when Enron hired the accounting firm Arthur Andersen LLP to perform “creative accounting,” allowing the energy company to appear more powerful on paper than it really was (Investopedia, 2011). Enron Corporation started investing massive amounts of money in “Special Purpose Entities” to generate huge amounts of revenues. Special Purpose Entities are creative ways for companies to more efficiently raise debt, but...
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...profit records each successive year during this period. In fact, in both 1980 and 1981 the company’s actual net income eclipsed the figure reported by the company. In 1980, Oaks top executives became concerned that the company could not indefinitely sustain its impressive growth rate in annual profits. To help the company maintain this trend, the executives began creating reserves that could be used to boost reported profits in later years. To report a smooth upward earnings trend and to provide a "cushion" of profits to be used in periods of lower actual earnings, Oak implemented a policy during 1980 and 1981 of establishing unneeded reserves to be released (reversed) in later periods, if needed.1 1. Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 63, 25 June 1985. 80 EXHIBIT 1 Oak Industries, Inc., Selected Financial Data, 1978-1981 Oak Industries, Inc. These “rainy day reserves” included overstatements of the company’s...
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...Ebbers was named CEO the following year. Through acquisitions and mergers, LDDS grew quickly over the next 15 years. The company changed its name to WorldCom, achieved a worldwide presence, acquired telecommunications giant MCI, and eventually expanded beyond long distance service to offer the whole range of telecommunications services. WorldCom became the second-largest long-distance telephone company in America, and the firm seemed poised to become one of the largest telecommunications corporations in the world. Instead, it became the largest bankruptcy filing in U.S. history at the time and another name on a long list of those disgraced by the accounting scandals of the early 21st century. ACCOUNTING FRAUD AND ITS CONSEQUENCES Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002. This disguised the firm’s actual net losses for the five quarters because capital expenditures can be deducted over a longer period of time, whereas expenses must be subtracted from revenue immediately. WorldCom also spread out expenses by reducing the book value of assets from acquired companies and simultaneously increasing the value of goodwill. The company also ignored or undervalued accounts...
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...Case Study: Lincoln Savings and Loan Association In 1978, Charles Keating, Jr. began focusing his time and energy on his business endeavours when he founded the real estate firm, American Continental Corporation (ACC). Six years later, ACC acquired Lincoln Savings and Loan Association, which was headquartered in Phoenix, although its principal operations were in California. In his application to purchase Lincoln, Keating pledged to regulatory authorities that he would retain the Lincoln management team, that he would not use brokered deposits to expand the size of the savings and loan, and that residential home loans would remain Lincoln's principal line of business. After gaining control of Lincoln, Keating replaced the management team; began accepting large deposits from money brokers, which allowed him to nearly triple the size of the savings and loan in two years; and shifted the focus of Lincoln's lending activity from residential mortgage loans to land development projects. On 14 April 1989, the Federal Home Loan Bank Board (FFILBB) seized control of Lincoln Savings and Loan, alleging that Lincoln was dissipating its assets by operating in an unsafe and unsound manner. On that date, Lincoln's balance sheet reported total assets of $5.3 billion, only 2.3 percent of which were investments in residential mortgage loans. Nearly two-thirds of Lincoln's asset portfolio was invested directly or indirectly in high-risk land ventures and other commercial development projects. At...
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