Accounting

accounting

2006 Arthur Andersen and Its Role in Accounting Scandals

There is an old remark saying that one evil action may lead to others evil actions , thus creating a series of criminal performances in to cover up the first evil action . This remark was true as it happened at Enron 's accounting scandals . The scandals highlight the improper conducts that violate internal control system and corporate governance ethics

The scandalous actions began when several executives of Enron was in agreement to conduct insider trading to enrich themselves . For some times

, this evil conduct was not identified but later , two external auditors discovered that there are unauthorized transfers of funds to the account of several managers within the company

After conducting a more thorough investigation , the two auditors found that several managers of Enron were performing insider-trading activities that involved stealing of large amount of money from the company since the transfer was not recorded in the Cash flow Statement of the company (Mclean , 2003

Interestingly , when Chief Financial Officer (CFO ) of Enron Corporation knew that the two external auditors had found the criminal actions , he persuaded the auditors to stop the investigation . The reason to stop the investigation was because the CFO revealed that people who performed illegal trading had contributed millions of dollars of income for the company . Thus , their violation was considered non-material compared to their contribution (Mclean , 2003

Unexpectedly , Arthur Andersen , who acted as consultant of Enron was agreed to provide fake financial report and further helped Enron to perform other illegal action such as the creation of offshore entities in to avoid taxes and raising profitability of businesses in certain sectors . These made-up companies provided Enron with full freedom of currency movement and full anonymity , which was potential for hiding losses the company

The action effectively created a bogus image of Enron as a company that continued showing profit as described in the financial statement However , the fake report created a spiral that required further and further financial scheme to hide the fact that the company was losing money

Therefore , in the case of Enron 's accounting scandals , besides Enron 's executives who performed dishonestly when it came to their financial statements , Arthur Andersen also played significant role in helping Enron to cover up certain financial information . Such illegal actions imply the need for any firms to keep a close watch on their auditors

Despite the fact that Arthur Andersen also contributed to the illegal action at Enron , a research performed by Weiss Ratings showed that out of the 33 companies that were cited for accounting irregularities in 2002 , approximately 94 percent of them were given a clean bill of health ' by their auditors and of these companies were warned of potential problems

Table 1 Result of 33 Audits

Auditing Firm Arthur Andersen 11 0 11

Deloitte Touche 5 0 5

Ernst Young 4 0 4

KPMG 5 0 5

Price Waterhouse Coopers 7 2 5

Tullis Taylor 1 0 1 Source : Taffera...