Arthur Andersen

Definition

Arthur Andersen was one of the largest and most prestigious accounting firms in the world, known for its auditing and consulting services. Its downfall came as a result of its involvement in the Enron scandal, which exposed significant ethical failures and raised questions about auditor independence and corporate governance practices.

5 Must Know Facts For Your Next Test

1. Arthur Andersen was founded in 1913 and became one of the 'Big Five' accounting firms, providing services to many high-profile clients.
2. The firm was heavily criticized for its role in the Enron scandal, where it was found to have destroyed crucial audit documents related to its work with the company.
3. Following the Enron collapse, Arthur Andersen lost most of its clients and ultimately ceased auditing public companies by 2002.
4. The scandal led to criminal charges against the firm, resulting in a conviction for obstruction of justice, although this was later overturned by the U.S. Supreme Court.
5. Arthur Andersen's downfall prompted widespread regulatory changes in the accounting industry, including the creation of new standards for auditor independence.

Review Questions

• How did Arthur Andersen's role in the Enron scandal illustrate challenges related to auditor independence?
  • Arthur Andersen's involvement in the Enron scandal highlighted significant challenges concerning auditor independence. The firm was found to have compromised its objectivity by prioritizing client relationships over ethical standards, leading to biased audits that failed to detect fraudulent activities. This situation raised critical questions about how auditors can maintain their independence while still serving their clients effectively.
• Discuss the impact of the Arthur Andersen case on regulatory reforms in accounting practices.
  • The downfall of Arthur Andersen had a profound impact on regulatory reforms in accounting practices. In response to the scandal, Congress passed the Sarbanes-Oxley Act in 2002, which established stricter regulations for auditors and improved corporate governance. These changes aimed to enhance transparency, ensure accurate financial reporting, and restore public confidence in financial markets after the collapse of such a major firm.
• Evaluate the ethical implications of Arthur Andersen's actions during its audits of Enron and how these actions influenced public perception of the accounting profession.
  • The ethical implications of Arthur Andersen's actions during its audits of Enron were significant, leading to a loss of trust in the accounting profession as a whole. By engaging in practices that prioritized profit over ethical standards—such as destroying key documents—Andersen not only violated professional ethics but also contributed to widespread financial losses for investors and employees. This scandal prompted a reevaluation of ethical standards within accounting firms and emphasized the need for greater accountability and integrity among auditors.

Related terms

Enron: A major American energy company that famously collapsed in 2001 due to accounting fraud, leading to significant legal repercussions for Arthur Andersen.

Auditor Independence:

The principle that auditors must remain objective and unbiased in their work, crucial for maintaining the integrity of financial reporting.

Sarbanes-Oxley Act:

A U.S. law enacted in 2002 aimed at protecting investors by improving the accuracy and reliability of corporate disclosures following the Enron scandal.