Arthur Andersen

Definition

Arthur Andersen was one of the largest audit and consulting firms in the world, known for its role in the accounting industry. The firm gained notoriety in the early 2000s for its involvement in the Enron scandal, where it was found to have engaged in unethical practices and collusion with clients to hide financial losses. This led to its downfall and subsequent dissolution, highlighting the consequences of poor ethical standards in accounting and the concept of big bath accounting.

5 Must Know Facts For Your Next Test

1. Arthur Andersen was founded in 1913 and grew to become one of the 'Big Five' accounting firms.
2. The firm's involvement in the Enron scandal resulted in a conviction for obstruction of justice, leading to its loss of license to practice as an auditor.
3. As a consequence of its collapse, thousands of employees lost their jobs, and clients were left scrambling for new auditors.
4. The Enron scandal and Arthur Andersen's downfall sparked significant changes in accounting regulations and practices, particularly around auditor independence.
5. The Sarbanes-Oxley Act was enacted in 2002 as a direct response to the failings exposed by the Enron scandal and aimed to restore public confidence in financial reporting.

Review Questions

• How did Arthur Andersen's actions during the Enron scandal exemplify issues related to big bath accounting?
  • Arthur Andersen's actions during the Enron scandal highlighted significant issues related to big bath accounting by allowing Enron to manipulate its financial statements through questionable practices. By taking substantial write-offs and hiding losses, Enron aimed to present a more favorable financial picture in subsequent periods. This not only misled investors but also raised ethical concerns about the role of auditors like Arthur Andersen, who failed to uphold integrity and transparency in financial reporting.
• Evaluate the impact of Arthur Andersen's collapse on the public's perception of the accounting industry and regulatory frameworks.
  • The collapse of Arthur Andersen significantly tarnished public perception of the accounting industry, leading many to question the reliability of financial statements and the integrity of auditing firms. This event triggered calls for stricter regulations, resulting in legislative changes like the Sarbanes-Oxley Act. The Act aimed to enhance corporate governance and accountability, reshaping how audits are conducted and reinforcing the importance of ethical standards in accounting practices.
• Assess how the fall of Arthur Andersen can be viewed as a turning point in accounting history, influencing modern auditing standards and practices.
  • The fall of Arthur Andersen represents a crucial turning point in accounting history, as it exposed systemic failures within audit practices and corporate governance. This scandal underscored the need for reform, leading to new auditing standards that emphasize transparency and independence. The repercussions prompted a broader cultural shift within the industry towards prioritizing ethical behavior and accountability, influencing how audits are performed today and ensuring that similar issues do not recur in future financial reporting.

Related terms

Enron: A major American energy company that used accounting loopholes and special purpose entities to hide its debt and inflate profits, leading to one of the largest corporate fraud scandals in history.

Big Bath Accounting: An accounting practice where a company takes large write-offs or losses in one period to clean up its financial statements, often used during periods of poor performance.

Sarbanes-Oxley Act: A U.S. federal law enacted in response to corporate scandals, including Enron, aimed at improving the accuracy and reliability of corporate disclosures in financial statements.