Arthur Andersen and Enron - two names that will forever live in infamy because of the events leading up to and including the debacle of December 2001, when Enron filled for bankruptcy. These two giants in the utility and accounting industries, and known throughout the world, took advantage of not only investors, but also the government and public as a whole, just so that those individuals involved could illegally increase their personal wealth. How could the backlash from the actions of the management of these two organizations have a positive influence in the accounting industry as a whole? The fallout from Enron’s bankruptcy and the SEC investigation that followed resulted in many changes to the industry to make standards tougher, penalties harder, and the accounting industry more reliable. At first glance, these “improvements” just seem like they are making more work for the many honest accountants in the industry, who are already doing the right things. However, this thesis will show how these changes actually are positive for the industry. In order to do this safety measures that were in place at the time of the debacle will be shown, the actual events leading up to the downfall of Enron and Arthur Andersen will be discussed, the changes that have occurred since the fall through the present day will be given, the changes that appear to be on the horizon for the accounting industry will be shown, and finally how all of this will impact the accounting industry as a whole in a positive fashion will be made clear.
Separately, former Andersen partner David B. Duncan, who pleaded guilty to a single count of obstructing justice and testified against his employer at trial, moved yesterday to withdraw the plea, citing the Supreme Court decision. Duncan did not signal in his plea deal that he "knew he was acting wrongfully," defense lawyers said. The government did not oppose the maneuver, but it has not ruled out bringing different charges against Duncan.
Brown, Ken and Jonathan Weil. Questioning the Books: How Anderson’s Embrace of Consulting Altered the Culture of the Auditing Firm. . March 12, 2002.
Executives at Arthur Andersen and Enron did not set out to have a positive impact on the accounting industry or any industry. They set out to make as much money for themselves as quickly as possible. They were willing to do whatever it took to make that money. These thoughtless acts and greed led both companies to an eventual downfall in bankruptcy. However, the accounting industry reacted by introducing changes that would, in the long run, improve itself and the economy in which it exists. The changes that are a response to the Andersen/Enron debacle may be coming to an end. We are probably seeing the last laws, pronouncements, and statements that are a direct result of these actions. Still, the changes that have occurred leave the accounting industry and the economy stronger. Will the industry ever be perfect? Probably not, but accountants and the world must continue to strive to make it as functional as it can be. Only by this continued striving can the industry be good enough to function effectively and even thrive.
The governmental changes had the farthest-reaching effect of all the changes that would result from the Enron/Anderson debacle. The plan that President Bush announced would make the penalties stiffer and would make the culpable, high-level management employees responsible for the workings of the company, something not yet established in American law. This gives the management of a company a new impetus to make sure that everything is absolutely correct. Which in turn means that financial statements should be more reliable than ever before.
"This represents an important step in removing an unjustified cloud over the professionalism and integrity of the people of Arthur Andersen," a spokesman for the firm said in a prepared statement.
Prior to the fall of Enron and their accountants, Arthur Andersen, there were many different types of safety measures in place to help protect the investors and the public as a whole. These safety measures included Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and all professional ethics. The use of GAAP by accountants is standard protocol. An accountant follows these principles as a matter of daily routine. According to Several accounting texts, GAAP is identified as a “dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements.”
Bryan Sierra, a Justice Department spokesman, said Andersen's nearly defunct status amounted to a "heavy factor" in the government's decision not to retry the firm.
Legal experts said the government was right to use its limited resources to focus on other cases. The Justice Department's Enron Task Force is scheduled to try former Enron leaders Kenneth L. Lay and Jeffrey K. Skilling on fraud charges in January. Both men have pleaded not guilty.
The government's decision not to retry the firm could help insulate Andersen from some civil liability. But the firm's partners have long since dispersed, and it likely will not return to auditing and accounting work.
The events that led up to the bankruptcy filing in December of 2001, started long before anyone began to suspect fraud at Enron. Andersen’s role in the Enron debacle should have been anticipated. Andersen had two major audit failures just a few years apart and just a short time before Enron filed bankruptcy. In 1996, Waste Management’s audit reports from Andersen were materially false and misleading resulting in an inflation of income by over $1 billion dollars between 1992 and 1996. This information came out in an SEC investigation, and led to Waste Management selling out to another company. In 1997 Sunbeam was found by the SEC to be using accounting tricks to create false sales and profits, Andersen signed off on these financial statements even after a partner flagged them. Sunbeam would later file for bankruptcy (Weber).
These two major audit failures should have put Andersen on their guard against another client failure, however the worst was yet to come. Internal memos at Andersen showed that there were conflicts between the auditors and the audit committee of Enron. Also included in these memos are several e-mails expressing concerns: about accounting practices used by Enron. However, the leading partner on the audit, David B. Duncan, overturned these concerns. Also, there is proof that Duncan’s team wrote memos fraudulently stating that the professional standards group approved of the accounting practices of Enron that hid debts and pumped up earnings (McNamee). However, because of the relationship between audit and non-audit fees, Andersen’s independence was probably flawed (Frankel). During the fallout of Enron’s bankruptcy and Andersen’s role in it, Andersen began to run an ad that Andersen would do what was right. In doing this they were trying to rebuild the consumer confidence in their accounting firm. While Andersen was attempting to pick up the pieces of their business, Paul Volcker, former Federal Reserve Chairman, presented a plan for a restructuring of Andersen so that they would have a chance of surviving this incident. Andersen did eventually agree to the restructuring, but it was too late to save the firm as a whole (Alexander). Anderson still exists as a company, although their only reason for doing so is to complete all the litigation against the firm. They are no longer auditing or consulting. Anderson was the major accounting influence in this incident, however they were not the main player.
The AICPA made several new Statements on Auditing Standards in response to the Enron events. The three that appear to be most closely linked to the Enron and Andersen debacle are SAS 96, SAS 98, and SAS 99. SAS 96 became effective January of 2002 and dealt with the record retention policies of accounting firms. In SAS 96 the requirements of SAS 41, which was the first SAS to address record retention, were reaffirmed. Also several new regulations were added. SAS 96 contains a list of factors that auditors should consider when attempting to determine the nature and extent of documentation for a particular audit area and procedure. It also requires auditors to document all decisions or judgments that are of a significant degree (SAS 96). For example, a decision of a significant degree would be an auditor approving a client not using GAAP for a portion of their financial statements. These changes appear to be a direct result of the paper shredding that went on at Arthur Andersen immediately after the Enron bankruptcy. SAS 98 makes a lot of revisions and amendments to previous statements. These changes include changes to GAAS, changes to the relationship between GAAS and quality control standards, and audit risk and materiality concepts in audits (SAS 98). All of these changes would appear to be related to problems that were discovered in the Andersen audit of Enron. SAS 99 outlines what fraud is, reaffirms the auditor’s responsibility to look for fraud, and reaffirms the necessity to gather all information for an audit (SAS 99). These changes appear to be in connection to the fact that Anderson did not find any fraud in Enron’s books, where fraud existed. These changes all came from within the AICPA.