Summary of Facts of the Case Study free essay sample

For most of those years, the firm’s name was synonymous with trust, integrity, and ethics. In its earlier days, Anderson sets standards for the accounting profession and advanced new initiatives on the strength of its then undeniable integrity. The Chicago-based accounting firm closed its doors in 2002 that is after 90 years of business. 1. 2 The Advent of Consulting Leorned Spacek joined the company in 1947 following the death of founder Arthur Andersen. Anderson began providing consulting services to large clients such as General Electric and Schlitz Brewing in the 1950s. Over the next 30 years, Andersen consulting business become more profitable on per-partner basis than its core accounting and tax services business. The company linked its consulting business in a joint cooperative relationship with its audit arm, which compromises its auditor’s independence, a quality crucial to the execution of a credible audit. Andersen’s consulting business becomes recognized as one of the fasters growing and most profitable consulting networks in the world. We will write a custom essay sample on Summary of Facts of the Case Study or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Ten years later, Arthur Anderson merge it’s operational and business systems consulting units and set up a separate business consulting practice in order to offer clients a broader range of integrated services. Throughout the 1990s, Anderson reaped huge profits by selling consulting services to many clients whose financial statements is also audited. In 1998, then SEC chairman Arthur Levitt publicly voiced this concern and recommended new rules that would restrict the non-audit services that accounting firms could provide to their audit lients that is a suggestion that Andersen vehemently opposed. Nonetheless, in 1999 Andersen chose to split its accounting and consulting function into two separate and often competing units. In August 2000, following an arbitration hearing, a judge rule that Andersen’s consulting arm could effectively divorce the accounting firm and operate independently. By, that time Andersen’s consulting business consisted of about 11,000 consu ltants and brought in global revenue of nearly $2 billion. Arthur Anderson as a whole employed more than 85,000 people worldwide. The new consulting company promptly changes its name to Accenture the following January and the court later order to better represents its new global brand of accounting services. Meanwhile, in January 2001, Andersen named Joseph Berardino as the new CEO of the U. S. audit practice. 1. 3 Baptist Foundation of Arizona The Baptist Foundation of Arizona (BFA), which Anderson serves as auditor, lost $570 million of donor funds. BFA, an agency of the Arizona Southern Baptist Convention, is founded in 1048to raise and manage endowments for church work in Arizona. The foundation also offered estate and financial planning services to state’s more than 400 southern Baptist churches, and was one of the new foundations to offer investment to individuals. BFA invested heavily in real estate, a more speculative investment strategy than other Baptist foundations in the state traditionally used and the foundation officials allegedly concealed losses from investors beginning in 1986. In addition, more than half of the foundation’s employees were laid off. Finally, the foundation petitioned for chapter 11 bankruptcy protections in 1999, listing debt of about $640 million against assets of about $240 million. Andersen, in a February 2000 statement, responded that it sympathized with BFA investors but stood the accuracy of its audit opinion. However, during nearly two years of investigation, reports surfaced that Andersen has been warned of possible fraudulent activity, and the firm eventually agreed to pay $217 million to settle the shareholder lawsuit in May 2002. 1. 4 Sunbeam Andersen’s troubles over Sunbeam Corporation began when its audits failed to address serious accounting errors that eventually led to a class-action lawsuit by Sunbeam investor and the ouster of CEO Albert Dunlap in 1998. Boca-based Sunbeam is the maker of such home appliance brands as Mr. Coffee, Mixmaster, Oster, Powermate and others. The company was also accused of using improper â€Å"bill and hold† transactions, which involve booking sales month ahead of actual shipment or billing, temporary inflating revenue through account receivable, and artificially boosting quarterly net income. As a result, Sunbeam was forced to restate six quarters of financial statements. In August 2002, a federal judge approved a $141 million settlement in the case. In it, Andersen agreed to pay $110 million to resolve the claims without admitting fault or liability. Losses to Sunbeam shareholders amounted to about $4. 4 billion, with job losses of about $1,700. 1. 5 Waste Management Overstated earnings $1. 4 billion at waste management was found by Andersen itself in court over questionable accounting practice. This charged Waste Management was complained filed by the SEC with a huge crime financial fraud over a period of more than five years. This complaint include the company management help and abetted others violations of antifraud, reporting and record keeping provisions of federal securities laws, resulting in a loss to investors of more than $6 billion. In that case Andersen was name as having assisted in the fraud by repeatedly issuing unqualified audit opinions on waste management materially misleading financial statement. SEC documents state that there were amount of fees that capped from Waste Management that would pay Anderson’s auditing services. Andersen identified improper accounting practice and presented to Waste Management official report called â€Å"proposed adjusting journal entries† that is outlined entries that needed be corrected to avoid understanding Waste Management’s expanses and overstating its earning. In other side, waste management refused to make the corrections and entered a closed-door agreement with Anderson to write off the accumulated errors over a 10 years period also change its underlying accounting practices. This agreement was viewed by SEC as an attempt to cover up past frauds and to commit future frauds. Andersen was paid some $220 million to Waste Management shareholder and $7 million to the SEC for this case. Four Andersen partner were waiting for approval and an injunction was obtained against the firm. Andersen also was forced to promise not to ign off on spurious financial statements in the future. After this matter settled, Waste Management shareholder lost $20. 5 billion and bout 11,000 employees were laid-off. 1. 6 Enron Enron is one of the biggest clients of Andersen. Andersen’s new CEO, Joseph Berardino had perhaps viewed the $1 million a week in audit fees of Enron. Andersen also able to make 80 percent of companies in oil and gas industry as its cli ents. On November 8, 2001 Enron was forced to restate five years worth of financial statements that Andersen had signed off on that is accounting for $586 million in losses. Enron had filed for bankruptcy within a month. In January 2002, Andersen was investigation by Justice Department and found that Andersen clients were prompting and its employees jump to ship. Eventually the auditing firm admitted to destroying a number of documents concerning its auditing of Enron which led to an indictment for obstruction of justice. On June 15, 2002 Andersen was found as the first accounting firm ever to be convicted of a felony. 1. 7 Trouble with Telecoms WorldCom was the largest client of Andersen and it had improperly accounted for nearly $3. billion of expenses and had overstated earnings in 2001 and the first part of 2002. Investors was launched a barrage of lawsuits that sent the telecom into bankruptcy court. Andersen was blamed WorldCom for the scandal. However, WorldCom also pointed the finger at Andersen for failing to find the accounting irregularities. SEC filed fraud charges against WorldCom that bring fired of its CFO. There were more telecommunicatio ns firm scandal related to Andersen such as Global Crossing and Qwest Communications. This case is related to the issue of fake asset swaps, in which the accused telecom companies allegedly exchanged fiber-optic broadband capacity at inflated prices in order to show huge gains. Global Crossing was lawsuit but investor and alleging Andersen that artificially inflated audit opinions on their financial statements even though it knew or failed to discover that they contained material misstatement. Qwest was avoid to bankruptcy court and had been admitted of using improper accounting methods and was forced to restate profits. 1. 8 Corporate Culture and Ethical Ramifications From the details of the investigations into accounting irregularities and fraud it appears that Andersen more concerned about its own revenue growth than where the revenue came from. This is because of corporate cultures that have been numerous inexperienced business consultants and untrained auditors were sent to client sites that ignored the company policies. There have another factor include in this matter that is partner’s limited involvement in the process of issuing opinions. When the company grew, the number of partners also stagnated. There also have evidence that Andersen had limited oversight over its audit teams and visibility also balance could not identified when audit teams had strayed from accepted policies. Andersen was hired former Federal Reserve Board chairman Paul Volcker to institute reform and helps him restore its reputation. After Volcker came, Anderson was offence for obstruction of justice related to the connection with shredding of Enron documents. Andersen was trying to negotiate a deal with international partnerships and salvage what was left. However, the company was forced to begin sell of various business units and ultimately laid off more than 7,000 employees in US. On that time, Alaska Air Group that is an Anderson client restated that an increase in shareholder equity of $31 million. This restatement was made on the recommendation of its new auditor that is Deloitte and Touche which had replaced Andersen. Andersen was fined $500,000 among other penalties. Anderson also had agreed that to stop auditing public corporations. Nowhere, the world Andersen can be found is at Accenture’s website. In 2005, Supreme Court was thrown out his conviction of obstruction of justice. Anderson was found guilty by federal jury for â€Å"corruptly persuading† works to shred document related to alleged improprieties by Enron. However, the court did not rule on whether Andersen’s shredding was wrong rather the case revolved entirely around the adequacy of the jury instructions at the company’s trial. Some expert believes that the court ruling was strictly based on technical issues rather than the fact available during the trial. Many business executive believe that quick rush to down Arthur Andersen’s accounting and auditing business may have negative impact on competition and the cost of auditing for all public corporations. On the way, Anderson’s involvement in many accounting fraud cases should have caused regulatory agencies to overreact. 2. 0 Implications for Regulation and Accounting Ethics Many clients of Andersen going into bankruptcy court because of accounting scandals. This also helps spur a new focus on business ethics, driven largely by public demands for greater corporate transparency and accountability. Other than that, congress passed the Sarbanes-Oxley Act of 2002, new guideline had been established and direction for corporate and accounting responsibility. This act was enact to combat securities and accounting fraud and includes, among other things, provisions for a new accounting oversight board, stiffer penalties for violators, and higher standards of corporate governance. Sarbanes-Oxley emphasizes on the accounting profession about auditor independence and quality, restricts accounting firm’s ability to provide both audit and non-audit services for the same clients, and requires periodic reviews of audit firms. Sweeping legislative and regulatory reform may e occurring too quickly in response to intense public and politic pressure. This reforms may not have been given enough forethought and cost-benefit consideration for those public corporations that operate within the law, that comprise the vast majority of those public corporations that operate within the law, which comprise the vast majority of corporate America QUESTION 1: Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties. In this case, Andersen was more concerned about the revenue earned but did not take note where the revenue came from or whether its independence as an auditor had been compromised because of the changes of the company vision and the corporate culture. As a result, Andersen has involved in the illegal issues and unethical issues. Legal Issues * Perpetuate the accounting fraud. The Baptist Foundation of Arizons (BFA) alleged concealed losses from investors beginning in 1986 by selling some properties at inflated prices to entities that had borrowed money from the foundation and were unlikely to pay for the properties unless the real estate market turned around. The investor lawsuit against Andersen accused the auditing firm of issuing false and misleading approvals of BFA’s financial statement, which allowed the foundation to perpetuate the fraud. At last, Andersen agreed to pay $217 million to settle the shareholder lawsuit in May 2002. Its audit failed to address serious accounting errors of Sunbeam Corp. The serious errors include fraudulent accounting strategies such as â€Å"cookie jar† revenues, recording revenue on contingent sales, and accelerating sales from later periods into the present quarter, using â€Å"improper bill and hold† transaction which involves booking sales months ahead of actual shipment or billing. In August 2 002, a federal judge approved a $141 million settlement in this case. In it, Andersen agreed to pay $110 million to resolve the claims without admitting fault or liability. * Questionable accounting practices. For this issue, Andersen was named in the case as having assisted in the fraud by repeatedly issuing unqualified audit opinions on Waste Management’s materially misleading financial statements. Andersen has did â€Å"special work† to earn additional fees, which outlined entries that needed to be corrected to avoid understating Waste Management’s expenses and overstating its earnings. At last, Andersen has paid some $220 million to Waste Management shareholders and $7 million to the SEC. It was also forced to promise not to sign off on spurious financial statements in the future. * Obstruction of justice. On November 8, 2001, Enron was forced to restate five years’ worth of financial statements that Andersen had signed off on, accounting for $586 million in losses. On June 15, 2002, the jury found Andersen guilty of obstruction of justice in case of Enron. It admitted to destroying Enron’s audited documents, which led to an indictment for  obstruction of justice. * Fail to find the accounting irregularities. WorldCom, Andersen’s largest client. Andersen has admitted to improperly account for nearly $3. 9 million of expenses and had overstated earnings in 2001 and the first part of 2002. Besides, Andersen failed to find the accounting irregularities of WorldCom. Ethical Issues * The first issue is Andersen did not audit properly the Baptist Foundation of Arizona (BFA) which causes the bankruptcy. BFA invested heavily in real estate, the profits from investments were supposed to be used as donation at churches but that real estate began down fall but at the same time the foundation’s top officers still continued to receive six-figure salaries. * The inaccurate information and unqualified audit opinions that provided by Andersen on Waste Management is one of the ethical issue too. It is because investors will make the investment decision based on the audit report. Any misleading information may overstate client’s revenue or hide the inaccuracy information. * The third issue is about the â€Å"unqualified† opinions on Sunbeam’s 1996 and 1997 financial statements despite of Sunbeam’s accounting and disclosure improprieties, where record â€Å"cookie jar† revenues, recording revenue on contingent sales, and accelerating sales from later periods into the present quarter. * The last issue is about compromise the independent of audits according to American Institute of Certified Public Accountants (AICPA). In 1950s, Andersen provides both auditing and consulting services in a corporation in order to earn more profit. It has been compromised the independent of audits and it is not an acceptable standard of stakeholder. QUESTION 2: What evidence is there that Andersen’s corporate culture contributed to its downfall? * After having an overview of this case study, we found there are many evidence caused Andersen’s corporate culture contributed to its downfall. First, Andersen more focuses on growth of revenue in his company and compromise of its independence as an auditor. It caused his company become a confusion of its corporate culture. Actually, independent audit of a client is the expression of an opinion on the fairness with the financial statements and free of material misstatement occurred in company. * Second, many inexperienced business consultants and untrained auditor were send to customer company. It caused Andersen’s become confusion of its corporate culture because all of them are unclear condition about customer company policies. Moreover, lack of understanding about company policies will also caused them make an errors in financial statement. Third, when the company becomes bigger and bigger, number of partners’ also will increase. It will caused limited involvement of partners in the process of issuing opinions. Limited involvement in issuing opinions process will also seriously make confusion of its corporate culture among them. * Lastly, Andersen had limited oversight over its audit teams in his company. Moreover, lack of such visibility was damaged by a lack of checks and balances that could have identified when audit teams had strayed from accepted. It will incur many problems. For example, audits failed to address serious accounting errors such as recording revenue on contingent sales and accelerating sales by using incorrect business transaction. Besides that, it will also lead to many doubtful accounting practices such as unqualified audit opinions will misleading financial statement in company. How can the provisions of the Sarbanes-Oxley Act help minimize the likelihood of auditors failing to identify accounting irregularities? In 2002, Sarbanes-Oxley Act has provided several Acts to minimize the likelihood of auditors failing to identify accounting irregularities. The act have enacted to combat securities and accounting fraud and includes provision for a new accounting oversight board, stiffer penalties for violators and higher standards of corporate governance. * According to Section 104: Inspection of registered Public Accounting Firms, it verifies that financial statements are accurate. It could prevent the questionable or illegal accounting practices. According to Section 201: Services outside the scope of auditors; Prohibited activities helps enhancing the accounting profession and emphasis auditor and analysts’ independence and quality, restrict accounting firms’ ability to provide both audit and non-audit services for the same clients and requires periodic reviews of audit firms. Thus, reduce likelihood of compromising good audit for more revenue. * According to Section 203: Audit partner rotation, rotate partners assigned to client, so fresh eyes see work papers. The rotation requirement of the audit partner helps avoiding of the â€Å"partner in crime† relationship. According to Section 204: Auditor Reports to audit committees, auditors must report to committee, who work for the board, not the company. This is to powerless of auditors by giving board power to investigate and rectify. This Act also prevents companies from publishing misleading statements. * According to Section 303: Improper influence on c onduct of audits, it allows to removes power from company personnel. This is to withholding of information from auditors by making the act illegal. Generally, the Act helps to improve the improper illegal and ethical problem introduced by the auditors and its corporation. It does help to minimize the likelihood auditors failing to identify accounting regularities. * According to Section 404: Management assessment of internal control, it gives auditor a voice outside of the audit to attest to policies demonstrated by the company. This Act prevents the information slipping by stakeholders by giving more visibility to the firm. * According to Title VIII: Corporate and criminal fraud accountability act of 2002, it makes a felony to impede federal investigation and provides whistleblower protection. It prevents the destruction of documents and will allow investigators to review work of auditors. * According to Section 1102: Tampering with a record or otherwise impeding an official proceeding, public company companies must also report on a rapid and current basic material changes in the financial condition or operation person acting to corrupt or destroy evidence liable for extended prison term, this is to other from attempting to interfere in an official investigation.