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Case Study on“Arthur Andersen”Course : AuditingCourse Code : ACT 341.1Prepared ForPrepared ByNameIDDate of Submission: 10 June, 2012
1Question # 1 : Describe Arthur Andersen’s organizational culture and explain how thefirm’s culture may have contributed to its downfall.In the beginning, Andersen was a watchdog. Founder Arthur Andersen made the firm'sname stand for something nearly a century ago, when he refused a client's demand to approvea ledger that falsely inflated profits. For decades thereafter, an auditing opinion fromAndersen was the gold standard for corporate books and records. If Andersen said thenumbers were solid, then investors, bankers, regulators and the public at large could count onit.Over time, greed corrupted Andersen. Its leaders became more devoted to collectinghefty fees than keeping books straight. Clients paid a fortune for Andersen's consultingservices, making its basic function of auditing into little more than an afterthought. The firm'smost experienced accounting technicians, the sticklers who maintained its principles, sawtheir status plunge in the partnership's hierarchy. As Enron ran wild, Andersen's ProfessionalStandards Group proved too weak to intervene. Money had trumped honest services.The decentralization of the firm was a big challenge for auditors because it was hard tooppose some clients who desired to see the limits of accounting principles. For example, theenergy trading firm Enron was a client of Arthur Anderson who paid a huge amount of moneyfor consulting services which was a small fraction of Andersen’s revenue but that was bigchunk amount for the local office. So in local office, the managers with individual goal ofrevenue, wanted Enron as their client though Enron wanted them to cheat on their investorsby hiding their financial weakness.Enron's executives were able to lie about their business performance and prospectsbecause Andersen went along. When the lies caught up with its client, instead of admitting itsfailure to safeguard the public trust, Andersen engaged in a cover-up. Its employees shreddednot just a few Enron-related documents, but box after box, day after day, for a period ofweeks.Andersen did exactly what Enron wanted them to do. As a result Andersen was chargedof not full disclosure financial position to their investors and Enron was delisted by New YorkStock Exchange and messed up the investment of many investors including 4000 employees.Finally Enron was bankrupted. As a result, Andersen was convicted for destroying auditrelated documents of Enron and it was at the end of the day lost its right of practice.
2Question # 2 : Explain why the provision of non-auditing services to an audit client maycompromise the auditor’s independence. In your answer, list two threats that jeopardize compliance with the principle of independence andexplain why they are threats.
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Auditor's report, Big Four auditors, Arthur Andersen