Ethical Mistakes by Arthur Andersen

Ethical Mistakes by Arthur Andersen

This paper will briefly discuss an article on Arthur Andersen, a major accounting firm that is famously tied to the scandal at the energy company Enron, and both their downfall due to major ethical lapses committed during audits of Enron by Arthur Andersen. Enron was one of the largest energy companies publicly traded, and the firm was extensively audited by Arthur Andersen over the years.

Brief History of Arthur Andersen

Arthur Andersen was the founder of Arthur Andersen, Inc. in 1918, he created the motto, “Think Straight and Talk Straight” when he established the company. The motto became firmly embedded in the corporate culture over the years, and was partially the reason for the company becoming an industry leader (Parrino, Kidwell, & Bates, 2012, p. 122). Arthur Andersen became an industry heavyweight for its skills in accounting and auditing; during the 1980’s, with the advent of mergers and acquisitions and information technology, the company developed another profitable expertise: consulting (Parrino, Kidwell, & Bates, 2012, p. 122). The company soon discovered its consulting business profits overtook its auditing business profits. An interesting byproduct of the auditing business was that many of their core business clients also became consulting clients. As a result, audit fees were “loss leaders” which attracted clients for the lucrative consulting work (Parrino, Kidwell, & Bates, 2012, p. 122).

Prior to the Enron scandal, there were numerous other auditing problems with some of Arthur Andersen’s major clients like Sunbeam, Waste Management, and Colonial Realty in the 1990’s. The Enron consulting and auditing contract was one of Arthur Andersen’s largest clients, and the one that inevitably led to the company’s downfall. Many of Arthur Andersen’s prior employees went to work for Enron, and the Arthur Andersen partner responsible for the Enron account worked directly out of Enron’s offices along with his 100 person team (Parrino, Kidwell, & Bates, 2012, p. 122).

The Ethical Issues Identified

As previously mentioned,