Reasons for Arthur Anderson’s Recent Problems

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Ans)

Reasons for Arthur Anderson’s recent Problems:

The reason for AA’s recent problems stem from the series of wrong steps they have taken in the past, which are:

• AA from the start (1989) has been motivated by its own revenue growth compromising ethics and committing legal misconducts along the way. They were not concerned with accounting discrepancies and even fraud.
• AA’s accountants were not happy with the consulting counterparts overachieving them. It hurt their pride according to Richard Measelle.
• AA’snew strategy of cutting costs and increasing revenue/client to $600000 was ambitious bit the way it was pursued proved to be recipe of disaster. They cut costs by forcing senior partners to retire by age of 56 years (although not a prima facie wrong decision), it led to less experienced auditors and less firm partners overseeing audits.[pic 2]
• The specific wrong steps were:

• Boston Chicken- AA converted a $50,000 audit fee into $3 million full engagement. The losses in financial statements were kept in secrecy. Hence, they were responsible for a fraudulent IPO which was apparently successful (but a sham in reality).
• Waste management- A payment of $7.5 million in audit fees and $17.8 million in non- audit fees paid to AA, resulted in sign-off on wrong financial statements overstating profit. Values of assets were also over-estimated.

Things to do

Complete revamp to the company is necessary. AA us suffering from massive loss of confidence in stakeholders and clients.

• Decision to rollback retirement age should be done with immediate effect.
• An independent ombudsman can be appointed, who can randomly verify/audit the work done by the agency.
• Peer review mechanism with other audit firms (preferably foreign) can be considered to ward off incorrect audit assignments.

The steps taken are most likely going to cost more than what they can achieve in short-run.In the long run the benefits will outweigh the costs.

Specifically for Waste Management Crisis, the Company AA can forego the audit fees illegally obtained and set an example that it does not accept fees outside the purview of its work.