Enron and Arthur Andersen Case Study
The Enron and Arthur Andersen case is a well-known example of a corporate scandal that rocked the business world in the early 2000s (Gibney, 2005). The case emphasized various conflicts of interest, unethical behavior, and accounting methods that contributed to Enron’s demise and the demise of Arthur Andersen, one of the world’s top accounting firms at the time (Nasiripour, S., 2019). The Enron and Arthur Andersen cases serve as a cautionary tale and a reminder of the value of openness, accountability, and ethical corporate practice.
Conflicts of interest in the case of Enron and Arthur Andersen
The Enron and Arthur Andersen cases show various conflicts of interest that led to unethical behavior, ultimately leading to Enron’s demise and Arthur Andersen’s demise. According to United States Securities and Exchange Commission (2002), one key conflict of interest was that Arthur Andersen was both the independent auditor and Enron’s consultant. Because of this dual function, Arthur Andersen’s commitment was divided between giving correct information to shareholders and appeasing Enron as a customer. Furthermore, Arthur Andersen was being compensated handsomely for both auditing and consulting services, thus blurring the lines between their need to deliver correct information and their incentive to continue a profitable commercial relationship with Enron (Nasiripour, S., 2019).
What could have been done?
To avoid these conflicts of interest, legislation prohibiting audit firms from providing advising services to the same companies they audited may have been put in place (Rakic, B., & Maksimovic, R., 2018). Another option would have been to compel audit companies to swap customers on a regular basis in order to keep auditors from building very intimate relationships with clients. Furthermore, mandating greater openness and disclosure of conflicts of interest would have assisted in ensuring that stakeholders were aware of any possible bias in the audit process. (Rakic, B., & Maksimovic, R., 2018)
Solution
To solve the issues raised by the Enron and Arthur Andersen cases, changes in laws and regulations are required. In reaction to the Enron incident, the Sarbanes-Oxley Act of 2002 was adopted, introducing various measures aimed at increasing corporate responsibility, transparency, and audit quality. The Act established the Public Company Accounting Oversight Board, which is in charge of regulating public company audits in order to safeguard investors’ interests and increase public trust in the auditing process (Congress.gov., 2002).
How Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures
Beyond direct legal pressures, there are numerous strategies to encourage ethical behavior. Companies may implement ethical standards of conduct and foster an environment that values honesty and responsibility. Having an independent board of directors and employing an ethics officer can also aid in identifying possible ethical concerns and ensuring that they are addressed effectively (Rakic, B., & Maksimovic, R., 2018).
To what extent (if any) should sustainability concerns and issues be incorporated in accounting analyses?
Accounting analyses should encompass sustainability concerns and difficulties to present a more full view of a company’s financial performance. Accounting approaches such as triple bottom line accounting, which considers environmental and social implications, can assist businesses in making better informed decisions that balance financial, social, and environmental issues (Rakic, B., & Maksimovic, R., 2018).
When (if ever) should organizational decisions with sustainability-related impacts and significant associated cost-implications (savings or expenditures) be shared with shareholders?
When these challenges are relevant to the company’s financial performance, organizational choices with sustainability-related consequences and considerable associated cost implications should be discussed with shareholders. Shareholders have a right to be informed of substantial risks to their investment, particularly those connected to sustainability. Companies, on the other hand, should be wary of releasing sensitive information that might jeopardize their competitive edge or intellectual property (Rakic, B., & Maksimovic, R. 2018).
Conclusion
Finally, the Enron and Arthur Andersen case emphasizes the significance of resolving conflicts of interest, encouraging ethical behavior, and factoring sustainability issues into accounting assessments. Regulations and ethical codes of conduct should be implemented to guarantee that businesses act in the best interests of their shareholders and society as a whole.
References
Congress.gov. (2002). H.R.3763 — Sarbanes-Oxley Act of 2002. Retrieved April 17, 2023, from https://www.congress.gov/bill/107th-congress/house-bill/3763
Gibney, E. (Director). (2005). Enron: The Smartest Guys in the Room [Film]. HDNet Films.
Nasiripour, S. (2019). The accounting scandal that destroyed a world-famous auditor. The Guardian. Retrieved April 17, 2023, from https://www.theguardian.com/business/2019/nov/20/arthur-andersen-accounting-scandal-collapse-enron
Rakic, B., & Maksimovic, R. (2018). Sustainability Reporting in Accounting: A Literature Review. Economic Research-Ekonomska Istraživanja, 31(1), 2021–2046. Retrieved April 17, 2023, from https://doi.org/10.1080/1331677X.2018.1555905
United States Securities and Exchange Commission. (2002). Statement by the SEC Regarding Arthur Andersen LLP. Retrieved April 17, 2023, from https://www.sec.gov/news/speech/spch575.htm
This article is written based on University of The People Business Law, Ethics, and Social Responsibility (BUS 5115) written assignment by Fristy Tania in April 2023
