Running head: ARTHUR ANDERSEN CASE

Arthur Andersen Case

Bryan Alley, Gabriella Goodfield, Deonne Griffin, Juliano Klein, Shamsuddin Mehri, and
Chinwe Nwogene
FIN/571
September 7, 2015
Christopher Kubik

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Arthur Andersen Case

Arthur Andersen was an accountant and he started his accounting firm in 1918. His legal
problems started before 2002. The problems continued after he started his firm. Arthur Andersen
became famous for the Enron Case. Learning Team A will discuss Andersen mistake and the
potential actions that leadership could have taken to prevent the organizational failure.
Andersens mistake
One of the mistakes made by Andersen was the failure of having kept the auditing and
consulting functions separate. They provided consulting services to the same companies they
audit. The auditors at Andersen are supposed to maintain their independence from the firm they
audit to avoid conflict of interest, which leads to dishonesty when auditing a firm because of the
fear of losing the consulting business. In addition, profitability became the primary focus of the
firm, managers and employees lost the ethical principle and integrity embedded in the company
since its establishment in 1918. The evidence presented at trial showed a breakdown in
Andersens internal control, a lack of leadership, and an environment in Andersens Houston
office that fostered recklessness and unethical behavior by some partners (Parrino, Kidwell, &
Bates, 2012, pg. 123).
Putting company's core business - auditing, in a conflict position with its principals and
ethical core values, as the consulting business became more lucrative than auditing. Partners
became more greed as the consuming business became more lucrative than auditing, which
generated internal issues on how to distribute retained earnings between the two groups. Partners
lost sight and completely oversaw the company's core business when partners started using their
influence in the accounts to persuade customers to buy Andersen's consulting services. For that,

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Andersen used unethical methods, which augmented an already known conflict of interest within
the industry - auditors not necessarily maintained independence from the firms they audited.
Potential Actions taken by leadership
The failure of the Arthur Andersen organization is a tragedy that could be prevented by
management. Leaders should have taken precautionary measure to prevent this failure. The
potential steps to prevent the mass failure were to implement goal, vision, and foundation for the
employees to follow on. This would clearly create a direct path for all employees to follow and
eventually achieve better financial health. The firm should have established a strict code of
conducts and rules, which would have been enforced to all employees. Secondly, the
management should have monitored and separated the consulting firms and audit as it was
creating a conflict of interest by selling consulting services to the firms that they were auditing.
In order for the auditors to meet the fiduciary responsibilities, they should have maintained
independent from the companies that they were auditing.
Elena N. Lougovskaia, co-founder of Lougovskaia stated it best, "Employees wear many
different hats and perhaps decision makers should be separated from people who sign the checks
or one person should be responsible for signing check and a separate person should be
responsible for accounting, processing invoices, and purchasing" (Wasserman, 2010). Executive
management should have implemented a number of systems that would have had checks and
balances performed in each department. These checks and balances should have included
internal audits, external audits, and surprise audits. Internal and external audits would have been
scheduled and announced prior to conducting, but the surprise audits would have been just what
they needed.

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Conclusion

As shown, Arthur failed to separate the consulting and auditing portions of his business
separate. This resulted in conflicts of interests as auditing a firm that was once consulted to lead
to poor audits to keep their consultation business. The firm should have led through strict code
of conducts as well as implementation of ethical policies. Ultimately, the companies drive for
more profit caused them to make unethical decisions that led to their ultimate demise.

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References

Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.).
Hoboken, NJ: Wiley.
Wasserman, E. (2010). How to protect your business against fraud.
Retrieved from http://www.inc.com/guides/protect-against-fraud