Arthur Andersen and Enron: A Case Study of Ethical Decline and Audit Failure
Overview
This case study examines the history of Arthur Andersen Consulting and its relationship with Enron, analyzing how the separation of consulting and auditing divisions created conflicting incentives. The paper traces Andersen's evolution from a traditional audit firm to a diversified consulting business, ultimately arguing that prioritizing revenue growth over audit integrity led to ethical compromise and contributed to the Enron scandal.
What this case study covers
- Case Study Summary: Overview of Andersen Consulting's founding in 1954 and initial consulting responsibilities
- Splitting Andersen Worldwide: Analysis of the division between consulting and accounting businesses, leading to Accenture separation
- Enron Audit: Examination of Andersen's relationship with Enron and failure to address accounting risks
- Professional Findings, Recommendations, and Conclusions: Assessment of Andersen's compromised integrity despite marketed values
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Case Study
Summary
Andersen Consulting
Andersen Consulting was officially introduced to consulting work in 1954. After the company was introduced, its initial consulting responsibilities entailed assisting clients in designing new electronic information systems. Two years after the company was introduced, Spacek was warned that the growing consulting business in accounting companies could compromise independence and limit the integrity of company audits. During the mid-1970s, it was reported that many auditing firms were pressured to minimize their expenditure and explore substitute resources. During the period, the fraud on the market doctrine was also embraced in the market. Based on the doctrine, investors were never mandated to demonstrate that they relied on false information to make decisions. In order to find other sources of revenue, the auditing firms focused on business and systems consulting. This practical move enabled Arthur Andersen to gain more revenue than other investments, such as the conventional audit and tax activities. Through the new business incentives, the company had the leverage of competing with established companies and making massive profits (Hawkins & Cohen, 2006). Although the new ventures were available, they became seductive and influenced ill accounting behaviors within the firm.
Splitting Andersen Worldwide
There were many differences between the consulting and accounting businesses. First, different needs and different resources, strategies, and operating techniques were required to meet these specific needs.