Ethical Challenges Faced by Arthur Andersen LLP

Arthur Andersen
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Arthur Andersen
Background
Arthur Andersen LLP was an American accounting firm providing auditing, consulting, and tax services to large corporations. In the 1990s, the public accounting firm was one of the “Big Five” accounting firms with more than 85,000 staff and offices spread all over the globe. However, accounting scandals of the late 1990s and early 2000s would cause irreversible damage to the multinational corporation’s reputation and ultimately lead to the firm voluntarily losing its CPA license to practice. Towards the end of the 1990s, Arthur Andersen found it increasingly difficult to balance its commitment to audit independence and its aspiration to expand its consultancy services. At the same time, the company was struggling to maintain its fidelity to accounting standards and its clients’ wishes to maximize profits.
These conflicts of interest would see the company become embroiled in several accounting and auditing scandals, including the Waste Management Inc. and Sunbeam Products cases in the early 2000s. However, the infamous Enron case would become its biggest accounting scandal and lead to the demise of the company. Arthur Andersen was found guilty of failing to detect, ignore, and approve accounting frauds for Enron Corporation, an American energy company that was involved in extensive accounting and corporate fraud for four years (Connell, 2002). The public accounting firm failed to fulfill its professional responsibilities when auditing Enron's financial statements, over and above, obstructed justice by destroying evidence of its misconduct by shredding documents related to Enron. This essay will focus on the Enron scandal and the ethical issues that contributed to one of the largest corporate bankruptcies in America.
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After Congress approved the deregulation of the sale of natural gas, the resulting markets allowed energy companies like Enron to capitalize on gas contracts by selling energy at exorbitant prices and generating large revenues. In an attempt to diversify, the company owned and operated various assets, including electricity plants, broadband services, and paper and water plants all over the world. This expansion strategy would see Enron become one the fastest rising companies and was widely hailed as the most innovative company in America. However, the company was banking on the flourishing dot-com bubble by selling exaggerated internet stocks to trading partners through its electronic trading website (Albeksh, 2016). When the dot-com trend started waning in the early 2000s, most of Enron's speculative business ventures proved disastrous. In order to indicate good performance, the energy company began using market-to-market accounting to conceal financial losses.
The lax regulatory environment in the stock market, as well as the corporation's complex business model and corporate governance, ensured that most investors remained oblivious of the unethical practices used by Enron to continue attracting investors through its exorbitantly priced stocks. These fraudulent corporate and accounting practices would continue until the eventua...