A State By State Accounting Guide

An Examination of Professional Ethics in Retrospect: The Enron/Arthur Anderson Scandal

Posted January 23rd, 2018 by admin and filed in Uncategorized

In 2001, the Enron scandal erupted; by 2002, Arthur Anderson collapsed, and the Big Five Accounting firms became the Big Four. Even nearly twenty years on, this scandal and the ensuring collapse of one of the world’s most respected accounting firms stands as the single best example of just how badly things can go wrong. No contemporary accounting ethics class fails to focus on these catastrophic events, and most professors believe this will continue to be the cautionary tail of ethical failures told for a century to come.

After nearly 90 years in business and no less than 28,000 employees, one of the largest accounting and professional services companies in the world closed its doors and was indicted by the U.S. Department of Justice for obstruction of justice for shredding Enron documents… though the conviction was later overturned.

While Arthur Anderson’s overall role and responsibility in the Enron scandal is still argued today, the general consensus is that the ethical culture of the company was diminished and that far too many risks were taken in the interest of the bottom line.

There are countless takeaways from the Enron scandal and subsequent downfall of a near-century-old accounting institution for today’s accountant.

Ethical Points to Consider

  • Objectivity is crucial – To be able to hold yourself and your work to the highest ethical standards, you must stay objective. Sometimes it gets a little too easy to make excuses or justify our actions when we know our behavior is inching toward violating the Code of Professional Conduct.
  • Ignorance is never an excuse – Playing the ignorance card doesn’t work. (“But I didn’t know I was breaking the Code.”) It is your responsibility to know, memorize, and live by the Code of Conduct.
  • Passing the buck doesn’t give you a free pass – Asking someone else to do what you know is wrong, or turning away from unethical behavior doesn’t protect you and is still considered a violation of the Code of Conduct. The “it wasn’t me” excuse is not an excuse for ignoring behavior you know is wrong.
  • Client violations can never be ignored – You’re just working for your client, so their indiscretions aren’t your problem, right? … Doing so means you are allowing them to deliberately violate internal controls. In other words, it’s impossible to act ethically when you’re performing services for a client who is attempting to defraud the government, clients, shareholders, or investors. Performing services for them makes you a conspirator in fraud and no less responsible than if you did it yourself.

Using the American Institute of Certified Public Accountants’ (AICPA) AICPA Code of Conduct, we’ll highlight just a few of the areas where Arthur Anderson failed:

Upholding the Integrity of the Profession

Integrity among CPAs is not as clearly defined as other points; instead, it is best defined as doing what is ‘right’ – both ethically and technically. It also means that if a gray area exists, you must use your best judgment to act with integrity. This tenet places the onus squarly on you, the CPA. If you feel in your gut you may not be making the right move, this tenet says that you’re breaking the Code of Conduct.

Keep in mind, you’re responsible for everything you do… and everything you don’t do.

Where Arthur Anderson went wrong: The firm did not let the Enron Audit Committee know that there weren’t proper internal controls in place to protect shareholder interests.

Scope and Nature of Services

If you suspect a client or company of engaging in unethical behavior, you should refrain from providing services to that client. It should go without saying that you only want to work with companies operating within the parameters of their own internal controls. To operate in a completely ethical manner, you can only engage in business with others who also operate under the highest ethical standards.

Where Arthur Anderson went wrong: The firm approved many of Enron’s Special Purpose Entities that were then used to hide losses and generate false profits.

Maintaining Objectivity and Independence

Because your actions (or lack there of) can result in financial gain or loss, it is crucial to avoid conflicts of interest and maintain objectivity and independence. This means avoiding any situation where your work for one client can impact another client. It also means not allowing any other biased opinion to affect your work or the decisions you make.

Where Anderson went wrong: The firm failed to make Enron’s Audit Committee aware that Enron’s CFO and his colleagues were involved in a number of conflict of interest situations.

Demonstrating Due Care

What it means: As a CPA, you are expected to provide services to the best of your ability and to always seek to improve your services and your profession. This means consulting with others when questions arise, continuing your education, and undergoing performance evaluations. Due care means always striving for improvement and excellence.

Where Arthur Anderson went wrong: The firm did not consider the advice of its quality control partner, Carl Bass.

Acting in the Public Interest

Everyone from your clients to the government to employers and investors rely on you to practice with the highest level of integrity and objectivity as to serve the public interest and maintain trust in commerce. You must ensure that your work honors the public trust.

Where Arthur Anderson went wrong: The firm was aware that many of the transactions between Enron and its Special Purpose Entities were manipulated and inflated, yet they allowed the company to knowingly mislead investors.

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