Arthur Andersen's Troubles

Topics: Audit, Auditing, Fiduciary Pages: 3 (1239 words) Published: March 21, 2011
Arthur Andersen’s Troubles

1. Arthur Anderson (AA) should have been able to help prevent to some extent the Enron disaster, however, they either missed or ignored Enron’s manipulations allowing the fraud to continue as long as it did. AA contributed to the disaster by approving the structure of many Special Purpose Entities (SPE), which Enron used for off-balance sheet financing. The SPEs did not meet the requirements of an independent company and should have been consolidated with Enron’s financial statements. Shares transferred to SPEs were not valued on the financial statements in compliance with GAAP, and side deals between Enron and banks were not brought to the attention of the board of directors; these issues should have been recognized and addressed by AA. Instead they were either missed or overlooked and AA allowed Enron to continue with these practices. The shareholders and board of directors of Enron expected the auditors, AA, to act in the interest of them and the public, and address any problems that these stakeholders are affected by. However, AA did not bring these issues forward, permitting Enron to continue to manipulate their numbers and mislead the stakeholders. 2. One decision of AA that was faulty was approving SPEs that should have been consolidated with Enron’s financial statements, but instead was used for off-balance sheet financing. The requirement of having an outsider three percent equity-at-risk, and decision control, to not be consolidated, should have been caught by AA, who should have fixed the problem. Another defective decision of AA was not advising the audit committee at Enron of important issues. One issue was that their CFO was involved in situations concerning significant conflict of interest. AA should have informed the audit committee of this because the audit committee could have brought this information to the board of directors, where a solution could have been formed. They could have found someone else to deal...
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