Issue 1: Independence
Arthur Anderson’s independence from their clients’ managers had been compromised because of the large fees which were earned from non-auditing services.
In 2000, Arthur Anderson received $27 million for non-audit consulting services, including fees for “development of a computerized financial system for conducting Enron’s internal audit.” This was compared to $25 millions Anderson earned from Enron for audit fees. Thus, it was difficult for Arthur Andersen to retain independence when it was receiving such a high consulting profits from Enron. This conflict of interest between auditing and consulting obviously influenced auditor’s independence.
Furthermore, as an audit partner that understands the role of being a “public watchdog” with “ultimate allegiance to the creditors and shareholders”, Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries.
In addition, Andersen had provided internal and external auditing service to Enron for 15 years. This long-term employment relationship between Enron and Anderson also impacted Andersen’s independence. Besides, Enron’s own in-house financial team was dominated by former Anderson partners. It is hard for Anderson to be impartial through its work free from pressure when it is lack of necessary rotation.
Issue 2: Evidence collection and evaluation
According to insufficient independence and no effective audit procedures which are mentioned above, it was difficult for Anderson to collect and evaluate evidence for its audit work and it failed in detecting and disclosing Enron’s material accounting misstatements. It was also found that Anderson deliberately destroyed the documentary evidence in June 2002 which could implicate itself before coming criminal investigation.
Issue 3: Corporate governance
The role of a company’s...
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