Arthur Andersen accounting firms was the auditor to Enron

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Secondary, the Enron`s management failed in their responsibilities. During the Enron`s share price fall, the Enron`s executives required their employees bought the stock, and at the same time, the executives were selling the stocks in order in turned their back on their employees. Finally, the employees lost their retirement funding, paychecks and other compensation plan. in view of the fact that a management must be trustworthy and have integrity, in this case Enron had deceived the employees faith and trust to the company. Therefore, the Enron`s management is one of the reasons lead to crisis of confidence.

External parties would be the Arthur Andersen auditing term and auditing commitment term. Arthur Andersen accounting firms was the auditor to Enron. Unlike Enron`s auditing term, the external term auditing term should be independent form Enron Company with unbiased attitude. This was clearly not the case, Arthur Andersen accountants knew long beforehand about `s growing loses, at the same time; Enron paid an enormous consulting fee to Andersen for inducing the action of using SPE `s to hide loss. Consequently, the detriment of reputation led to the demise of Andersen audit firm.

The three types of consulting services I would like to introduce would be Financial Advising, Operation and Human Capital. Firstly, Financial Advising is one of the main types of consulting services. Auditing firms would support CFOs to navigate the complexity of their role, arrange the structure of their function and to enhance their contribution to the business. As being a CFO, it has to take the decision support information in the appropriate time and transform the finance function from a 'supporting' function to a 'business partner' instead of just reducing the costs of finance function.. For example, Deloitte provide a specific CFO Service consist of finance transformation, integrated performance management, shared services design & implementation and outsourcing advisory. However, the CFOs may lead to conflicts of interest between auditing firms and CFO. Once the auditing firms are taking parts of the aggressive accounting and financial reporting treatments, the role for them being independence would be shaking. Since the CFOs may wish to pay a higher consulting fees to the auditing firms for windows dress the financial statement. A good financial statement can delight the shareholders and attract more investors in the future. Therefore, auditing firms would help their clients to hide their loss by their auditing knowledge if they want to receive higher revenue. For example, during the early months of 2002, Enron had paid an enormous consulting fee to Andersen for the SPE-related Transaction, this cause critics charges that the above action impaired Andersen `s independence.

Second type of consulting service I would like to introduce is Operation. By PwC, the operation could include separate into borderless procurement, revenue growth, shared services and outsourcing and sustainability. The above action all used to improve the management and process by increased the effective of their operating processes and supply chain. For example, in some cases, auditing firms may suggest their clients make the service transformation such as moving from traditional, product oriented organization to service oriented companies, which can clearly classify the difference between normal operating business and service business. Nevertheless, it is impossible to ensure the operation advising would be successful. Once the company follow their auditing firm`s suggestion but get a loss. This will badly affect the auditing firm's impression as loss of potential clients. as a result, the auditing firms would like to hide their client`s loss in order to keep their own reputation. This would be identifying as self-interest which is a threats to independence.

The last but not least, third consulting service would be Human Capital. Every organization gets human resources issues, these issues arise as well as the business start to grow with more business strategy. Therefore, auditing firms try to provide innovative, integrated and practical solutions to align the organization`s people and business strategies by supporting human capital consulting services. It aims to maximize the potential of the client`s worker in order to improve the business performance. The threats for this consulting service is similar to operation consulting service, the auditing firms may make a wrong suggestion which transform the workers in to inappropriate position, it will lead to de-motivated the client`s worker and cause bad performance. Seriously, the staff may leave the business then organization need to hire or train another worker which increase the cost of human resources. Sometimes, the auditing would like to hide their mistake by helping window dress their client`s financial statement or debts off the balance sheet.


The following are five recommendations that have been made recently to strengthen and the independent audit function. Sarbanes -Oxley Act(SOX) would be the first I want to explain.

SOX is a united states federal law enacted on July 30, 2002 which set new or encourage quality for all U.S public company boards, management and public accounting firms. This act address a host of recommendation for strengthens the independent audit function. SOX section 204 concentrate on auditor reports to audit committees, it outline that each registered public accounting firm should report any issues to the audit committee of the issuer timely. The above section is useful for maintain the auditor independence as it required some essential elements. First, it is said that all critical accounting policies and practices would be used. Secondary, the issuer would discuss all alternative treatment of financial information within lawful accounting principles.

In response to SOX`s action, the Securities and Exchange Commission (SEC) exchanges proposed new rule and regulation to strengthen audit committees. One of the action that SEC practice is final rule which related to non-audit service, as auditing firms provide non-audit service to their client such as consulting service would impair the accounting firm`s independence. Consequently, the final rule includes preventing certain partners taking part of the auditing service. Furthermore, final rule address an accountant would not be independent from auditing firm`s client if the auditing firms received any payment other than audit, review and attest services. I would support the above recommendation since it separate the non-audit service and audit service by different parties in order to keep the audit service independence as the auditor cannot function in the role of management. SOX 201 outline the services outside the scope of practice of auditors, under 201, it identify the non-audit service including

Bookkeeping or other services related to the accounting records or financial statements of the audit client

Financial information systems design and implementation

Appraisal or valuation services, fairness opinions, or contribution-in-kind reports

Actuarial services

Internet audit outsourcing services

Management functions or human resources

Broker or dealer, investment adviser, or investment banking services

Legal services and expert services unrelated to the audit

Any other service that the board determines, by regulation, is impermissible.

By 'Sarbanes-Oxley Act of 2002'

In SEC final rule, it also enhanced the unique ability and responsibility of the audit committee which used for prevent the auditor form the pressures that caused by their clients CEOs, CFOs, internal auditing term and management. This would be useful for maintaining independence but it difficult to practice, since the only way to encourage the auditor ability would be education or professional training. However, it can`t ensure the auditing term wouldn`t be induce by the large amount of fees that their clients paid especially

Another action take by SEC would be the correction to final regulations. This rules relate to requirements towards auditor independence and minimize the misstatements of financial statement, it enhanced disclosure of fees paid to auditors.

Beside SEC and SOX, in Government Auditing Standards 2010 Exposure Draft also outline a conceptual framework for independence. it used to provide a clear means for auditors to classify auditor independence and the framework are based on facts and circumstances that are often unique particular audit business. However, these auditing standards are only a draft so it difficult to ensure the information is accuracy or would not be correct in the future.