This memo will discuss why Arthur Andersen was found with accounting scandal strongly tied with Enron and how Arthur Andersen failed to comply with the idea of independence to separate with the client as different parties in work, interest, and human resources.
Enron worked with Arthur Andersen closely in many different types of accounting services including internal auditing, external auditing, and consulting. With all the time being spent in Enron, Arthur Andersen was not able to differentiate the purpose of their work. Enron created an office space where the auditors could stay at Enron. It begins with consulting to preparing the financial statements and auditing the statements. Arthur Andersen seemed like another accounting department in Enron. The auditors were supposed to audit financial statements in order to detect any misstatements, but they were shortsighted due to the fact that they have prepared their own financial statements. In addition, the employees and the auditor’s relationships were really close, and it resulted in the auditors decreasing their doubtful mind about strange transactions. The enactment of Sarbanes-Oxley section 201 prohibits public accounting firms provide internal auditing to a public company because it creates internal conflict and also increase the possibility of misstatements. Arthur Andersen’s employees were always spotted in Enron’s office. Furthermore, employees from both companies went on vacations together. It made people suspects if there was an alliance between the two. Enron, being one of the biggest clients in Houston office, pays Arthur Andersen about a million per week to do the service. It was a client that the accounting firm wanted to keep. With Enron as Arthur Andersen’s client, the accounting firm was able to gain more clients in oil and gas industry. Thus, when the engagement managers and partners discovered the fraudulent transactions, they were unwilling to communicate with the board of directors or disengage from the client. The firm compromised their independence to the revenue they are generating. The main purpose for auditors is to serve the publics interest assuring the financial statements were free from fraud …show more content…
Arthur Andersen did not appear as an independent third party from their clients, and the accounting firm was also bearing a financial conflict. Being the fifth biggest certified public accounting firm in the United States, Arthur Andersen was helping companies creating fraudulent financial statements. The scandal decreases the public’s faith in security exchange once again. Congress enacting Sarbanes-Oxley with new regulations specifically for public company and registered public accounting firm to retain the public’s