CASE STUDYON

ARTHUR ANDERSEN PRESENTED BY;

ASIF SHAH UMMEHANI

GROUP-3 SEC-B

INTRODUCTION

Evolution of a large organization on the basis of integrity and adherence to professional standards

The importance of ethics, integrity and professional standards in the audit business. The need to balance economic and social benefits in corporate decision making.

GRACE TO DISGRACE

In March 2002, Andersen , one of the world's leading audit firms, was indicted by the US Department of Justice on charges of obstructing the course of justice in the Enron case

DOJ had begun a criminal investigation into Andersen in January 2002 in connection with the Enron case

DOJ's investigation revealed that Andersen had deliberately destroyed crucial documents relating to Enron during October-November 2001

Through the late-1990s, Andersen's name had figured prominently in various instances of business fraud by its clients, namely, Sunbeam, Waste Management Inc., Quest Communication, Global Crossing, and Baptist Foundation of Arizona.

The Fall - Was Andersen Guilty?

In October 2001, Enron, a leading energy trading company in the US and one of the biggest clients of Andersen, announced its third-quarter results for 2001.

The third-quarter results included a loss of $638 million, a $35 million write-down due to losses on its partnerships, and a decrease in shareholder's equity by $1.2 billion.

Suspecting Enron of financial misappropriations, the SEC launched an investigation into Enron's financial dealings in late October.

In November 2001, Enron restated its financial statements for the years, 1997 to 2000 and for the first two quarters of 2001, and reported a loss of $586 million for that period.

The Fall - Nailing Andersen In April 2002, Duncan pleaded guilty to the charge of obstruction of

justice (by shredding documents) and agreed to cooperate with the DOJ and testify against Andersen.

Duncan testified that though at first the Andersen audit team had known about certain accounting errors at Enron, it did not force Enron to reflect it in its financial statements.

In mid-2001, the team changed its mind and forced Enron to write-down $1.2 billion in shareholders' equity and asked it to attribute the write-down to an accounting error.

The Debate on the Role of Auditors

Excessive greed of Auditors.

Obsolete Accounting standards.

Conflict between Auditing and Consulting.

Inefficient partnership model of Audit firm.

Retiring Auditors finding births in boards of the companies they audited.

The Aftermath In August 2002, Andersen Worldwide, the parent company of the US-

based Andersen, agreed to pay claims worth $60 million to Enron shareholders and creditors (against claims of over $25 billion)

Andersen Worldwide also stated that it was not responsible for the deeds of Andersen (US), as Andersen (US) operated as an independent division

In October 2002, Andersen received the DOJ verdict: the firm was given the maximum court sentence (in such cases) of five years probation on its US operations and a $500,000 fine for altering evidence of its Enron work..