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1.Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties.
In this case study, in my opinion, the causes of that the Andersen’s auditing of companies accused of accounting improprieties, it’s has a main factor. Because Athur Andersen do not think about the company who is to cooperate whit it is like Athur Andersen to make deceptive accounting. These four real cases to show us how they operate the deceptive accounting.
First point, “Sunbeam.”
1997 sunlight company (SUNBEAM) the bankruptcy case, the sunlight company is referred to the forge sales volume, the profit and the expenditure. Under its partner discrete sampling's premise, Andersen had still approved the sunlight company to have the questionable point financial reporting. Finally, Sunlight Company suspends pay. Claim request which proposed regarding the American negotiable securities and the transaction committee, Andersen strong against. Finally, to accuse in the situation which shows neither approval nor disapproval, Andersen and the shareholder out of court settlement, compensates $110million dollars.
Second point, “waste management.”
Waste Management the company to make a false report gathers shares the desk, Waste Management Company’s financial reporting 1992 to 1996 income false report to amount to $1.4 billion dollars to the company. The American negotiable securities and the transaction committee discovered that Andersen's report of audit is not extremely real, and has the misleading function. Rules it to be a suspect the improper occupation operation finally. Andersen has accepted this ruling, and has paid damages $7 million dollars civil fines, but to it whether should say nothing pro or con responsible. The Andersen also agreement is $220 million dollar out of court settlement payment partial funds, but had not acknowledged that oneself have any error.
Third point is “Baptist Foundation of Arizona”.
BFA invested heavily in real estate, a more speculative investment strategy than other Baptist foundations in the state traditionally used. Profits from investments were supposed to be used to fund the churches’ ministries and numerous charitable causes. Problems began when the real estate market in Arizona suffered a downturn, and BFA’s management came under pressure to show a profit.
Fourth point is the most important point, “Enron”.
Andersen in 1985 established the beginning from the Enron to make the audit for it, has done the entire 16 years. Besides the pure audit, Andersen also provides the management audit and the advisory service. In the mid-1990s, Andersen with signed a subsidiary agreement safely, Andersen has assumed full responsibility the management audit work safely.
Not only that Enron's referral service also completely is responsible by Andersen. Andersen’s auditing of companies from 1997 to 2001 fictitious profit $586 million dollars, and hid several billions US dollar debts. The US Supervisory department's investigation discovered that in Enron's employees more than 100 come from Andersen unexpectedly, including chief accountant and the Chief Financial Officer and so on senior clerk, but in the board of directors, has half trustee and Andersen has direct or the indirect relation. In October, 2001, SEC announced that to carried on the investigation Andersen. Might while, Andersen's Houston Office in two weeks which started from October 23 destroy several thousand page of Enron's documents. But the company in October 17 had known that the US Securities trading Committee in carries on the investigation to Enron's financial situation, receives the securities trading committee's subpoena after November 8 only then stops the destruction document.
2.What evidences is there that Andersen’s corporate culture contributed to its downfall?
As the details of these investigations into accounting irregularities and fraud came to light, it became apparent that Andersen was more concerned about its own revenue growth than where the revenue came from or whether its independence as an auditor had been compromised.
One of the reasons for this confusion in its corporate culture may have been that numerous inexperienced business consultants and untrained auditors were sent t client sites that were largely ignorant of company policies.
Another factor may have been its partners’ limited involvement in the process of issuing opinions. As the company grew, the number of partners stagnated.
There is also evidence that Andersen had limited oversight over its audit teams and that such visibility was impaired by a relative lack of checks and balance that could have identified when audit teams had great discretion in terms of issuing financial statements and restatements.
In this case study paper we can see an example of Andersen’s corporate culture contributed to its downfall. “In February 2002, Andersen hired former Federal Reserve Board chairman Paul Volcker to institute reform and help restore its reputation. Soon after Volcker came n board, however, Andersen was indicted for obstruction of justice in connection with the shredding of Enorn documents. During the investigations, Andersen had been trying to negotiate merger deals for its international partnerships and salvage what was left of its US operations. But amid a mass exodus of clients and partners and Beraedino’s resignation, the company was forced the begin selling off carious business units and ultimately laid off more than seven thousand employees in the United States.
3.How can the provisions of the Sarbanes-Oxley Act help minimize the likelihood of auditors failing to identify accounting irregularities?
The act was enacted to combat securities and accounting fraud and includes, among other things, provisions for a new accounting oversight board, stiffer penalties for violators, and higher standard of corporate governance.
In response, Congress passed the Sarbanes-Oxley Act of 2002, which established new guidelines and direction for corporate.
Sarbanes-Oxley Act Section 104 : Inspection of registered public accounting firms. What it will do is Verify that financial statements are accurate. It could prevent using questionable accounting practices.
Section 201: services outside the scope of auditors. What it will do is restrict auditors to audit activities only. It could prevent fostering improper relationships; reducing the likelihood of compromising a good audit for more revenue.
Section 203: audit partner rotation. What it will do is rotate partners assigned to client so that “fresh eyes” see paperwork. It could prevent fostering “partner-in-crime” relationship.ect.
All of the case study table C7-1.
Sarbanes-Oxley Act goal strengthens the company responsibility, protects the public company investor's benefit to be exempt from company top manager and the related organization violation, its intrinsic logical mentality is: Enhances the public corporate finance report and information disclosure timeliness and the accuracy, may protect the public company investor's benefit effectively; But strengthens the company top manager financial report responsibility, provides the outside audit independently and so on, will be helpful in enhances the corporate finance report and the information disclosure quality.
The special discussion audit independence, and proposes certain measures, one of them is forbids the Accounting firm both to provide the audit service to the identical customer, and provides the advisory service. Research discovered that after Sarbanes-Oxley Act implementation, the auditor is willing to provide the non-standard non-reservations the report of audit, moreover, in the corporation report profit the earnings management's degree reduces. This discovery supports the Sarbanes-Oxley Act enhancement audit independent inference.
Because one of Sarbanes-Oxley Act central contents is the tighten auditing committee, the restricted surplus management (improves information quality). If the market can the full anticipated Sarbanes-Oxley Act influence, these earnings management be so high, the National audit office independence bad To be listed, its market response must be few with the earnings management, between the National audit office independence strong To be listed has the remarkable difference. Their experience result cannot obviously support its deduction. The author believed finally, Sarbanes-Oxley Act passing, but is quantity increases unceasingly to the market, the scale enlarges unceasingly accountant the corrupting practices event's instinct responded, it contains the content more is statesman's slogan and the instigation, but is not one kind of reform in the true sense.
For the accounting profession, the Sarbanes-Oxley Act emphasizes auditor independence and quality, restricts accounting firms’ ability to provide both audit and nonaudit services for the same clients, and requires periodic reviews of audit firms. All are provisions that the Arthur Andersen of the past would likely have supported wholeheartedly.