Ethics: Arthur Andersen Case Study Examples

Arthur Andersen founded Arthur Andersen LLP (AA) in 1913. AA was built upon legendary integrity. On one occasion, Arthur refused to approve a transaction that could have inflated the earnings of a local railroad company. In 1954, AA started offering consultancy services that soon overtook audit services as the main revenue source. The culture of AA started changing from one where integrity and reputation came first, and instead AA focused on an aggressive pursuit of revenues. As the pressure for profits mounted, AA adopted more rationalized Audit approaches that required more analysis and less time input.
AA started having difficulties resolving the conflict of interest posed by the need to maximize revenue and to protect the interest of shareholders, the government, and the public. Conducting audit in an objective and independent manner would require the firm to sometimes criticize the financial reporting practices of the management and this could conflict with the firm’s objective of maximizing revenue. For this reason, AA took an increasingly relaxed approach towards it audit practices. In addition, AA was not sure whether they should serve the interest of the current or future shareholders.
In pursuit of revenue, AA made the partner in charge of the client to have powers to override the recommendations made by the quality control partner. For instance, when Bass questioned Enron financial reporting over their SPEs, he was removed from Enron audit. AA made more mistakes when they decided to obstruct justice by shredding documents that would have assisted the SEC in investigating the Enron scandal. When AA was sued, they were convicted and this effectively meant they could no longer audit listed firms. AA suffered major reputation damage that even though they had a good chance of succeeding in an appeal, they had lost most of their clients and employees. AA did not bother to file an appeal and instead choose to close shop.