Bachelor of Business

Assignment Cover Sheet

Subject Comparative business ethics & social responsibility

Subject Code HC 2121
Lecturer Ms. Janice Lui
Assignment Title Individual case study
Trimester: 1 2009

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Student’s name Student’s Signature

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Wong Chun Fai, Tommy (HIH0254)

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1. Describe the legal and ethical issues surrounding Andersen’s auditing of
companies accused of accounting improprieties.

The term social responsibility is an organization’s obligation to maximize its positive

impact on stakeholders and to minimize its negative impact. There are four levels of
social responsibility – economic, legal, ethical, and philanthropic (figure 2-3).

The term corporate citizenship is often to express the extent to which businesses
strategically meet those responsibilities placed on them by their various stakeholders.1

Business is expected to obey all laws and government regulation to fulfill legal issues.
Regarding ethical concern, business should follow standards of acceptable as judged
by stakeholders.

As an auditing firm, Andersen has its set of standards for the accounting profession.
However, with the change of the corporate culture and the company vision (which
will be presented at Question 2), 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.

Thereafter, Andersen started to involve into the illegal and unethical issues which at
last, led to the close of its doors after ninety years of business.

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Ferrell Fraedrich Ferrell, Business Ethics 7th edition, 2009 update, P.30

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Legal issues surrounding Andersen’s auditing:

The following 5 cases disclosed the legal issues surrounding Andersen’s auditing
practice.

1. Perpetuate the accounting fraud.

The Baptist Foundation of Arizons (BFA), which Anderson served as auditor, bilked
investors out of about $570 million.

BFA allegedly concealed losses from investors beginning in 1986 by selling more
properties at inflated prices to entities that had borrowed money from foundation and
were unlikely to pay for the properties unless the real estate market turned around.
The scheme eventually unraveled, leading to criminal investigations and lawsuits
against BFA and Anderson.

By that, Anderson was accused of issuing false and misleading approvals of BFA’s
financial statements, which allow the foundation to perpetuate the fraud. And finally
Arthur Andersen paid $ 217 million to BFA to settle a lawsuit.

2. Failed to address serious accounting errors

In August 200, Andersen agreed to pay $ 100 million to Sunbeam Corp. to resolve the
claims without admitting fault or liability. It was lawsuit by Sunbeam investors for its
audits failed to address serious accounting errors include recording revenue on
contingent sales, and accelerating sales from later period into present quarter, using
improper bill and hold transaction which involves booking sales months ahead of
actual shipment or billing.

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3. Questionable accounting practices

In the case of Waste Management, Andersen was named in the case as having aided
the fraud by repeatedly issue unqualified audit opinions on Waste Management’s
materially misleading financial statement. Indeed, Andersen accepted to earn
additional fees suggested by Waste Management though “special work” which
Andersen had to write off the accumulated errors over a ten year period and change its
underlying accounting practices.
At last, Andersen found itself in court over questionable accounting practices with
regard to $ 1.4 billion of overstated earning at Waste Management. Finally, it paid $
220 million to Waste Management. It was also forced to promise not to sign off on
spurious financial statements in the future.

4. Obstruction of justice

Andersen viewed Enron as one of the biggest client, which provided a million a week
in audit fee to Andersen, along with the consulting fees it paid to Andersen’s spin-off
firm, Accenture. CEO of Andersen treated this as a significant opportunity to expand
revenues at Andersen.

In 2001, Andersen help destroying a number of documents concerning the auditing of

Enron after she was forced to restate five years worth of financial statements that
Andersen had signed off on, accounting for $586 million in losses.

In June 15, 2002, Andersen found guilty of obstruction of justice in case of Enron. It
admitted to destroying Enron’s audited documents, which led to an indictment for
obstruction of justice.

5. Failing to find the accounting irregularities

Worldcom is the largest clients of Andersen. As an auditor, of Worldcom, Andersen

admitted to improperly account for nearly $3.9 billion of expenses and failed to find
the accounting irregularities of Worldcom..

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Ethical issues

1. Compromising the independent of audits

According to American Institute of Certified Public Accountants (AICPA), the

objective of an independent audit of a client’s finance statement is the expression of
an opinion on the fairness with the finance statements present and obtains reasonable
assurance that client’s finance statements are free of material misstatement. In 1950s,
Andersen provide both auditing and consulting services in a corporation in order to
draw larger profit There is a potential for compromising the independent of audits and
it is not an acceptable standard of stakeholder.

2. Creating employee military

In 1999, it split its accounting and consulting function in to two separate and often
competing units. Competition between the two units for accounts tended to discourage
a team spirit and instead fostered secrecy and selfishness. Communication suffered,

3. Inaccuracy information to stakeholder

Mostly investor will depend on the audit report for investment decision. Any
misleading information bought by questionable accounting practices may overstate
client’s earning, hide the improper business deal or another inaccuracy information.
This is not an acceptable standard of stakeholder specially investors.

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Economic issues

1. Wealth of investors

Improper auditing practice would lead to the spreading out of the failed accounting
information which investors depend on for investment decision.

Any inaccurate accounting information would properly attribute to the loss of the
investors and shareholder, which was opposite to maximizing stakeholder wealth in
social responsibility.

2. Job of staff

Just referring of the cases, the invalid accounting information usually cause the
lawsuit against the corporation and at last, lead to the bankruptcy. At this stage, the
close of business must make the thousand of people losing their job.

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2. What evidence is there that Andersen’s corporate culture contributed to its
down- fall?

Business ethics, is associated with increased profits

Many samples indicate that corporate have significant performance declines after
disclosure of the failure to act responsibly to business ethics. Many researches showed
that social responsibility, including business ethics, is associated with increased
profits. The results provide evidence that corporate concern for ethical conduct is
becoming part of strategic towards obtaining the outcome of higher profitability.

A successful social responsibility program must align with corporate culture of the
organization; this is to identify the mission, values and norms that likely to have
implications for social responsibility.2

Change in its corporate culture

In case 7 of the text book, we found that Arthur Andersen was exemplified integrity
that was synonymous with accounting profession in its earlier days. It set standards
for the accounting profession and uncompromising insistence on auditor
independence. It emphasis on recruiting and retaining big clients came at quality and
independent audits.3

In the 1950s, Anderson began providing consulting services to large clients such as
General Electric and Schlitz Brewing. Over the next 30 years, its consulting business
became more profitable per partner than its core accounting and tax service business.
Those individuals who could deliver the big accounts were often promoted ahead of
the practitioners of quality.

This is a fundamental change in its corporate culture. The firm became focus on
growth generated, one in which obtaining high profit consulting business seems to
have been regarded more highly than providing objective audit services.

2
Ferrell Fraedrich Ferrell, Business Ethics 7th edition, 2009 update, P.16
3
I bid, P.362

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Corporate culture contributed to its down- fall

In 1999, Anderson split its accounting and consulting function into two separate.
Reportedly, competition between two units for account tended to discourage a team
spirit and instead fostered secrecy and selfishness.

Compromise of its independence as an auditor and concern about revenue growth

became a confusion of its corporate culture. This corporate culture also posed an
ethical dilemma, gain more profit by consulting service or compromising
independence of audit. Revenue orientated directly led to later unethical decision.

With the revenue orientated culture, numerous inexperienced business consultants and
untrained auditors were sent to client sites who were largely ignorant of company
polices. As the company grew, the number of partners stagnated that had limited
oversight over its audit team.

Employee military, down in quality of audit team and management and unethical
issues in the company finally led to numbers of lawsuit for perpetuate the fraud, audits
failed to address serious accounting errors, and questionable accounting practices,
convicted of obstruction of justice. Essentially the company shut down the business.

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3. How can the provisions of the Sarbanes-Oxley Act help minimize the
likelihood of auditors failing to identify accounting irregularities?

In 2002, US Congress have passed the Sarbanes Oxley Act to established new
guidelines and direction for corporate and accounting responsibility. The act have
enacted to combat securities and accounting fraud and includes provision for a new
accounting oversight board, stiffer penalties for violators and higher standards of
corporate governance. It helps minimize the likelihood of auditors falling to
accounting irregularities in follow area:

Public Company Accounting Oversight Board4

An oversight board is to oversee the audit of public companies in order to protect the
interests of investors in the preparation of informative, accurate and independent audit
reports for companies. Their duties include:

This is to verify that financial statements are accurate so as to prevent the use of
questionable/illegal accounting practices.

Auditor and analyst independence

To accomplish auditor independence, Section 201 of the act no longer allows

registered public accounting firms to provide both non audit and audit services to
public company-National securities exchanges and registered securities associations
have already adopted similar conflict-of-interest rules for security analysts, brokers,
and dealers, who recommend entities in research reports.

It help enhancing the accounting profession and emphasis auditor and analyst
independence and quality, restrict accounting firms’ ability to provide both audit and
non-audit services for the same clients and requires periodic reviews of audit firms.
Thus, reduce likelihood of compromising good audit for more revenue.

4
Ferrell Fraedrich Ferrell, Business Ethics 7th edition, 2009 update, P.105-106

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Corporate and Criminal Fraud Accountability

The act makes the knowing destruction or creation of documents to “impede, obstruct
or influence” and existing or contemplated federal investigation a felony. The SEC
could freeze extraordinary payments to directors, officers, partners, controlling
persons, and agents of employees. The U.S. Sentencing Commission reviews
sentencing guidelines for securities and accounting fraud.

The act’s uniqueness from past legislation is its perspective to mandate accountability
from the many players in the “game of business,” creating more explicit rules in
playing fair. The act creates a foundation to strongly discourage wrongdoing and sets
ethical standards of what’s expected of American business.

This is to prevent destruction of documents, will allow investigators to review work of

auditors

Audit partner rotation

The rotation requirement of the audit partner helps avoiding of the “partner in crime”
relationship.

Auditor reports to audit committees

Auditors must report to committee, who work for the board, not the company. This is
to powerlessness of auditors by giving board power to investigate and rectify.

Management assessment of internal controls

This gives auditor a voice outside of the audit to attest to polices demonstrated by the
company Information slipping by stakeholders by giving more visibility to the firm

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Enhanced Financial Disclosures

With independence, the Sarbanes-Oxley Act is better able to ensure compliance with
the enhanced financial disclosures of public companies’ true condition. Registered
public accounting firms are required to identify all material correcting adjustments to
reflect accurate financial statements. Also, all material off-balance-sheet transactions
and other relationships with unconsolidated entities that affect current or future
financial conditions of a public company must be disclosed in each annual and
quarterly financial report. In addition, public companies must also report “on a rapid
and current basis” material changes in the financial condition or operation persons
acting to corrupt or destroy evidence liable for extended prison term. This is to other
from attempting to interfere in an official investigation.

Improper influence on conduct of Audits

Also any improper influence on conduct of audits would be removed power from
company personnel. This is to withholding of information from auditors by making
the act illegal.

Generally, the Act helps to improve the improper illegal and ethical problem
introduced by the auditors and its corporation. It does help to minimize the likelihood
of auditors failing to identify accounting regularities.

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Reference:

[1] Ferrell Fraedrich Ferrell, Business Ethics 7th edition, 2009 update.

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