What did Arthur Andersen contribute to the Enron disaster? I have read about this and I am having trouble understanding it.
Arthur Andersen, a huge accounting firm, apparently hid debts and covered for dummy firms owned by Enron. When Andersen feared discovery, the company ordered most documents destroyed.
Check these sites for more information.
http://www.time.com/time/business/article/0,8599,193520,00.html
http://en.wikipedia.org/wiki/Arthur_Andersen
The accounting firm Arthur Andersen played a significant role in the Enron scandal. To understand their contribution, let's break it down step by step:
1. Background on Arthur Andersen: Arthur Andersen was one of the largest accounting firms in the world, known for providing auditing and consulting services to numerous clients, including Enron.
2. Role as Enron's auditor: The primary responsibility of an auditor is to review a company's financial records and statements to ensure they are accurate and comply with accounting standards. Arthur Andersen was Enron's external auditor, tasked with examining Enron's financial statements and providing an opinion on their reliability.
3. Compromised independence: Andersen's relationship with Enron became problematic as they also provided consulting services to the company. This dual role created a conflict of interest, as the consulting fees were substantial, potentially compromising Andersen's independence and objectivity in auditing Enron's financial statements.
4. Approval of questionable accounting practices: Enron used complex and aggressive accounting practices to manipulate its financial statements and hide debt. These practices relied heavily on special purpose entities (SPEs) that were used to misrepresent Enron's financial health. Andersen, despite being aware of these practices, approved and signed off on Enron's misleading financial statements.
5. Document destruction controversy: As the Enron scandal unraveled, allegations arose that Arthur Andersen had destroyed documents related to their work for Enron. The destruction of documents was perceived as an obstruction of justice and raised suspicions about Andersen's intent to cover up their involvement in Enron's fraudulent activities.
6. Legal implications and downfall: Due to their role in the Enron scandal, Arthur Andersen faced extensive legal repercussions. In 2002, they were indicted for obstructing justice by destroying documents. The indictment resulted in the firm losing its reputation, clients, and ultimately, its ability to continue operating. Andersen was convicted in 2002, and while the conviction was later overturned by the Supreme Court, the damage had already been done.
In summary, Arthur Andersen's contribution to the Enron disaster can be attributed to their compromised independence as an auditor, the approval of questionable accounting practices, and the controversy surrounding the destruction of documents, which ultimately led to their downfall.