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

We certify that:

This assignment is our work. We acknowledged and disclosed fully any

assistance received in its preparation and cited any sources from which we used

data, ideas, words, either quoted directly or paraphrased.

This assignment was prepared by us specifically for this subject.

Student’s name Student’s

number

Signature

Wong Chun Fai, Tommy (HIH0254)

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This cover sheet must be attached to your assignment.

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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.

1 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. C ompromising 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. I naccura c y 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 investor s

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 Board 4

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.

A uditor 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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