Arthur Andersen

Definition

Arthur Andersen was one of the five largest audit and accounting firms in the world, known for its role in the development of the Anglo-American accounting model. The firm became infamous due to its involvement in high-profile corporate scandals, particularly with Enron, leading to its collapse in 2002. This downfall highlighted significant issues in auditing practices and corporate governance within the framework of the Anglo-American accounting model.

5 Must Know Facts For Your Next Test

1. Arthur Andersen was founded in 1913 and quickly grew to become one of the most respected accounting firms globally.
2. The firm was deeply involved in consulting services, which blurred lines between auditing and consulting, contributing to ethical conflicts.
3. In 2001, Arthur Andersen was found guilty of obstructing justice by shredding documents related to its audit of Enron, leading to its eventual dissolution.
4. The fallout from Arthur Andersen's collapse resulted in significant regulatory changes in financial reporting and auditing practices across the United States.
5. The scandal surrounding Arthur Andersen has had a lasting impact on public trust in accounting firms and the importance of corporate governance.

Review Questions

• How did Arthur Andersen's involvement with Enron illustrate weaknesses in the Anglo-American accounting model?
  • Arthur Andersen's role in the Enron scandal showcased critical weaknesses in the Anglo-American accounting model, particularly regarding auditor independence and ethical standards. The firm's dual role as both auditor and consultant for Enron created conflicts of interest that undermined the integrity of financial reporting. This case prompted widespread scrutiny of how audit firms operate and led to calls for stronger regulations to protect investors and ensure transparency.
• What were the key regulatory changes prompted by the collapse of Arthur Andersen, and how do they influence current accounting practices?
  • The collapse of Arthur Andersen spurred significant regulatory reforms, most notably the enactment of the Sarbanes-Oxley Act in 2002. This legislation established stricter requirements for financial disclosures and corporate governance, aiming to enhance accountability and restore investor confidence. These changes have since influenced current accounting practices by emphasizing auditor independence, establishing internal controls over financial reporting, and creating a framework for monitoring compliance.
• Evaluate the long-term effects of Arthur Andersen's demise on the accounting profession and public perception of audit firms.
  • The demise of Arthur Andersen had profound long-term effects on the accounting profession, fundamentally altering public perception of audit firms. The scandal not only diminished trust in one of the 'Big Five' firms but also raised awareness about ethical practices within the industry. As a result, many regulatory bodies now enforce stricter compliance measures, leading to increased scrutiny and accountability among auditors. This shift has reshaped how audit firms operate today, promoting a culture of transparency that is essential for restoring public confidence.

Related terms

Enron: A major American energy company that was involved in one of the largest accounting frauds in history, leading to its bankruptcy and the collapse of Arthur Andersen.

Sarbanes-Oxley Act:

A U.S. federal law enacted in 2002 to protect investors from fraudulent financial reporting by corporations, directly influenced by the scandals involving Arthur Andersen and Enron.

Big Four: The four largest international accounting and professional services firms, which include Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG, that arose after the downfall of Arthur Andersen.