Ethics and Professional Responsibility Essay Example

auditing services to Enron. Additionally, they must refrain from assigning an accountant to work with a company associated with important personnel like the Chief Accounting Officer.

The impaired independence of Andersen was caused by several factors, including the implementation of a compensation policy that led accountants, such as Duncan, to exceed their authorized responsibilities. This policy was never supposed to be implemented and had the negative effect of impairing independence. To compound the problem, Andersen continued to foster a strong relationship between the two companies.

The Fund of Funds went bankrupt in the 1970s due to overcharging by King Resources Company, their investment adviser. They discovered that properties sold to them were sold at an unfair price. As a result, they sued Arthur Andersen for not informing them about the overcharging. Eventually, Arthur Andersen had to pay $70 million to the Fund of Funds.

Andersen audited both FOF and KRC, considering KRC a risk to their firm due to difficulties caused by John King, KRC’s owner. The Denver Andersen office conducted audits for NRFA, an investment adviser for FOF, as well as for KRC. The office was aware of the relationship between FOF and KRC.

FOF's audit included assessing the market value of NRFA interests, which Andersen failed to determine. Andersen merely assessed the compliance of valuations with FOF guidelines. Notably, Andersen's independence came into question as it audited three companies with intimate relations. This resulted in a conflict of interest between FOF and KRC.

Andersen faced a dilemma: should they inform FOF about the hefty overcharges on properties being sold from KRF to FOF, or should they remain silent to protect KRC's interests? Ultimately, Andersen chose the latter and

suffered consequences. However, they should have declined to work with KRC as soon as they learned of their advisory relationship with FOF to avoid auditing for conflicting parties. This situation highlights the potential legal liabilities that auditing firms can face. Regardless of their decision, a lawsuit with the client was inevitable.

Both Enron and the Fund of Funds cases highlight a serious problem concerning independence, specifically in relation to the generally accepted auditing standards set by the AICPA. These standards state that auditors must maintain independence in their mental attitude in all aspects related to the audit. However, Andersen's provision of non-auditing services compromised their independence, leading to more stringent regulations imposed by the Government Accountability Office. These regulations prohibit public accounting firms from allowing auditors to work on nonattest engagements for the same client and from performing significant or material nonattest services that could affect the audit. Additionally, Section 203 of Sarbanes-Oxley addresses issues regarding Andersen's independence.

According to section 203, the accounting firm cannot conduct audits for the same client for more than 5 consecutive years. Within Arthur Andersen, the Professional Standards Group (PSG) reviews challenging accounting, auditing, and tax matters. Although the PSG strongly objected to the accounting problems found in Enron, their concerns were dismissed. Even a member who opposed the handling of the situation was taken off the Enron account.

Enron had the intention of enhancing their leverage, while also avoiding more debt on their balance sheets, by establishing a special purpose entity. Though the PSG opposed this step and advised against creating the SPE, the auditing team permitted its creation. Thus, Enron went ahead with the formation of LJM, a special purpose

entity. Duncan misrepresented the opposing views of PSG and allowed Enron to proceed with their plans despite PSG's constant objections.

Despite discovering a significant amount of debt not reflected in Enron's balance sheet, Andersen chose to retain Enron as a client, largely due to the reassurances of Duncan. Andersen failed to provide quality assurance and neglected to follow the company's audit check system. The creation of PSG was intended to identify any issues arising from client audits, but higher management continuously overruled PSG's advice, and no one followed their suggestions. PSG should have held greater authority.

The SARBOX's response to the overriding of accounting and auditing research function opinions and recommendations was section 103. The solution is for both groups to collaborate in addressing client issues or concerns instead of disregarding research function decisions, such as those from Andersen's professional standards group. The board should work alongside advisory groups. Andersen had a policy regarding document retention and disposal, where documents not necessary or relevant to the audit file should be disposed of unless a lawsuit had been filed. However, after the SEC announced an investigation into Enron, Duncan and his audit team began shredding documents from Enron.

Shredding was halted when the SEC subpoenaed Andersen. Duncan was terminated for shredding and Andersen faced obstruction of justice charges for disposing of Enron-related documents. The documents ought not to have been shredded, and Duncan used the document retention policy to conceal the situation. They were following company directives, but it ultimately exacerbated the issue. The document-retention policy was ill-advised.

Duncan was not afforded the opportunity to destroy the documents, as Section 203 of the Sarbanes-Oxley Act mandates that companies

maintain all audit paperwork, information related to audits, and evidence supporting conclusions for a minimum of 7 years. This requirement was implemented to prevent the destruction of crucial audit documentation, as was witnessed in the Andersen shredding scandal during Enron's case. Due to overstatement of reported earnings by $1.43 billion, Waste Management is an example of such a scandal.

Waste Management's management altered depreciation estimates and implemented inappropriate accounting strategies to decrease expenses. Arthur Andersen conducted Waste Management's audits for more than five years. Despite Waste Management's inaccuracies and questionable accounting practices, Arthur Andersen deemed them insignificant in 1994 and granted an unreserved opinion. Additionally, Arthur Andersen suggested various accounting corrections and recommended that management modify their accounting policies.

Although Waste Management did not follow through with the necessary measures several years ago, Andersen still provides unqualified reports with additional proposed accounting adjustments. Consequently, the SEC filed a lawsuit against Waste Management's executives and founder. Furthermore, the SEC also charged Andersen for distributing deceptive audit reports from 1993 to 1996, pointing out their failure to exercise reasonable professional care while preparing the audit report.

Despite identifying material misstatements and deceiving the public, Waste Management failed to rectify their errors and utilize generally accepted accounting principles; during the first audit. Knowing this, Andersen should have declined the engagement instead of issuing a report that was not unqualified. Because of their longstanding relationship, accepting the engagement and not providing an unqualified report could result in conflict of interest and impairment of their independence. Therefore, discontinuing the engagement entirely would be the best option.

The topic of independence resurfaced in the Waste Management and Andersen case. Despite undergoing yearly audits, the government

implemented the Sarbanes-Oxley Act to tackle apprehensions regarding conflicts of interest and independence. The act stipulates that a company cannot audit their client for more than five years consecutively.

Section 206 mandates that a public auditing firm cannot hire former chief officers of their clients to audit the same clients in order to prevent conflicts of interest. A similar situation occurred at Waste Management, where all the previous chief financial and accounting officers had worked as auditors at Andersen.

Improper accounting was used by WorldCom, leading to an overstatement of revenue by $958 million and an understatement of line costs by more than $7 billion. Arthur Andersen determined that WorldCom's reporting of revenue and expenses was inaccurate but could not find adequate evidence for the improper accounting due to heavy restrictions placed on them by WorldCom and inadequate information provided. These revelations emerged following WorldCom's bankruptcy filing.

Andersen faced several limitations while auditing WorldCom. They were denied access to the company's computerized reporting system, and communication with auditors was strictly prohibited. Despite viewing WorldCom as a high-risk client, Andersen relied mainly on substantive analytical procedures without implementing surprise audits. Furthermore, the auditors disclosed a list of procedures to be performed to WorldCom's senior management, depriving them of any opportunity for free investigation. Substantive analytical procedures should not have been prioritized over evidence collection. Andersen should have clearly stated in their report that their access to information and ability to gather proper evidence were severely limited.

It could have been more beneficial to avoid entering into a partnership with WorldCom due to the significant limitations and attempts at concealing information, which may have resulted in fraudulent activity. In 1996, Albert

J. Duncap was appointed as CEO of Sunbeam, a company recognized for implementing intense cost-cutting measures. However, Sunbeam experienced a greater loss than anticipated in 1998, leading to Duncap's termination and the revision of the company's financial statements from 1996-1998.

Arthur Andersen, the auditing firm for Sunbeam, was accused of irresponsibly providing unapproved reports for Sunbeam. One of Andersen's partners, Harow, was aware of inappropriate restructuring costs, excessive litigation reserves, and inappropriate revenue recognition related to the sale of inventory. Harow made various proposals to correct entries that did not follow GAAP. However, Sunbeam rejected these proposals, and Harow went along with their decision.

Despite being aware of Sunbeam's improper accounting, Harow continued to provide them with unqualified opinions on their financial statements for both 1996 and 1997 after complying with their request. Harow's lack of due professional care caused him to overlook several issues with accounting entries not adhering to generally accepted accounting principles, in spite of the audit's diligence.

One factor that contributed to the formation of Audit Committees was Harow's failure to stand firm in his decisions and give in too easily to Sunbeam. These committees consist of at least three external directors who are solely responsible for selecting, compensating, and supervising the public accounting firm. In the event of potential fraudulent activities or risks, auditors are obligated to report to the Audit Committee.

After the implementation of the Sarbanes-Oxley Act, there was a case that exemplified how some individuals will still disregard established regulations. Ethics ultimately depends on individual choice. Bernie Madoff famously deceived investors with a clever "split-strike conversion strategy" that falsely suggested he could generate significant returns through securities investments.

Instead of investing the

money in securities, Madoff deposited it into a bank account at Chase Manhattan Bank. The financial statements of Bernard L. Madoff Investment and Securities were audited by Friehling ; Horowitz, but David Friehling was arrested for aiding Madoff with investment advisor fraud and submitting bogus audit reports to the SEC. Friehling neglected to confirm BLMIS revenues, assets, liabilities related to BLMIS client accounts.

Friechling failed to perform internal control testing for payments related to corporate expenses or securities purchases made by BLMIS for their clients. Throughout the audit, Friechling did not exercise due care or maintain professional skepticism. It was intentional on Friechling's part to participate in Madoff's ponzi scheme, despite being aware of the risks involved. Friechling continued to work with Madoff, possibly due to the allure of significant compensation incentives.

After discovering the fraudulent activities of Madoff's business, the auditors should have immediately withdrawn from the engagement. As a result of the Ponzi scheme, the PCAOB will oversee the financial statements of all nonpublic broker-dealers for fiscal years ending after December 31, 2008. The SEC also proposed that investment advisers who have custody of customer assets undergo surprise annual audits without prior notice. From January 1, 2012, accounting firms with three or more professionals in New York will undergo peer reviews once every three years. These cases ultimately led to the creation of the Sarbanes-Oxley Act of 2002 due to many firms struggling with independence and conflicts of interest.

Despite the measures implemented by the act to prevent similar incidents from happening again, there may still be individuals who will not follow the regulations and rules imposed on them. Detecting fraudulent acts and disputes remains difficult

even with significant restrictions unless corporations are thoroughly investigated. However, ethical and professional responsibilities will always be highlighted in any field. Adhering to moral values and prioritizing the public's welfare is the morally upright action.

Anticipated changes to laws and regulations are expected to maintain public safety. The effectiveness of the Sarbanes-Oxley Act and PCAOB in achieving this aim has been satisfactory and is expected to persist, unless new instances of fraud or scandal arise that require further modifications.