Too Little , Too Late: How the Government could have prevented the fall of Arthur Andersen

In lieu of an abstract, below is the first paragraph of the paper. Arthur Andersen's accounting fraud, later costing investors and corporations billions in losses, could have been stopped had adequate governmental regulations been in place to uphold the quality auditing of corporations. Auditing is the outside accountant's main responsibility: double checking financial statements to verify a company's status. Any failure to uphold quality accounting warrants a Securities and Exchange Commission (SEC) investigation, and legislation should be enacted to stop repeated examples of accounting malevolence. This article is available in The Review: A Journal of Undergraduate Student Research: http://fisherpub.sjfc.edu/ur/vol7/iss1/6 Too Little, Too Late: How the Government could have prevented the fall of Arthur Andersen By Justin Miller Arthur Andersen's accounting fraud, later costing investors and corporations billions in losses, could have been stopped had adequate governmental regulations been in place to uphold the quality auditing of corporations. Auditing is the outside accountant's main responsibility: double checking financial statements to verify a company's status. Any failure to uphold quality accounting warrants a Securities and Exchange Commission (SEC) investigation, and legislation should be enacted to stop repeated examples of accounting malevolence. Many are familiar with Arthur Andersen's fraudulent partnership with Enron and WorldCom as they were major news stories that received tremendous media coverage. However, the list of companies that Andersen improperly audited is lengthy and dates back to the early Nineties (Squires 113). The public is largely unaware of this early deception because, for example, when Arthur Andersen allowed the books to misrepresent the financial picture of the Baptist Foundation of Arizona, (BFA). The BFA eventually settled their lawsuit without being fully punished (Bartlett v. Andersen 1 9). Andersen's fraudulent partnerships piled up into crescendo of corporate deceit. Legislation like the Sarbanes-Oxley Act, enacted in response to Enron and WorldCom, should have been passed after the BFA scandal. Self-regulation in the accounting industry failed miserably at stopping Andersen's deceit. Effective legislation would have curtailed some of the worst examples of corporate fraud this country has ever seen. An Overview of Andersen Arthur Andersen was formed in 1913, and "for 89 years it was the mainstay of the accounting profession holding a reputation for honesty and trustworthiness" (Squires 10). In the Eighties it was so dominant that the eight major accounting firms were known as Arthur Andersen and the Seven Dwarfs (Squires 5). Just before the collapse, Andersen had offices in 350 cities worldwide and was previously known as the "Marine Corps of Accounting," for their quality audits and good reputation (Arthur ^ 1, Fowler f 20). It employed 85,000 and worked for some 100,000 clients (Arthur f 1, Ex-Andersen ^ 1). Somewhere down the line Andersen strayed from its reputable beginnings, turning unethical and greedy. The immediate cause of the shift in ethics came after a period of sixty years. The leadership of Harvey Kapnick grossly expanded Andersen's size through partnerships. This practice was continued through the early Nineties. Though strong leadership had made the firm a global accounting giant, it grew so fast it lost sight of its humble beginnings out of greed (Squires 73, 77, 89). Weak Regulation Lays Foundation for Deceit Investment groups and stock brokers watch earnings statements of corporations and will only buy if favorable economic gains are on the horizon. Arthur Andersen misstated financial statements and neglected its auditing responsibilities to augment positive earnings reports for the corporations it represented. Auditing successful companies on the rise meant greater financial success for Andersen itself. Thus, this cycle of greed led to more profit and more greed. Andersen lost sight of its responsibility to the investing public and was willing to deceive investors for its own financial profit (Letters f 3). The company began to hire employees of similar personality types, often referred to as Andersen Androids. They specifically hired young, quiet, noncombatant workers who would pose the smallest chance of blowing the whistle on the firm's scams (Squires 125). America needed the SEC to step up its watch of accounting practices and corporate fraud, but the government standard in the Nineties was ineffectual. It merely called for various small organizations like the Public Oversight Board. Such organizations were known as Self-Regulating Groups because the accounting industry was and had been a selfregulating industry for decades. These groups took on much of the power that the SEC should have claimed. The SEC's limited powers were set up so that the government could limit the amount of bureaucracy given to the Securities and Exchange Commission upon its establishment. This move proved to be a multi-billion dollar mistake. A number of specific examples of corporate accounting fraud led to the demise of Arthur Andersen. Throughout five examples the government did not do enough to prevent future auditing fraud. Rather, the government followed a policy of appeasement philosophy and merely fined Arthur Andersen and was foolish enough to believe the firm's, "promise not to repeat the behavior" (Fowler f 18).