Enron had a long relationship with its outside auditor Arthur Andersen (AA) since 1985. Arthur Andersen was an international firm of 36,000 employees but dismissed after the collapse of Enron. During two companies 16 years business relationship, AA not only provided Enron external auditing but also provided internal auditing and consulting services. Until 2001, according to Enron past four years annual reports, Enron overstated its profits by $568 million in total which it had taken up 20 percent of Enron’s earnings. Andersen auditors helped Enron to cheat this earnings to the public through manipulate and falsified accounts. On June 15, 2002, Andersen was admitted that they were shredding audit documents of Enron. (Arthur Andersen v. United State, 2005)
There are four aspects that Arthur Andersen(AA) had an important contribution on Enron collapsed. Firstly, Andersen never disclosed their unethical behavior when they falsified and manipulated financial accounts. Because of Enron was one of AA’s major clients, there was downward pressure on auditing fees. Andersen faced considerable pressure to maintain the audit fees in relatively low level. The company believes that the audit opinion given by the accounting company is only like the goods on the market. In order to secure AA’s own financial interest, AA participated the cheat game with Enron together on several years annual reports. It is unethical action but also break the law. To try to save AA’s important client and also AA attracted by financial interest for their own, AA act in illegal way. From ethical aspects, AA broke integrity and acted not objectivity, they should stop this fraud at the beginning stage.
Secondly, Arthur Andersen placed increased emphasis on performing consulting services for audit clients. It was violating accounting and auditing standards because there were conflicts of interests among these services. This conflict of responsibilities of AA didn’t follow auditing standards and were illegal. Enron were paying Andersen more for consulting than for the financial statement audit. As a result, the business risks to the AA when there are disagreements with the client about financial statement will increase.
In addition to unambiguous responsibilities, the fact of AA violated the principal of independency also existed because there were close relationships and interest conflicts between AA’s employees and Enron’s executives. The audit partner, David Duncan, who was in charge of the Enron account and was a close personal friend of Enron’s chief accounting officer. Meanwhile, there were many management-levels of Enron from AA. For example, in 2000, seven AA auditors joined Enron (Jennings, 2009, p.355). In additional, there are many permanent offices at Enron available to AA employees, and also many AA employees kept close relationships with the staff in Enron. All of these facts affected the independence of auditors from AA.
Fourthly, SEC experience the most difficulties to process Enron case. After Enron collapsed, AA destroyed many audit papers and documents. The SEC hardly to know the truth and collect evidence during investigation of Enron. AA’s in-house counsel advised destroyed of documents (Jennings, 2009, p.358). It is both unethical and illegal behavior.