Accounting Essay

11292 Words Mar 23rd, 2014 46 Pages
Michael C. Knapp
Cases in Auditing , 2003

Ethics case enron corporation John and Mary Andersen immigrated to the United States from their native Nor-way in 1881. The young couple made their way to the small farming community of Piano, Illinois, some 40 miles southwest of downtown Chicago. Over the pre-vious few decades, hundreds of Norwegian families had settled in Piano and sur-rounding communities. In fact, the aptly named Norway, Illinois, was located just a few miles away from the couple's new hometown. In 1885, Arthur Edward An-dersen was born. From an early age, the Andersens' son had a fascination with numbers. Little did his parents realize that Arthur's interest in numbers would become the driving force in
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A few years later, Andersen and a friend, Clarence Delany, established a partnership to provide accounting, auditing, and related services. The two young accountants named their firm Andersen, Delany & Company. When Delany decided to go his own way, Andersen renamed the firm Arthur Andersen & Company.
In 1915, Arthur Andersen faced a dilemma that would help shape the remain-der of his professional life. One of his audit clients was a freight company that owned and operated several steam freighters that delivered various commodities to ports located on Lake Michigan. Following the close of the company's fiscal year but before Andersen had issued his audit report on its financial statements, one of the client's ships sank in Lake Michigan. At the time, there were few for-mal rules for companies to follow in preparing their annual financial statements and certainly no rule that required the company to report a material "subsequent event" occurring after the close of its fiscal year—such as the loss of a major asset. Nevertheless, Andersen insisted that his client disclose the loss of the ship. An-dersen reasoned that third parties who would use the company's financial state-ments, among them the company's banker, would want to be informed of the loss. Although unhappy with Andersen's position, the client eventually acqui-esced and reported the loss in the footnotes to its financial statements.
Two decades after the

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