Acct Checkpoint Essay

896 Words Jun 11th, 2013 4 Pages
Read the Arthur Andersen’s Troubles Ethics Case on pp. 107–113 (Ch. 2) of the text.
Answer questions 1, 3, and 4 on p. 113 in 200 to 300 words. When responding to question 3, focus solely on the Enron case.

1. What did Arthur Andersen contribute to the Enron disaster?

Arthur Andersen (AA) did not advise the Enron Audit Committee that Enron’s policies and internal control were not adequate to protect the shareholders’ interests even though AA had assumed Enron’s internal audit function (Brooks, 2007, 110).
As their accountants they should have had and were supposed to have had reviewed the company's financial condition and truthfully report on that condition. This would have allowed the investors as well as the public to estimate
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As in the Enron case, Arthur Andersen also had a computer consulting firm which Enron hired. Greed played an important role in their downfall, by AA not wanting to lose their client; they risked conflict of interest just to please them. The need and want to keep the large firm clients, had the audit partners associating more with the needs of the client instead of the accounting ethics. These ethics require accountants to investigate anything that does not seem right and also to tell the truth about the quality and amount of risk seen as they audit a company. As for as the Enron’s case, Arthur Andersen failed to establish and reveal the false profits that were reported.
Enron used “special purpose entities” (SPEs) to access capital or hedge risk. By using SPEs such as limited partnerships with outside parties, a company is permitted to increase leverage without having to report debt on its balance sheet. The company contributes hard assets and related debt to an SPE in exchange for an interest. The SPE then borrows large sums of money from a financial institution to purchase assets or conduct other business without the debt or assets showing up on the company’s financial statements. Enron took the use of SPEs to new heights of complexity and sophistication, capitalizing them with not only a variety of hard assets and liabilities, but also extremely complex derivative financial instruments, its

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