Case Study: Arthur Andersen V. Arthur Anderson

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1. According to the article, there are various Arizona state government agencies suing Arthur Andersen. More specifically, the litigation was brought by Arizona’s Corporation Commission (Securities Division), as well as the state’s attorney general.
The principal allegation of the lawsuit is that Arthur Anderson ignored clear signs and evidence that one of its clients—the Baptist Foundation of Arizona (BFA)—was engaged in ongoing fraud. The firm’s response is that Arthur Andersen did everything it ought to have done. The response suggests that the conspiracy that BFA was engaged in was very complicated, and it would have required extensive investigation to discover—and that such an investigation is not something that Arthur Andersen is legally
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The lawsuit alleges that Arthur Andersen ignored a number of clear warning signs. One was lunch that one of its auditors had with an accountant who had recently resigned from BFA. She allegedly told the auditor that BFA regularly inflated the value of its assets and covered up financial losses. A second warning sign was that several midlevel employees of BFA left the foundation at around the same time. Finally, there was an anonymous phone call made in 1997 from a person who warned of the illegal practices BFA was engaging in. The only that Arthur Andersen did that might be construed as reacting appropriately was the writing of an internal memo that alluded to the phone call. But the suit alleges that the matter ended there.
5. For Arthur Andersen to regularly give a company like BFA copies of its audited financials, which are then distributed to investors, is a dubious practice. It should probably not be allowed, on the grounds that Arthur Andersen essentially incurs a conflict of interest: It obtains further revenue through the company whose financials are in question if it provides clean audits, but not otherwise. It seems that the suit would not specifically mention the provision that the auditing firm made with respect to the financials, if BFA were legally allowed to do so

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