Corporate Ethics Failure – A Critical Analysis Essay

Custom Student Mr. Teacher ENG 1001-04 13 February 2017

Corporate Ethics Failure – A Critical Analysis

Arthur Andersen, in 1913 established a corporate entity that for decades provided a benchmark for auditing and consulting in the accounting industry. From the onset Mr. Andersen worked to build a foundation for his company representative of the principles of excellence in the technical and ethical aspects of his new company. His ethical model focused on Utilitarianism, the greatest amount of good for the greatest amount of people. In the late 1940’s after the founder passed away, newly appointed CEO, Senior Partner Leonard Spacek, further exhibited his leadership and commitment to ethical practices by helping to establish the Accounting Principles Board, their prinmary responsibilities being to set industry accounting and ethical standards. This is a direct reflection on the commitment Arthur Andersons executive staff place on the company’s belief in performing their practice in an honest and trustworthy manner. Spacek was so revered that former Federal Reserve Chairman Paul Volker once refered to as Spacek’s tenure as a time when Arther Andersen was the “Gold Standard “ for the accounting industry.

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These standards built a reputation in the accounting community which led to tremendous success. Honesty and integrity were trademarks of the company that concentrated on quality, leadership and developing its personnel to be experts in every aspect of the accounting industry . As the business began to grow, Arthur Andersen eventually became a leader in the financial industry, employing as much as 77,000 accounting professionals in 84 countries. A reflection on the many positive aspects of Arthur Andersen, its commitment to the many ethical principles it championed, both in its own corporate structure and that of the accounting community. In this writers opinion, with such metrics in place, it is amazing that such a large entity could implode and collapse. However, if one understands the importance of ethical behavior and the impact of lost trust, the analysis is not difficult. The problems encountered at Arthur Anderson were the result of inappropriate ethical behavior which resulted from compromises of their own ethical standards.

These began as small issues for various clients that over time grew creating a slippery slope from which Arthur Andersen could not recover. Corporate enterprises are funded by investors, stockholders and consumers. Likewise, their activities, both internal and external, also affect investor, stockholder, stakeholder and consumer. All depend on the financial health and viability of the company to support their individual interests. The responsibility of the SEC is to verify financial wellbeing and provide a tool for which potential investors and stock buyers can fairly judge the risks involved as they decide which company their money should support.

Auditors share the responsibility the provide analysis of the the financial condition while looking for errors in the bookkeeping/ accounting of the company’s financial position. The auditor’s responsibility is to correct or balance any errors thus preventing a misleading view of the true financial strength of the company. If this view is compromised by providing or allowing false data to exist, the company’s position is weakened, investors are led under false pretenses, placing their investments at risk. The SEC depends on a complete, thorough and truthful analysis from an auditor to verify the financial status providing security for those desiring to invest or provide financial support.

Arthur Andersen’s problems began precisely as mentioned earlier, when executives began to Behave unethically in a manner against the principles on which the company was founded. It is important to note that while Arthur Anderson employed good business ethics, the company flourished. As it began to compromise it’s integrity the long term consequences eventually to appear. The Enron collapse represents just one of many cases where mistakes were made and hidden. For Arther Andersen, in business almost 90 years, the destruction of Enron documents to prevent the SEC from gaining access to incriminating evidence shows how corrupt the accounting firm had become.

While millions of dollars in revenue for Arthur Andersen were at stake, the viability of the company depended on the reputation it garnered. The demise of the company resulted from the dishonest tactics it employed to remain in power. As of June , 2002, the company had laid off 7,000 employees, and lost more that 650 of it’s 2,300 public audit clients with the layoff of thousands pending. The slippery slope to extinction had begun. http://money.cnn.com/2002/06/13/news/andersen_verdict/

In the article “12 Ethical Principles for Business Executives” by the Josephson Institute, published on December 17, 2010, stated that “ language establishing standards or rules describing the kind of behavior an ethical person should and should not engage in, are ethical principles.” More specifically they are specified as “Honesty, Integrity, Promise keeping and Trusworthiness, Loyalty, Fairness, Concern for Others, Law Abiding, Commitment to Others, Leadership, Reputation, Morale and Accountability.”

http://josephsoninstitute.org/business/blog/2010/12/12-ethical-principles-for-business-executives/ The founder, Arthur Andersen, embodied these principles to the point that he personally reimbursed a client for an accounting mistake made under his watch. While a disclaimer on the part of Arthur Andersen guards against minor mistakes in the accounting audit/ review, it seems this created a gray area that was taken advantage of. Also, management should have developed a zero tolerance mechanism to maintain an ethical culture dedicated to preventing inappropriate behavior. Policy should have mandated regularly documented training on business ethics, and the importance of its implementation as the auditing process ensued. Any issues should have been to the client with reconciliation mandantory prior to an Audit Opinion being submitted.

The indictment of Arthur Andersen and subsequent trial provided proof the Audit Opinion and review of Enrons balance sheet and financial statements were submitted with the intention to skew the true condition of the company’s true fiscal condition, thus deceiving the shareholders, board of directors, potential investors and stakeholders. An overview of the measures in place to safeguard against inappropriate accounting behavior provide an insite to the items that were violated during Enron and Arthur Andersens quest to bilk investors share holders of millions.

“ These safety measures included Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and all professional ethics. The use of GAAP by accountants is standard protocol. An accountant follows these principles as a matter of daily routine. According to several accounting texts, GAAP is identified as a “dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements.””

http://faculty.mckendree.edu/scholars/2004/stinson.htm

The article “7 Principles of Admirable Business Ethics” presents seven additional principles which complement ethical behavior. Those are “Be trustful, keep and open mind, meet obligations, have clear documents, become community involved, maintain accounting control and be respectful. http://sbinformation.about.com/od/bestpractices/a/businessethics.htm In conclusion, legal analyst’s formulate the opinion that “executives at Arthur Andersen and Enron did not set out to have a positive impact on the accounting industry or any industry.

They set out to make as much money for themselves as quickly as possible. They were willing to do whatever it took to make that money. These thoughtless acts and greed led both companies to an eventual downfall in bankruptcy.” The subsequent prosecution of these firms has produced new controls which should serve to prevent this type of financial disaster. Most notably the Sarbanes-Oxley Act which includes requiring companies to reevaluate its internal audit procedures and makes sure the accounting practices either “meet or exceed the expectations of the auditors.” http://faculty.mckendree.edu/scholars/2004/stinson.htm

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