The Influence of Arthur Andersen vs Enron Case in Auditing Practices

This report examines the significant impact of the Arthur Andersen and Enron case on the field of auditing. The case highlights issues of professionalism, ethics, and due diligence, as well as the importance of the agency relationship and the potential for conflicts of interest. The report discusses the failures in corporate governance, accounting irregularities, and the resulting financial crisis. It explores how the case led to the enactment of the Sarbanes-Oxley Act, which aimed to protect investors and improve the accuracy of financial reporting. The report also addresses the role of auditing standards, such as GAAS, GAAP, and SAS, in preventing future audit failures and promoting ethical behavior. The case underscores the importance of auditor independence, transparency, and accountability in maintaining public trust in the financial system. The conclusion emphasizes the lasting impact of the Arthur Andersen and Enron case on the auditing profession, emphasizing the need for continuous improvement and adherence to ethical standards.

AUDIT & ASSURANCE CASE STUDY
Effects Of Arthur Andersen Vs Enron
Case In Auditing Field
Student’s Name
Institutional Affiliation

AUDIT & ASSURANCE CASE STUDY
Arthur Anderson and Enron case file formed the basis of the firm's professionalism, ethics, and
due diligence while relating to clients. It further illustrates the sense of responsibility of the firms to the
clients without favor or conflict of interest.
Agency being the relationship between the principal, the agent and 3rd party should see the icon of
mutual benefit among the parties but not sufficing the others as it is being witnessed in the case
involving Enron. Mutual benefit relationship theory occurring in Environ case informs us of the existence
of mishaps in most firms thus forgetting the shareholder needs and expectations. In this case of Arthur
Andersen Vs. Enron we clearly see the management not caring Salter (2008.Pg 23) on facilitating the
process of increasing returns of the shareholders instead they concentrate on misappropriation by
cooking the books of the accounts as well as attempts to offer incentives and havens to agents so as to
act in the best interest of the them.
Agency involves the delegation of responsibilities as well as decision-making thus as the agent
represents the principal it is expected for their agent to do so wholesomely without favor or with the
expectation of something in return. Enron was supposed to represent the parent(principal) company
on conducting the audit services free from any other tasks that are contrary to audit policies set in place,
Enron firm instead has been doing its own things to extent of benefiting at the expense of the principal
Stein(2007.Pg 1390)
Information is deemed powerful hence the hypothesis behind perfect access to information to
all the parties as well as its disclosure of any aspect of information that is deemed material is important
during the audit. All the parties bounded by the agency relation as well as the users of the information
are entitled to correct and material information. Enron firms transaction were seen to be private thus no
disclosure was ever made to the extent of persons questioning the essence of non-disclosure only to
realize it was accounting hoax tactics both through the books of accounts and by virtue of word of
mouth. This denial to issue the correct, material and in context assurance information to the users
brought the firm to a situation of non-compliance.
Insurance hypothesis is applied where audit loss has occurred thus allowing the investors to sue
auditor so as to recover losses resulting from misstated financial statements hence reducing investors
risks. In Arthur case, this was seen to especially safeguard client’s interest due to loss of closure of
business and bankruptcy that was resulted from wrong disclosure and intentional interference of the
books of accounts hence this theory had to apply to rescue 3rd parties in investors.
As a result of what befell Arthur Andersen, Enrol,Tyco as well as WorldCom the need to enact
public company accounting reform and investor protection act was brought into legislation so as to

AUDIT & ASSURANCE CASE STUDY
protect investors as well as inform management on their role and responsibility regarding the accuracy
authenticity of the financial hence limiting them from denial of accounting discrepancies awareness in
case it happens.
This further outlined the limits of the duties and responsibilities of the auditors Arens (2007.Pg
17) thus preventing him from the offering of non-audit services that have in the past led to the conflict
of interest.
Provisions to curb corporate persons from enjoying conflict of interest at the expense of the minority
was likewise set as the law allowing the public to disclose on any matter deemed to cause or result from
the conflict of interest.
Safety measures the likes of GAAS, GAAP, SAS as well as professional ethics Donaldson(2008.Pg
300)was introduced to guide the accountant on daily accounting and auditing activities during
preparation and reporting of the financial statements hence controlling audit and accounts operation
Whittington(2010.Pg 26). The use of the above set guidelines together with government policies set in
place as restored trust in auditors as well as promoting the rapport among the agency but only to the
extent of responsibility accorded by the law.
Arthur Andersen and Enron’s case was deemed to be one of the worst financial crisis that resulted
from auditors negligence that lowered the integrity of audit. However were it not for it there would
never have existed the auditing and accounting standards as well as guidelines policies that have made
operations smooth and accountable Cosserat(2009.Pg 7).

AUDIT & ASSURANCE CASE STUDY
References
Arens, A. A., Elder, R. J., & Beasley, M. S. (2007). Auditing and assurance services: An
Collapse. Human Relations, 60(9), 1387-1410.
Cosserat, G. W., & Rodda, N. (2009). Modern auditing. Wiley.
Donaldson, L. (2008). Ethics problems and problems with ethics: Toward a pro-management
Harvard University Press.integrated approach. Prentice Hall.
Salter, M. S. (2008). Innovation corrupted: the origins and legacy of Enron's collapse.
Stein, M. (2007). Oedipus Rex at Enron: Leadership, Oedipal struggles, and organizational
theory. Journal of Business Ethics, 78(3), 299-311.
Whittington, R., & Pany, K. (2010). Principles of auditing and other assurance services.