Arthur Andresen auditing of Enron and conflict of interest

Analysis
Name
Course
Instructor
Date
Arthur Andresen auditing of Enron and conflict of interest
Arthur Andersen was one of the top notch accounting firms being sort by corporations especially in the US in competition with KPMG, Deloitte Touche Tohmatsu, Ernst & Young, and PricewaterhouseCoopers. As one of the leading accounting firms offering tax, advisory and consulting services to global corporations, the firm was widely respected. The firm was the auditor of Enron, which failed spectacularly after discovery that the company had been engaging in fraudulent activities. Thus, the reputation of Arthur Andresen LLP was irredeemably impaired. The firm subsequently surrendered its practicing license in the US after it was found guilty in auditing the accounts of Enron; a court ruling in favor of Arthur Andresen did not repair the inflicted damage on the company’s reputation.
Like other big five accounting and auditing firms at the time, they engaged in both auditing and consulting work for various corporations. There was pressure to pay auditing partners for work unrelated to auditing and Arthur Andersen’s auditors got compensated for consulting and for other fees that came into the firm. Furthermore, the likelihood of restatement of earnings would lessen the chances of renewal in partnership for auditors. Given that Enron appeared to have a good reputation, satisfying the management of Enron was a top priority for the firm as they sought to enhance their reputation of being the auditors of a major US corporation.
Consulting can lead to bias during decision making in auditing like the case of Arthur Andersen. The firm suggested that consulting did not affect their independence, but the compensation system adopted by the firm shows that it was focused on keeping clients than making objective decisions on accounting books of Enron and other clients. Clearly, the firm would violate the accounting profession code of ethics in a bid to make more money from consulting services; auditors had no incentive to give unfavorable opinions even when a conflict of interest arose. Arthur Andersen also received a substantial amount of income from management advisory under consulting, and hence the firm increasingly became reliant on management consulting as the field had tremendous growth potential than auditing.
Ernst and Young as Lehmann’s auditor- conflict of interest
Ernst and Young was also capable in the ensuing near collapse of Lehman Brothers following the mortgage sub prime crisis. Nonetheless, Lehman Brothers were involved in the manipulation of accounts using Repo 105, which made the financial accounts appear better to the investor (Jeffers, 2011). Had the auditors provided information on the use of aggressive accounting techniques then prudent persons would not have reasonably used mortgage instruments associated with Lehman Brothers. Nonetheless, Lehman Brothers did not disclose material facts to the Securities & Exchange Commission or in their financial statements. Use of Repo 105 resulted to the removal of troubled securities in the financial statements of Lehman Brothers and this may have resulted to inflated market price of the company (Jeffers, 2011).
However, unlike the Enron case, Ernst and Young did not suffer the same fate even after lawsuits against the firm. One of the reasons is that the company executives in Lehman Brothers committed fraud and auditors are not liable in these cases. Nonetheless, the sanctions placed on Ernst and Young were not punitive enough given that the firm took little efforts to investigate reports on the use of Repo 105. At the same time, revenue from consulting work carried out on Lehman Brothers was a steady source of income. Even though, regulators had put restrictions on revenue stream from auditing and consulting the same organization, after the Enron scandal revenue from consulting increased substantially over time.
Lehman Ethics and criminal liability
The involvement of Lehman Brothers in the US real estate market was simply a reflection of the liberalization and ease in credit facilities in America. Nonetheless, the complex financial instruments used by the company could not easily be understood, and the riskiness of the instruments did not deter people from using them. The appearance of toxic assets and use of Repo 105 was an ethical issue that warranted tighter regulation rathe...