Accounting and Financial Statements (Ethics)
and external audit services for Enron as well as many other services. The independence issue arises out of the fact that Anderson received fees from total services in the amount of $52 million, which was made up of $27 million for non-audit services and $25 million for audit services (Indictment of Arthur Anderson). Since Anderson received more money for non-audit services Anderson’s objective opinion with regards to its audit procedures could have been compromised and most likely were. If the firm went against Enron’s management, it could lose over half its revenue for the client.
Since the independence issue is looked at more closely in the manner Anderson audited Enron financial statements. The three financial reporting issues at hand during this case were the consolidation of Special Purpose Entities, the adjustments previously not made to its 1997 financial statements, and the reclassification of $1.2 billion of stockholders’ equity (Indictment of Arthur Anderson). Anderson claimed that these issues arose because Enron withheld important information from them, but it is important to make sure that Anderson should not have been more aggressive in its audit procedures.
The way Anderson dealt with this situation once the SEC started its investigation proves that Anderson’s independence was impaired because the firm was aware of the problems with Enron financial statements. Instead of preserving documentation to assist Enron and the SEC, “Anderson employees on the Enron engagement team were instructed by Anderson partners and others to destroy immediately documentation relating to Enron, and [were] told to work overtime if necessary to accomplish the destruction” (Indictment of Arthur Anderson). These actions prove that Anderson knowingly withheld information from the SEC and were directly involved in the unethical actions of Enron.
In the end, Anderson ultimately collapsed due to other clients and stakeholders losing confidence in the firm’s services. The public’s reaction to this situation shows how once trust is lost in a company’s accounting and financial reporting the system ultimately fails. Stakeholders no longer feel confident in what the company stands for and will not support it. This situation exemplifies how important accurate and proper financial reporting is to the success of any company.