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There are rules put in place by the government to regulate a company’s social behaviour. The regulation is important since companies have been known to act unfairly when it comes to rivalry with other firms for customers and profits. The Anderson Company did not pay sufficient attention to the laws that regulate competition.
In the midst of their rivalry with other accounting firms for profits and customers they behaved unethically. They issued unqualified opinions on erroneous financial statements so that their big clients would give them higher volumes of consulting jobs.
In the 1950s the company began offering consulting services which became highly profitable over the next thirty years. It was fast-growing, highly profitable and recognized globally. Through their unethical practices the company was able to edge out other accounting firms and increase their market share in consultancy.
Other firms would receive less work since they did not behave in an unethical manner. These practices constitute unfair competition. There are laws that protect consumers when it comes to the goods and services that a company sell. There are also laws that protect the consumers of the financial statements. The consumers of the financial statements are the regulators, shareholders, potential investors and the employees.
Anderson did not consider the consumers of the financial data of their clients. They allowed the companies to publish incorrect financial statements and even participated in covering up irregularities. The consumers were not alerted of financial difficulties. The senior management at Enron had overstated the net profit and shareholder’s equity by $1.58billion and $2.59billion respectively over the four year period 1997 to 2000 (Norwan, Mohammed & Chek, 2011).
The potential investors would not have bought any stock in the company if they knew of the difficulties. The current stockholders would have sold off their investments. The employees would have looked for jobs elsewhere. The government would have stepped in to control company operations in order to protect the stakeholders.
The effect of Sarbanes-Oxley Act on Arthur Anderson case
The Anderson Company faced ethical dilemmas when it started to offer consulting services to its audit clients. The consulting section was bringing in so much revenue that the senior management were willing to cover up the unethical actions of their clients. Managers were getting promoted based on fees collected from consulting clients rather than their performance in quality audits. The Sarbanes-Oxley Act eliminates conflict of interest arising from such situations.
Section 201 prohibits public accounting firms from providing both audit and non-audit services to a public company without the express approval of the audit committee. Another area that created conflict of interest was the lack of rotation of the company’s auditors. The Act states that two senior auditors should not be in charge of a client’s auditing responsibilities for more than five years. The other audit staff cannot work on one account for more than seven years.
Secondly if the Act had been in place Anderson would not have faced the numerous challenges it did with the fraudulent senior management of client firms. The Act requires that the CEO and CFO take personal responsibility for the preparation of the financial statements.
They have to certify that the records are credible and accurate. They must oversee the implementation of the internal control system over the company and declare that they have done so in the financial statements. The higher personal responsibility and the high fines attached in the event of non-compliance would have deterred some of the senior managers from tampering with the financial records. The senior management of Anderson would also have been more reluctant to engage in fraud.
The Act requires that the audit firm states whether the management’s oversight of implementation of internal controls was effective. It increases the liability of the audit firm. Two areas that are used widely to commit fraud are cut-off processes and the treatment of off-balance sheet items.
The management has to ensure the accounts provide a true picture. The Act has enhanced the disclosure of off-balance sheet items. The companies have to identify the material adjustments that affect the financial statements in order to portray the right picture to the investors. They must be disclosed in each annual and quarterly financial statement. The Anderson lawyer in Texas was able to avoid legal responsibility by claiming the Fifth Amendment. She knew what was going on in the company and did not inform the authorities.
The Act modifies the relationship between the lawyer and the client requiring the lawyer to report instances of wrongdoing to top management or the board of directors. There is also more protection for the whistle-blowers. It is possible that there were staff in the Anderson Company who wanted to inform authorities but they were scared.
The Sarbanes-Oxley Act provided for the establishment of a public company accounting oversight board that monitors the audit of public companies. It would also ensure that accounting standards are adhered to. The body would also inspect the conduct of accounting firms regularly.
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The Anderson unethical practices would have been deterred by the creation of the oversight body. The Act also makes it a felony for anyone to destroy documents in order to impede an investigation. This would have prevented Anderson from destroying audit documents at the end of Enron’s audit.
Ethical decision making factors that affected Anderson
In the ethical framework for decision making two elements played a big role to the disintegration of the Anderson Company. These were organizational culture and opportunity. The ethical issue that existed at Anderson was whether they should report wrongdoing by their clients and give an adverse or qualified opinion on the financial statements or turn a blind eye.
These clients were the ones who paid high fees for consulting services making the business highly profitable (Bhasin, 2012). The company also knew of the adverse effects their decision would have on other stakeholders such as the employees, customers and shareholders.
Organizational culture is able to shape an employee’s actions over time despite the values and beliefs the employee had before joining the company. The top management communicated to the staff that getting high-profit consulting opportunities was better than providing objective auditing services.
It was reinforced by the fact that the people who brought in big accounts were promoted at a faster rate than those who were engaged in quality audits. The staff wanted to excel. They also wanted to be appreciated. This caused them to bow to pressure and start compromising on their objectivity. The corporate culture created for them an opportunity to engage in unethical behaviour.
The company sent many inexperienced business consultants and untrained auditors to audit clients yet these people had not really grasped the company’s policies. The number of partners did not increase in proportion to the growth in the size of the company. The number stagnated causing the partners to be stretched. They were not involved in the issuance of audit opinions. The task was delegated to the audit teams. There was no proper oversight over the teams to sound off an alarm when the staff had strayed from company policies.
There was also a lack of team work in the organization. There were unhealthy levels of competition between the consulting and the auditing staff. The consulting staff felt justified in their demands for higher pay since they brought in more money. There was therefore a lot of hostility with staff exhibiting unhealthy behaviours such as secrecy and self-interest.
These factors contributed to a decayed corporate culture. Unfortunately when the staff and management evaluated their actions in light of ethics they did not feel guilty. No one reported the company and issues only came out when their clients were faced with investigations and financial difficulties.
The impact of strong ethical leaders on Anderson Case
Ethical leaders have a desire or passion to do the right thing as they perform their duties. The senior management at Anderson did not have a desire to do what is right. They had been warned of fraudulent activities at Baptist Foundation of Arizona yet they did not take any steps to investigate the allegations and report the clients to the authorities.
At the Sunbeam Corp there were serious accounting regularities yet the Anderson Company did not ensure that the company rectified the position on the financial statements. The Anderson Company chose to offer a clean or unqualified opinion on the financial statements.
The company was involved in recording sales for future periods in the current period and inflating the sales figures using the accounts receivable figures. The accounting firm should have done the right thing. Ethical leaders are also supposed to be role models for the staff in the organization (Ferrel, Fraedrich & Ferrel, 2011). Waste management ensured it restricted its audit fees in their relationship with Anderson.
In addition, the senior management explained to the Anderson senior team they would pay them for “special work”. Anderson was bribed into allowing the company to write off their irregular accounting entries for several years. The partners failed to be role models perpetuating a culture of unethical practices.
The partners had even allowed the destruction of audit documents for Enron where they had given unqualified opinions on the financial statements. This was viewed as obstruction of justice by the regulating authority which is a felony.
Another quality of ethical leaders in companies is the consideration of all stakeholders and the impact the decisions taken will have on them. Anderson permitted various companies to tamper with the financial results without considering the shareholders, potential investors and employees.
Investors take up stock in a company when the financial statements reflect a good picture. These companies would tamper with information for over five years. The shareholders and employees both lost significantly when the companies were declared bankrupt. The leaders were also not proactive in avoiding ethical dilemmas which is a quality of ethical leaders.
The provision of consulting and audit services to the same client was an issue which the partners knew would create conflict of interest yet they allowed it to happen instead of putting policies and procedures to prevent such scenarios. Lack of independence between clients and external auditors is a critical area that weakens the strong corporate governance structures in an organization (Grove, 2011).
The senior management failed to be competent managers who took a holistic view when it came to their company’s ethical culture. Promoting the staff who brought in big accounts in consulting instead of prioritizing quality audits showed that the management did not view ethics as a strategic arm of the organization.
Bhasin, M. (2012). Corporate Accounting Frauds: A Case Study of Satyam Computers Limited. International Journal of Contemporary Business Studies, 3(10): 16-42.
Ferrel, O., Fraedrich, J., & Ferrel, L. (2011). Business Ethics: Ethical Decision Making and Cases. Mason: South-Western Cengage Learning.
Grove, H. (2011). Major Financial Reporting Frauds of the 21st Century: Corporate Governance and Risk Lessons Learned. Journal of Forensic & Investigative Accounting, 3(2): 191-226.
Norwan, N., Mohammed, Z., & Chek, I. (2011). Corporate Governance Failure and its Impact on Financial Reporting within Selected Companies. International Journal of Business and Social Science, 2(21): 205-213.