John and Mary Andersen immigrated to the United States from their native Norway in 1881. The young couple made their way to the small farming community of Plano, Illinois, some 40 miles southwest of downtown Chicago. Over the previous few decades, hundreds of Norwegian families had settled in Plano and surrounding communities.

In fact, the aptly named Norway, Illinois, was located just a few miles away from the couple’s new hometown. In 1885, Arthur Edward Andersen was born. From an early age, the Andersens’ son had a fascination with numbers. Little did his parents realize that Arthur’s interest in numbers would become the driving force in his life. Less than one century after he was born, an accounting firm bearing Arthur Andersen’s name would become the world’s largest professional services organization with more than 1,000 partners and operations in dozens of countries scattered across the globe. Think Straight, Talk Straight Discipline, honesty, and a strong work ethic were three key traits that John and Mary Andersen instilled in their son. The Andersens also constantly impressed upon him the importance of obtaining an education. Unfortunately, Arthur’s parents did not survive to help him achieve that goal. Orphaned by the time he was a young teenager, Andersen was forced to take a fulltime job as a mail clerk and attend night classes to work his way through high school. After graduating from high school, Andersen attended the University of Illinois while working as an accountant for Allis-Chalmers, a Chicago-based company that manufactured tractors and other farming equipment.

In 1908, Andersen accepted a position with the Chicago office of Price Waterhouse.

At the time, Price Waterhouse, which was organized in Great Britain during the early nineteenth century, easily qualified as the United States’ most prominent public accounting firm. At age 23, Andersen became the youngest CPA in the state of Illinois. A few years later, Andersen and a friend, Clarence Delany, established a partnership to provide accounting, auditing, and related services. The two young accountants named their firm Andersen, Delany & Company. When Delany decided to go his own way, Andersen renamed the firm Arthur Andersen & Company.

In 1915, Arthur Andersen faced a dilemma that would help shape the remainder of his professional life. One of his audit clients was a freight company that owned and operated several steam freighters that delivered various commodities to ports located on Lake Michigan. Following the close of the company’s fiscal year but before Andersen had issued his audit report on its financial statements, one of the client’s ships sank in Lake Michigan. At the time, there were few formal rules for companies to follow in preparing their annual financial statements and certainly no rule that required the company to report a material “subsequent event” occurring after the close of its fiscal year-such as the loss of a major asset. Nevertheless, Andersen insisted that his client disclose the loss of the ship. Andersen reasoned that third parties who would use the company’s financial statements, among them the company’s banker, would want to be informed of the loss. Although unhappy with Andersen’s position, the client eventually acquiesced and reported the loss in the footnotes to its financial statements.......

Questions:-

1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe were most responsible for that crisis. Briefly justify each of your choices.
2. List three types of consulting services that audit firms are now prohibited from providing to clients that are public companies. For each item, indicate the specific threats, if any, that the provision of the given service could pose for an audit firm’s independence.
3. For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen’s involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.

4. Briefly describe the key requirements included in professional auditing standards regarding the preparation and retention of audit workpapers. Which party “owns” audit workpapers: the client or the audit firm?
5. Identify five recommendations made to strengthen the independent audit function following the Enron scandal. For each of these recommendations, indicate why you support or do not support the given measure. Also indicate which of these recommendations were eventually implemented.
6. Do you believe that there has been a significant shift or evolution over the past several decades in the concept of “professionalism” as it relates to the public accounting discipline? If so, explain how you believe that concept has changed or evolved over that time frame, and identify the key factors responsible for any apparent changes.
7. As pointed out in this case, the SEC does not require public companies to have their quarterly financial statements audited. What responsibilities, if any, do audit firms have with regard to the quarterly financial statements of their clients?
In your opinion, should quarterly financial statements be audited? Defend your answer.