1. What circumstances likely led to large public auditing companies getting caught up in the major corporate scandals?

As the country started into the new century, public confidence in big business and accounting practices was shattered with several major back-to-back scandals. The most famous was Enron, a Houston-based energy company that had been the darling of investment bankers and the business press. Fortune magazine named Enron “America’s Most Innovative Company” for six consecutive years. In late 2001, it all came crashing down when Enron filed for bankruptcy, becoming the largest bankruptcy in U.S. history. It cost thousands of employees their jobs and, even worse, the retirement savings they had invested in the company as the stock price plummeted from over $90 to under $1 per share. The blame for the company’s failure was placed on several company executives for illegal financial transactions in moving assets and expenses among company entities as well as approving fraudulent accounting to hide the transactions. The company’s auditing firm, Arthur Andersen, was convicted of obstruction of justice and disbanded.