7.

A perceived lack of integrity caused irreparable damage to both Andersen

and Enron. How can you apply the principles learned in this case personally?
Generate an example of how involvement in unethical or illegal activities, or
even the appearance of such involvement, might adversely affect your
career. What are the possible consequences when others question your
integrity? What can you do to preserve your reputation throughout your
career?
Integrity being straightforward and honest in professional and business
relationships; fair dealing and truthfulness; not being associated with information
that contains materially false or misleading statements or information furnished
recklessly.
The accountancy profession in much of the world presents its idea of ethical
behavior as comprising five fundamental principles, which together form a
framework for behaving ethically in the professional and business sphere. One of
these principles is integrity, which FEE believes involves going beyond mere
compliance with the law. FEE believes that there is a case to argue that integrity is
actually the core principle of professional behavior, as without integrity, no
professional activity can be relied upon.

A perceived, or even likely more detrimental to ones career, a proven lack of

integrity, can cause damage to a career in many ways. Integrity is an
important foundation in client and employee/employer relationships.
Integrity equates to placing trust in an individual that he or she will conduct
themselves with ethical and moral standards. Studying the damage caused
to Andersen and Enron is a good example to conduct oneself with a high
standard and not engage in activities at our outside of work which would
cause someone to question your integrity as well as the trust relationship.
An example of involvement in unethical or illegal activities, or the

appearance of involvement which may adversely affect your career, would be

participation in drugs, this activity could be extrapolated to ones personality
which could go against the moral of integrity of clients or supervisors.
Since this is a perceived negative activity, a client or employer might wonder
what risks of integrity or moral standards the individual applies in work
activities. When this happens, clients or supervisors may lose trust in you
and decide to work with someone else or you may be overlooked for
promotion or have other negative consequences.
To preserve your reputation throughout your career, one should always
conduct themselves with high ethical and moral standards to maintain their
integrity. This would include judgment and decisions made at work as well as
activities engaged in outside of work.
Auditing career is very professional so sometimes you have to do judgments
and these judgments must consider the interest of all parties-not just
themselves or management if a professional is involved in a decision the
ethical appropriateness of which is later called into question by shareholders
or regulatory authorities, for example, he or she will run the risk of losing his
or her job, and possibly even the ability to obtain work with other firms due
to a damaged reputation or loss of professional license. Even if a particular
action does not technically break any laws, if others have any reason to
question a professionals integrity there will be a loss of trust that will
negatively affect the demand for this persons services. An auditor can
preserve her or his reputation by ensuring that she or he follows her or his
conscience and exercises a high level of ethics and professionalism. She or
he can also rely on firm resources and personnel, for example by obtaining
an objective second opinion, to ensure that personal judgment are accurate
and unbiased

Example, recently a four-day leadership conference was held for about 800
students completing an internship at a large public accounting firm. The interns
were given instructions to abstain from alcohol during the four-day period of the
conference. The firm placed trust in the interns and expected the directive to be
followed individually on an honor system. Unfortunately, several of the interns
betrayed the trust given them. Due to the drunken actions of one intern, a fellow
guest at the conference hotel made a complaint that made its way to the partner
responsible for the conference. As a result, the interns employment offer was
rescinded, and all of the interns felt that their collective reputation had been
tarnished to some degree. Despite his attempts to keep his untoward actions
private, the intern neglected the basic principle that private actions can often
have public consequences for the individual and others.

8. Why do audit partners struggle with making tough accounting decisions

that may be contrary to their clients position on the issue? What changes
should the profession make to eliminate these obstacles?
Public accounting is a highly competitive, service-oriented business. As is the case
with most other service-offering enterprises, public accounting firms have a vital
interest in pleasing their clients by providing value and excellent customer service.
In order to provide excellent client service, partners may sometimes feel pressure
to avoid taking tough stands on a clients accounting choices. Otherwise, partners
may run the risk of losing clients to other accounting firms.Furthermore, public
accounting firms are in the business of making money. As owners of a public
accounting firm, partners are naturally interested in the financial performance of
the firm because, among other reasons, partner income and bonuses depend on
annual revenues. Partners are often responsible for revenue targets each
year and aggressively attempt to reach these targets. One interesting note is

that audit fee revenues from such companies as Enron are very lucrative
Andersens audit fee at Enron was about $48 million per year.
some argue that the provision of consulting, internal auditing, and other
services to auditing clients may have compromised the auditors ability to be
objective and take tough stands on questionable accounting practices. Along these
lines, it is interesting to note that in 2000 Andersen earned more from Enron in
consulting fees than in auditing fees, with consulting fees topping $50 million in
that year alone.
A Securities and Exchange Commission (SEC) rule was also enacted to
require external audit firms to rotate primary audit engagement partners off
of clients after approximately five to seven years. This rule was enacted to
prevent too close of relationships between external audit firms and client
management, which may cause independence issues. Further, reporting
requirements by external auditing firms to their clients audit committees
were mandated to include: (i) critical accounting policies used; (ii)
alternative treatments of financial information within GAAP that have been
discussed with management; (iii) ramifications of the use of such
alternatives, and the treatment preferred by the accounting firm; and (iv)
other material written communications between the auditor and
management.
In order to eliminate these obstacles, auditors need to be committed to putting
the public interest first. They need to be upfront with each client by affirming that
even though the accounting firm desires to add value to the clients business,
difficult decisions that are contrary to managements position on certain issues
may have to be made to protect the interests of the investing public. By laying
this foundation, difficult decisions will be easier to make when such circumstances
arise. Firms may need to reformulate their performance evaluation and
compensation practices to determine whether they provide incentives for local

partners to take aggressive stances that may not be in the best interests of the firm
as a whole. In addition, most large accounting firms require national approval for
local office partners to sign off on certain complex or aggressive accounting
positions, mitigating the sometimes strong individual pressures on local partners
to please the client.
9. What has been done, and what more can be done to restore the public
trust in the auditing profession and in the nations financial reporting
system?
The enactment of the Sarbanes-Oxley Act of 2002 was an effort to make
sweeping changes to restore public trust in both the accounting profession
and financial reporting performed by companies given the problems in the
case of Arthur Andersen and Enron where both the external audit firm and
management made unethical decisions which caused public trust to erode
these sweeping changes were necessary. In addition to the changes required
of external audit firms
The Act began requiring CEOs and CFOs to certify in the financial statements
of public companies related to the accuracy of financial statements (report).
Specifically, the certification requirements require certification that:
they have personally reviewed the report;
based on their knowledge, the report does not contain any material
misstatements or omissions;
based on their knowledge, the financial statements and other financial
information included in the report fairly present in all material respects the
companys financial condition and results of operations;
they are responsible for establishing and maintaining internal controls, and
have designed and reviewed the effectiveness of internal controls to ensure
that they receive material information in a timely manner, and have
presented their conclusions about the effectiveness of internal control in a

report based on their evaluation;

that they have disclosed to the audit committee any fraud and all
significant deficiencies in the design or operation of the internal controls
which could adversely affect the issuers ability to record, process,
summarize, and report financial data and have identified for the issuers
auditor any material weakness in internal controls; and any fraud (material
or immaterial), that involves management or employees who have a
significant role in the issuers internal controls; and,
they have indicated in the report whether or not there were any significant
changes in internal controls or other areas that affected internal controls
subsequent to the date of their evaluation, including any corrective actions
taken regarding significant deficiencies and material weaknesses.