Business Finance – Accounting
Research on Arthur Andersen/Enron In 2002, the audit firm Arthur Andersen (one of the then ‘Big 5’ audit firms!) collapsed following charges brought against it in the United States relating to the failure of its client, Enron. Some other clients announced that they would be dismissing Arthur Andersen as their auditor even before it was clear that Arthur Andersen would not survive.
a) Using the three theories outlined in Moroney et al. (2017, chapter 1)) (i.e., the prescribed textbook) on the demand for audit ((i) Agency theory, (ii) Information hypothesis, and (iii) Insurance hypothesis), explain some reasons why these clients took this action. (3 x 2 marks = 6 marks)
(b) Present an argument of why a similar event is not likely to happen again. Your discussion should be (i) in context of what went wrong with Arthur Anderson/Enron and (ii) make specific references to how regulations and auditing standards have changed since the collapse of Arthur Andersen. (10 marks)