Arthur Andersen Complex

What comes to mind when the name Arthur Andersen is mentioned? Many would say their partners were unethical, terrible people and the events that transpired will tarnish the accounting profession forever. But others believe these partners at the Chicago based CPA firm were good people who were constantly making tough choices.

Jim Haag is a partner at the accounting firm Peat Marwick LLP. With the dual function of regulating and operating for profit, Jim described the inherent complexity of the CPA practice. These CPA firms are for profit, yet are in business to assure valid financial statements. When an auditor finds a misstatement, the CPA is obligated to present a qualified or adverse opinion on the audit report saying the financials cannot be relied on.However doing so is your own worst enemy, because the client will likely hire someone else come next year. The reason is the client can probably find a CPA firm which will give it a clean opinion for the same circumstances.

This brings up the question, how do you maintain public confidence yet maximize profits? Jim remembers a time in particular when this situation happened during an audit. He was auditing a retail client when the group found an error in its accounting system. When the auditors communicated the findings the client would not correct the error. Jim emphasized the event was material which may cause relying parties to be deceived. These parties include shareholders, suppliers, creditors, banks, managers, employees, and communities. Finally management presented the auditors with an ultimatum. Jim Haag can forgive the error warranting a clean audit opinion on the audit report, or give an adverse opinion subsequently being fired for future audits. The client at the time was an extremely attractive client. If Jim gave a clean opinion, he would definitely keep his job in the short run, but would be uncertain about the future. What would happen if the SEC finds out what he did? Further, what would happen if his deceptive practices became public knowledge? If Jim gives an adverse audit opinion he would probably not receive any planned future promotions. Even worse, he may lose his job.

Thus, Jim has two options in this ethical dilemma. First the auditor could give an adverse opinion saying the financial statements can not be relied upon and lose the client. Second the auditor could work with the client to hide or clean up the financials, subsequently giving the client an unqualified clean opinion.

What should Jim do?