Below are the initial details of the case,
A SAD TALE: The Demise of Arthur Andersen
In January 2002, there were five major public accounting firms: Arthur Andersen, Deloitte Touche, KPMG, Waterhouse’s, and Ernst & Young. By late fall of that year, the number had been reduced to four. Arthur Andersen became the first major public accounting firm to be found guilty of a felony (a conviction later overturned), and as a result it virtually ceased to exist.
That such a fate could befall Andersen is especially sad given its early history. When Andersen and Company was established in 1918, it was led by Arthur Andersen, an acknowledged man of principle, and the company had a credo that became firmly embedded in the culture: “Think Straight and Talk Straight.” Andersen became an industry leader partly on the basis of high ethical principles and integrity.
How did a one-time industry leader find itself in a position where it received a corporate death penalty over ethical issues? First, the market changed. During the 1980s, a boom in mergers and acquisitions and the emergence of information technology fueled the growth of an extremely profitable consulting practice at Andersen. The profits from consulting contracts soon exceeded the profits from auditing, Andersen’s core business. Many of the consulting clients were also audit clients, and the firm found that the audit relationship was an ideal bridge for selling consulting services. Soon the audit fees became “loss leaders” to win audits, which allowed the consultants to sell more lucrative consulting contracts.
Tension between Audit and Consulting
At Andersen, tension between audit and consulting partners broke into open and sometimes public warfare. At the heart of the problem was how to divide up the earnings from the consulting practice among the two groups. The resulting conflict ended in divorce, with the consultants leaving to form their own firm. The firm, Accenture, continues to thrive today.
Business Structure Advice
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I am currently starting a business and developing my business plan. I’m in need of some advice on how to start forming my business. I am not sure exactly how it will be financed and whether or not I want to take on partners. I am interested and willing to learn the intricacies of my options to determine how to best proceed with my plan.
Please advise on what my options are the advantages and disadvantages of each, and possible tax consequences for each scenario?
Answer will incude:
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d) Any extra information gathered in the course of answering the case study.
1. To what extent do market pressures encourage unethical behavior? Can the demise of Andersen be blamed on the fact that the market began rewarding consulting services of the kind Andersen could provide?
2. How serious are the kinds of conflicts of interest discussed in this case? Did Sarbanes-Oxley eliminate the most serious conflicts?
3. Was it fair for the government to destroy an entire company because of the misdeeds of some of its members, or had Andersen become such a serious offender that such an action on the part of the government was justified?
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