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    Corporate Disasters: Financial Reporting Flaws
    Corporate Disasters: Financial Reporting Flaws
    Corporate Disasters: Financial Reporting Flaws
    Ebook131 pages2 hours

    Corporate Disasters: Financial Reporting Flaws

    By Gale and Cengage

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    About this ebook

    Corporate Disasters: What Went Wrong and Why profiles the biggest corporate mistakes or misdeeds throughout history -- covering the people, the times, the decisions made. This volume covers Financial Reporting Flaws. Each essay puts the business and its operators in the context of its own time, explaining the market, social, and technology forces at play, and each explores the key make-or-break decisions that led to disaster.
    LanguageEnglish
    PublisherCengage Learning - Gale
    Release dateNov 3, 2013
    ISBN9781535821155
    Corporate Disasters: Financial Reporting Flaws

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      Corporate Disasters - Gale

      Acquisitions

      Introduction

      By all accounts, one aspect of California’s Silicon Valley differentiates it from other communities: it has a high tolerance for failure. In fact, while executives and entrepreneurs in many industries and locales take tentative steps to avoid risk of failing, in Silicon Valley these same people are encouraged to move forward aggressively and learn quickly from the failures that inevitably await them. There is no shame in failure, nor is there in highlighting failed ventures on a resume. In fact, those very failures are sometimes looked upon favorably by employers or financial backers as signs that a person has gone through some trials by fire and emerged smarter as a result.

      In every field of life, failure is often the precursor to success. This truism seems increasingly acknowledged by management consultants, political pundits, and the media. One of the most dramatic examples is Nike’s 1997 classic 9000 Shots commercial, popularly known as the Michael Jordan failure commercial, wherein the basketball superstar acknowledges his failures, only to point out how important they were:

      I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games.

      Twenty-six times I’ve been trusted to take the game winning shot...and missed.

      I’ve failed over and over and over again in my life. And that is why I succeed.

      Of course, not all players, in sport and in life, rise above their failures. But even though some stories may not be inspirational, they are still valuable, if only as examples of what not to do. In short, failure, as much as success, is worth studying for what it can teach us—providing us models of perseverance to emulate and examples of hubris to avoid.

      These are the kinds of stories we have sought to capture in this volume. They illustrate failure across industries—from retail to manufacturing to finance—and they showcase bad decisions in marketing, strategy, management and more. More than a few of them illustrate classic human foibles. Herein we see tales of crowd-induced mass delusion, underestimating threats from new competitors or new technologies, and the omnipresent temptation to bury one’s head in the sand and hope everything will just be okay.

      In some of the essays, we cover companies that ultimately learn from their failures and emerge stronger. In others, missteps bring down entire enterprises. In all cases, they serve as useful examples for students and teachers of business alike at the graduate and undergraduate level, and for advanced high school students.

      Each essay is focused on the story of a particular failure and was chosen for its ability to show, in a different time and context, why it occurred. An attempt was made to balance essays across disciplines and to be as pluralistic as possible. However, these essays tend to focus on the twentieth and twenty-first centuries. And they tend to cluster around the disruptive influences—globalization, technology, etc.—that have dramatically changed industries and markets.

      Special thanks go to Product Manager Michele LaMeau for leading this initiative. This book is the product of some innovative publishing work, as Michele applied techniques gleaned from our agile software development practice to the production of content, the result being high quality production in record time. Thanks also to Miranda Ferrara, who served as hands-on mentor to Michele, to Mark Springer, Mike Huellmantel, and Keith Jones, who played pivotal roles in making this book a reality, and to numerous others who shared their talents to create this volume. I am grateful to all of them.

      David Forman

      Vice President and Publisher

      Gale, Cengage Learning

      Arthur Andersen: An Accounting Firm Fails

      The history of Arthur Andersen LLP spans the company’s 20th-century rise and fall, as external auditing and consultation services became more complex and Andersen drew its profits increasingly from its consulting side. Court-order spin off of the consulting part of Andersen led to more trouble for company, when it was found guilty of fraud in stating Enron and WorldCom profits to be higher than in fact they were. As Andersen failed, federal legislation established stricter accounting practices.

      This case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. Information was gathered from corporate as well as public sources.

      After analyzing this case study, students should be able to do the following:

      Compare/Contrast the value and goals of external auditing and consultation services

      Evaluate the effect of profit motive on accounting practices

      How Arthur Andersen Developed

      The origins of Arthur Andersen LLP are easier to pinpoint than other firms because of the way accounting companies split and merged throughout the 20th century.¹ The clearest start occurred when Arthur Andersen himself entered the accounting world. Andersen trained at Northwestern University and purchased his first public accounting business in 1913, only a few years before he became a professor and wrote an accounting textbook. The firm, known as Andersen, DeLany & Company, eventually became Arthur Andersen & Company due to partner changes.

      As an entrepreneur, Andersen held high hopes for his firm. After another 15 years of hard work and representation, the firm had 400 employees in 1928. A year earlier, in 1927, Arthur Andersen & Company testified at a Ford Motor Company U.S. tax hearing, raising its public status significantly. In 1932 the company represented utility Commonwealth Edison and helped manage its financial restructuring following the Great Depression, a move that increased revenues by 20 percent while winning the firm widespread positive publicity. Andersen himself continued to manage the company while writing economic and financial treatises on accounting law, interpretation, and responsibility.

      The Big Eight

      Arthur Andersen died in 1947 after growing the firm across the eastern United States. Leonard Spacek, an associate, led the company into the 1950s during the period when the major U.S. accounting firms were known as the Big Eight. Arthur Andersen occupied a unique spot in the Big Eight; most of the other major accounting practices were an amalgam of American and British partners that had joined forces through complex mergers, but Arthur Andersen started in the United States and expanded by building offices in the United Kingdom instead of merging with existing U.K. businesses.

      By the 1950s two distinct branches of accounting had emerged in the United States that changed the nature of the Big Eight. The first was necessary external auditing. Auditors examined company books and financial strategies to compare them to the increasingly complex U.S. accounting laws. Companies had become accustomed to generally accepted accounting principles (GAAP), formed after the Great Depression, with new practices added as legislation or business operations changed. Yet businesses needed reliable methods to look for inconsistencies or spot security gaps in their own strategies. Internal auditors helped, but for many corporations external audits prevented any conflict of interest, enabling a clearer look at corporate practices and much more effective legal standing in case of a problem. The auditor, in turn, guaranteed honest, effective examination of accounts for signs of fraud or violations.

      Another newer branch of accounting that grew rapidly in the 1950s was consultation. Businesses hired consultants to study their books and then crafted plans to tighten security, increase efficiency, and positively affect bottom lines. The consulting branch was far more proactive than the auditing branch, offering training and innovation instead of only reports on current practices.

      The development of each branch split many accounting firms, including Arthur Andersen. Consulting services promised high profits, while auditing provided market assurance that companies were doing their best to follow GAAP. In a perfect world, accounting consultants and their ideas would always take second place to auditing. In practice the balance was a tricky one. Arthur Andersen depended on its consulting side for much of its growth during the 1970s as it expanded across the United States.

      Consultancy Continues Its Rise

      By the 1980s the Big Eight had become the Big Six through additional mergers, and the remaining firms prepared for a new revolution in the finance industry prompted by the widespread use of computers. From the beginning, businesses created commercial computer systems for companies looking for faster, more effective ways to keep accurate track of financial accounts. However, many companies hesitated to adopt such a broad new technology, as they lacked the expertise to use computer systems properly in their day-to-day accounting work.

      Accounting firms quickly grasped the opportunity to provide a new era of consulting services by advising clients on where and how to use computer systems to manage their bookkeeping. Companies showed a natural inclination to go to accounting firms for these services, which spurred the formation of a robust computer system consultant division within Arthur Andersen and related firms. Soon Arthur Andersen was developing large-scale checklists and methodologies for large companies managing multiple divisions.

      How the 1990s Changed the Game

      The balance between auditing and consulting proved difficult in the late 1980s, until Arthur Andersen divided the firm into two clear-cut divisions, the auditing firm Arthur Andersen & Company, and the consulting firm Andersen Consulting. The company started putting more focus on the lucrative consulting side. Revenue increased between 1988 and 1992 due almost entirely to consulting growth.

      The first problem occurred in 1992, when the Resolution Trust Corporation sued Arthur Andersen for negligence in its audits. A number of thrifts (another

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