Enron and Andersen - What Went Wrong and Why Similar Audit Failures Could Happen Again

Abstract:     
This chapter from Enron: Corporate Fiascos and Their Implications (Nancy B. Rapoport & Bala G. Dharan, eds., Foundation Press 2004) posits that unconscious bias, compounded by organizational flaws and a culture at Andersen that emphasized marketing non-audit services to audit clients in an effort to boost profits; significant conflicts of interest and self-interest; and greed all help explain the audit failure at Enron. Although the Sarbanes-Oxley Act of 2002 attempted to strengthen auditor independence, under the guise of increasing auditor independence, a public company's management can still recommend that the audit committee hire another accounting firm to provide tax or other non-prohibited consulting services if the auditor does not approve, or at least acquiesce in, certain accounting treatments or disclosures preferred by management. In addition, unconscious bias suggests the need to require mandatory rotation of audit firms after fixed terms for preset fees to eliminate the threat that the client can fire or otherwise punish the auditor for failing to approve questionable accounting practices.

Keywords: Enron, Andersen, audit failure, expectation gap, auditor independence, non-audit services, tax services, unconscious bias, Sarbanes-Oxley, audit committee

JEL Classifications: K22

Accepted Paper Series