Source A Sad Tale: The Demise Of Arthur Andersen Case Financ ✓ Solved

Source A Sad Tale The Demise Of Arthur Andersen Case Financial Data

As an analyst at a Policy Think Tank, such as the Brookings Institute, you are tasked with conducting research on select public accounting firms, focusing on an overview of the industry, public sentiment, and the regulatory framework before and after the enactment of the Sarbanes-Oxley Act (SOX). Your goal is to formulate a recommendation to your manager regarding whether SOX should be continued, modified, or repealed. Your analysis report must include a narrative supported by tables, charts, and graphs as appropriate. The report should not exceed four pages, and any computations should be provided in a separate Excel spreadsheet. Only two files, the report with embedded visuals and the Excel workbook, should be submitted.

The report must be organized as follows:

  1. Background: Provide an overview of your selected Think Tank’s mission related to SOX policy, highlighting why this Think Tank is suited to author the report. Include a brief history of issues faced by Arthur Andersen and other public accounting firms, especially those that led to SOX legislation. Conduct research and analyze the public accounting industry’s prior need for regulation before SOX.

  2. Before SOX: For your assigned firm, explore industry operations, competitive landscape, and outlook that contributed to the need for SOX. Your research should cover:

    • Comparison of market share by revenue for your firm versus industry leaders.
    • Comparison of profitability ratios between your firm and the industry.
    • Analysis of revenue percentage, staffing, and operational focus on consulting and audit services.
    • Concerns related to ethical operations and performance quality of your firm.
    • Any other relevant information informing the impetus for SOX.
    • Furthermore, answer Question 1 from the source case within this narrative.

  3. After SOX implementation until Arthur Andersen’s conviction overturned: Examine the landscape of top public accounting firms after SOX’s implementation and until the overturning of Arthur Andersen’s conviction. Discuss whether your firm gained or lost advantages, including:

    • Market share comparison by revenue.
    • Profitability ratio comparison.
    • Revenue, staffing, and service focus analysis.
    • Ethical and performance concerns.
    • Impact of SOX on your firm.
    • Furthermore, address Question 2 from the source case in this section.

  4. Revisiting SOX’s Impact on the Industry: Analyze how the public accounting industry, especially your firm, operates post-SOX. Focus on changes in:

    • Market share trends among major firms.
    • Financial performance metrics like ROE, ROA, and profit margins.
    • Revenue composition from consulting, audit, and other services.
    • Ethical concerns and performance quality issues.
    • Address Question 3 from the source case.

  5. Evaluation and Recommendation: Based on your comprehensive research and analysis, determine whether SOX remains necessary. Consider whether it should be maintained, updated (with suggested modifications), or repealed, supported by historical and current issues within the industry.

Your final report must be clearly structured, properly formatted with a cover page (including your name and Think Tank), labeled sections, and page numbers. Use a formal, academic tone, with a font size of at least 12 for text and 11 for charts/graphs. The document should be single-spaced, and all references must be included in a separate section, following appropriate citation styles.

Sample Paper For Above instruction

The demise of Arthur Andersen serves as a pivotal case study in understanding the evolution of regulatory oversight in the accounting industry, especially in the context of the Sarbanes-Oxley Act (SOX). As a research analyst at the Brookings Institute, which is dedicated to fostering public understanding and policy innovation on issues affecting the economy and institutions, detailed analysis of Arthur Andersen’s failure and the regulatory environment before and after SOX is essential to inform policy recommendations on whether to maintain, modify, or repeal SOX.

Background and Context

The primary mission of the Brookings Institute aligns with promoting transparency, accountability, and integrity within financial markets, making it especially suited to analyze the implications of SOX. Historically, Arthur Andersen was one of the largest accounting firms globally, revered for audit services but marred by scandal following its involvement in the Enron collapse. The scandal revealed critical lapses in ethical standards and operational integrity, prompting legislative action to enhance regulatory oversight. Prior to SOX, the industry was characterized by significant consolidation, intense competition, and concerns regarding conflicts of interest, especially with firms providing both audit and consulting services.

Pre-SOX Industry Landscape

Before SOPX, the public accounting industry was heavily dominated by firms such as Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), and Arthur Andersen. Market share analyses show that these four firms collectively held a substantial portion of the industry’s revenue, with Andersen’s decline accelerating due to the scandal. Profitability ratios, including return on assets (ROA) and return on equity (ROE), indicated high profitability but raised questions about ethical lapses. Furthermore, the industry faced accusations of compromised independence, especially as consulting revenues grew, creating conflicts of interest and diminishing audit quality.

Impact of SOX and Arthur Andersen’s Downfall

With the enactment of SOX in 2002, the industry saw significant changes. Market share shifted as firms adjusted their service portfolios, with some benefits favoring firms that emphasized audit integrity, whereas others were disadvantaged due to increased compliance costs. The legislation introduced stricter internal controls, audit committees, and greater accountability for senior management. Arthur Andersen's conviction in 2002, subsequently overturned in 2005, marked a turning point; the firm’s reputation was irreparably damaged, leading to its dissolution, while others adapted to new regulatory demands, often by enhancing ethical standards.

Post-SOX Industry Dynamics

Post-implementation, the top four firms maintained their dominance, but with notable shifts in their operational focus and service offerings. Revenue share from consulting decreased relative to audit services, reflecting increased scrutiny on conflicts of interest. Financial performance analyses, including profit margins and return ratios, revealed enhanced stability but also significant compliance expenses. Ethical concerns persisted, but the industry's reputation was gradually restored through stronger oversight and emphasis on transparency. The impact on Andersen’s legacy underscored the importance of robust regulatory frameworks.

Industry Reforms and Future Outlook

Today, the industry operates under an environment of heightened regulation and oversight, with ongoing debates about whether SOX’s provisions should be updated or repealed. Recent discussions focus on balancing regulatory burdens with the need for ethical standards and market confidence. Based on comprehensive analysis, maintaining SOX—with targeted updates—appears prudent, strengthening accountability mechanisms without imposing unnecessary burdens on firms. Repealing the act could risk a regression to lax standards, jeopardizing the integrity of financial reporting.

Conclusion

The case of Arthur Andersen exemplifies the critical need for effective regulation within the public accounting industry. The evolution post-SOX demonstrates that while challenges remain, the legislation has significantly contributed to restoring public trust and improving industry standards. Therefore, a policy that refines and updates SOX, rather than repeals, is best suited to ensure ongoing compliance, ethical integrity, and confidence in financial reporting.

References

  • Baginski, S. P., & Haslem, J. A. (2009). The Sarbanes-Oxley Act: Implications for Internal Control and External Audit. Journal of Accounting Education, 27(2), 55-61.
  • Coates, J. C. (2007). The Goals and Promise of the Sarbanes-Oxley Act. Journal of Economic Perspectives, 21(1), 91-116.
  • Gao, P., & Zhang, H. (2006). Market Reaction to the Enforcement of the Sarbanes-Oxley Act of 2002. Journal of Accounting and Public Policy, 25(3), 362-394.
  • Heritage Foundation. (2003). The Sarbanes-Oxley Act and Its Impact on Business and Industry.
  • Li, C., & Wang, S. (2013). The Impact of Sarbanes-Oxley Act on Auditor Litigation and Audit Quality. The Accounting Review, 88(3), 927-957.
  • Nagar, V., & Rajan, M. (2014). The Effect of the Sarbanes-Oxley Act on the Market for Corporate Control. Journal of Financial Economics, 113(3), 543-563.
  • Public Company Accounting Oversight Board. (2020). PCAOB Annual Reports and Standards.
  • Reynolds, J. K. (2009). Changing Regulatory Environments and Auditing Practices: Post-SOX Developments. Accounting Horizons, 23(4), 123-138.
  • Securities and Exchange Commission. (2004). Regulation of Public Accounting Firms.
  • The Economist. (2002). The Fall of Arthur Andersen: A Lesson in Corporate Governance.

Related Assignments