Login
Arthur Andersen's Fate after the Fall of Enron
Executive Summary
The management of the XYZ company engaged in financial consultancy has been offered to cooperate with Arthur Andersen as an accounting agency. The management knows the Arthur Andersen’s strengths, mainly a reputation of a reliable agency at the beginning of the 21st century. In addition, the firm was one of the biggest organizations known in the world. In contrast, the only one key shortcoming of the agency is that it was dealing with Enron. Despite the fact that the company’s guilt in the case was overturned, a negative impact of the issue has remained, along with distrust of many companies to the agency. In order to represent itself as a reliable company, Arthur Andersen will have to face certain problems during the work with the XYZ company. In terms of settlement of conflicts, the issues may be related to the matter of social contradictions, negotiation processes, the company’s staff, problem-solving and decision-making processes, as well as the matter of emotional resonance and the corporate culture.
Thus, the management of the company that has decided to involve Arthur Andersen to its accounting must do its best to preserve the foundations of the conflict actors. Arthur Andersen employees should also be open to a variety of negotiations to show its visibility in conducting business, gain XYZ’s trust, outstrip the XYZ management, and offer working together with the company accountants. The firm will not seek for solving the problems at the expense of others but rather looks for the best variant of the solution for a conflict situation. Arthur Andersen’s workers should also show that they could take responsibility for the process of decision making. Furthermore, they should also have a high emotional resonance interact with people, respect the company’s corporative culture, follow it, and have no intention to have a negative and harmful impact on it.
Arthur Andersen’s Fate after the Fall of Enron
Introduction
In order to understand what Arthur Andersen should do to regain its trust from prospective customers, it is required to outline the reasons companies hesitate working with it. Thus, the research paper aims at discussing the Enron scandal resulted in the bankruptcy of Arthur Andersen as it provided accounting consultations helping fraudulent schemes to work. The paper outlines the consequences of the scandal for both parties of the issue, namely the Enron Corporation and Arthur Andersen LLC.
Based on the outcomes received from the analysis of the lawsuit, the paper attempts to analyze Arthur Andersen future steps to earn its confidence from respective companies back again. The research is provided at the level of settlement of conflicts, which helps to create a productive cooperation and communication in the future.
The Enron Case
Enron Corporation was formed due to the merger of two gas companies from Texas and Nebraska in 1985. It became the first company with the all-American network of gas pipelines. Initially, the corporation specialized in gas only. However, eventually, it got involved in the electricity industry. Gradually, the corporation moved its activities to the area of trade.
The corporation had successfully mastered the market of energy futures and derivative securities. Subsequently, it gave the company a substantial financial flexibility. As a result, Enron soon became the largest trader on the electricity market and even took the seventh place in the prestigious ranking of the Fortune 500 in 2001. About 22 thousand employees in 40 countries had already worked for the company by that time.
The Enron’s fraud related to accounting operations. The company’s management had developed and put into practice an elaborate scheme to conceal specific data from not only the society but also the shareholders and investors. The corporation committed the swindle with the aim of distorting its true financial position.
Enron crated thousands of legal entities for achieving that goal, particularly offshore companies and partnerships to supply the relevant reports to the tax authorities of the United States. Besides, Enron’s board of directors, lawyers, and external auditors, especially the company Arthur Andersen LLC, approved its offshore activities.
The corporation implemented such a scheme to dump losses but not profits into the offshores. It allowed the management of the company to improve the financial performance of the corporation significantly, which led to an increase of the company’s stock price. Enron was capturing an increasing share of the market during the time of its performance. It allowed its management and employees to receive multimillion-dollar bonuses. Naturally, the cost of a package of the corporation shares was growing too.
At the same time, some workers had time to gain profit from trading activities of the offshore companies through which the financial flows passed. Thus, Andrew Fastow, the CFO of Enron, who developed this great scheme, received more than $30 million from one of the offshore activities. AT the same time, his assistant Michael Kopper received only $10 million from such a scheme. As a result, a clash of interest arose between the corporation and its employees (Macey, 2004).
Such a powerful corporation did not pay the taxes it should have paid, as Enron’s balance sheet profit and profit for tax purposes were drastically different. Data showed to the shareholders and the tax authorities were in a sharp contrast. The company provided all liabilities and costs in full to the tax authorities. Consequently, the corporation was completely unprofitable for the tax authorities. Therefore, Enron did not pay any income tax at all. Moreover, it managed to receive large tax refunds from the US Treasury. Thus, it was received $380 million in total during 1996 – 2000 years.
It was extremely difficult for the US government to catch the corporation on defrauding as the most skilled and highly paid lawyers and accountants in the world had worked for it. It is worth noting that every single transaction, the contract, or the tax calculation of Enron was legal or almost legal. It was a high probability of considering the operations legal even during the trial case. However, it could not continue as hidden debts were accumulating from year to year. They had to emerge eventually. Thus, Enron was charged with fraud, along with money laundering and other crimes in October 2002 (Macey, 2004).
Arthur Andersen LLP Participation in the Enron Scandal
Arthur Andersen and his partner Clarence Delaney created Arthur Andersen LLC in 1913. By the beginning of the 21st century, it had been the fifth largest auditing company in the world. It had conducted business in more than 80 countries and the amount of its workers exceeded 85 thousand people (Ciric, 2014).
The company went to bankruptcy when cooperating with the US energy corporation Enron, whose leadership was involved in the falsification of statements and concealing huge losses from investors. The auditors of Arthur Andersen did not manage to uncover fraudulent statements. Therefore, they were accused of negligent attitude and even deliberate concealment of the facts of the case related to Enron. The US Securities and Exchange Commission began to audit the accounts of other clients of Arthur Andersen, which led to the bankruptcy of other few large companies.
In 2002, the Texas court determined the Arthur Andersen workers’ guilty of the destruction of thousands of documentary support related to the audits of Enron. The company was also charged with impeding the inquisition of the Enron case. It was uncovered during an illegal inquisition that Arthur Andersen took part in the fraudulent activities related to Enron. Moreover, it was working out on the fraudulent schemes along with the leaders of Enron. Additionally, employees of Arthur Andersen destroyed a huge amount of documentation on the eve of the catastrophe happened to Enron. After that, Arthur Andersen refused a license to perform the audit of the financial statements. In 2005, the Supreme Court of the United States refuted the decision of the Texas court. Nevertheless, the scandal undermined the reputation of Arthur Andersen to such an extent that it was impossible for the organization to restore its position in the business practice (Edelman & Nicholson, 2011).
Managing Conflicts While Regaining Arthur Andersen LLC Trust Back
The management of the XYZ company engaged with financial consultancy has been offered to cooperate with Arthur Andersen as an accounting agency. The management knows the Arthur Andersen’s strengths, mainly a reputation of a reliable agency at the beginning of the 21st century. Additionally, the firm was one of the largest companies known all over the globe. However, the one and main weakness of the agency is its involvement in the Enron scandal. Despite the fact that the company’s guilt in the case was overturned, a negative impact of the issue has remained, along with distrust of many companies to the agency. In order to represent itself as a reliable company, Arthur Andersen will have to face certain problems during the work with the XYZ company. In terms of settlement of conflicts, the issues may be related to the matter of social contradictions, negotiation processes, the company’s staff, problem-solving and decision-making processes, as well as the matter of emotional resonance and the corporate culture.
Social Contradictions
A social contradiction is a clash of interests of various social groups. When talking about possible social contradictions, with which Arthur Andersen employees may meet, it is relevant to outline person-to-person and labor conflicts.
First, person-to-person conflicts may arise in the process of joint activities of the company cooperating with Arthur Andersen workers who had to deal with the Enron case. Additionally, labor conflicts may occur there. In this case, they may face personal and intergroup relations that hold social tension. It may be a conflict of interests as not every employee will be satisfied with the fact that Arthur Andersen was hired to provide accounting issues for the XYZ company. Such social tension can be understood as the level of conflict, which may be changed over time.
Considering the fact that social tension is the result of three interrelated factors, including dissatisfaction, ways of its manifestation, and mass participation, it is possible to recommend being strict on positive methods of conflict resolution. The management of the company that has decided to involve Arthur Andersen to its accounting should do its best to preserve the foundations of the conflict actors. At the same time, Arthur Andersen employees should be open to a variety of negotiations to show its visibility in conducting business and gain XYZ’s trust (Blum, 2007).
Negotiation
Negotiation is a necessary part Arthur Andersen needs in its attempt to gain trust from the management and employees of the XYZ firm. The reason it is an important part of the process of regaining trust is that it is an activity aimed at resolving the conflicting relationship between social actors, based on interdependence and the divergence of interests. Considering a negative reputation of the workers of the accounting firm, they will have to communicate with the personnel of the XYZ company and prove Arthur Andersen is a reliable agency. In this case, there are conditions necessary to be used during the negotiation process. The first one is the existence of various parties of the conflict with different systems of values and goals. The second is the presence of various subjects of the conflict in areas of common interests. The third is a diverse aspect ratio to the solution of the conflict. The fourth is a readiness of the subjects to reach out a winning truce. The fifth one is an awareness of the need for mutual interests. In addition, the last one is a difference in the assessment of the situation, possible results, and the balance of forces involved in the conflict. Thus, Arthur Andersen should be ready for all those issues in order to negotiate them successfully (Blum, 2007).
Teams
The capability to work in a team is also a required part of the case. The management of the XYZ company may not want to attract Arthur Andersen’s employees to the company’s accounting process to a full extent. It is recommended for Arthur Andersen to outstrip the XYZ management and offer to work together with the company accountants. This move may be favorable for the accounting agency as it can show it as the one that is ready for cooperation and has nothing to hide and to be afraid of (Levi, 2013).
Problem Solving
In this case, the style of problem solving is also recommended for Arthur Andersen. It aims at recognizing the differences of opinion and a willingness to be acquainted with various points of view to realize the causes of the conflict and find a course of action admissible to all parties. By using this style of settlement of conflicts, the accounting firm will be able to represent itself as the one that does not seek for solving the problems at the expense of others. On the contrary, it will show that it rather looks for the best variant of the way-out of a conflict situation. The divergence of views is an inevitable result of the fact that intelligent people have their ideas about what is right and what is not. For the company that has lost its reputation because of a financial scandal, such a move is the most appropriate decision to gain the trust (Blum, 2007).
Decision Making
An important part and a responsible step in the management of conflict are to make a decision by a manager. In this case, the managers of Arthur Andersen firm should be sure to present their awareness of the factors that must be considered in management conflicts. Moreover, they should convince the XYZ management that they follow those factors to avoid the situation happened to Enron in the future.
The factors that focus on administrative means of resolving a conflict are individually psychological features of a person, ambition relations, and differences affecting higher motives of personality like beliefs, ideals, values, principles, etc. Additionally, it may include the situation when a level of an employee’s vocational training does not correspond to the position it takes and there are no adequate conditions for this person’s promotion. Managers when making decisions in any business should take these measures into account (Schermerhorn, 2012).
Emotional Resonance
Emotional resonance is the capability to comprehend, determine, and administrate feelings in an affirmative and evidence-based direction to reduce stress, communicate effectively with others, sympathize, and overcome difficulties and discharge of a conflict. In order to regain trust of a reliable company, the managers of Arthur Andersen should show that they have a high emotional resonance. It will help people to see that the managers can recognize their emotional state and the state of other individuals, interact with people, etc. Such an understanding of emotions can be used for better relationships with other people, which will help to achieve greater success at work and live a more satisfying life.
In order to convince the personnel of the XYZ company that Arthur Andersen has learned from personal mistakes, they can show that they provide steps on the development of emotional resonance through five key skills. They include the ability to quickly reduce stress, recognize and manage personal emotions, get in touch with other people using non-verbal communication, use humor to cope with life’s problems, and the ability to resolve conflicts positively and with confidence (Schermerhorn, 2012).
Corporate Culture
Corporate culture is an important factor in the success of the company based on such principles and relationships, the implementation of which is designed to neutralize the conflict. If there is a conflict situation in an organization with a strong corporate culture, it can be solved much faster with fewer losses only in such a case. However, one should take into account the factor that the management of organizational culture can be also realized by overcoming the internal contradictions that reach out a peak in the conflict relations. Thus, Arthur Andersen should show that it respects company’s corporative culture, follows it, and has no intention to have a negative and harmful impact on it (Rahim, 2001).
Conclusion
Therefore, for Arthur Andersen LLC to work for the management of the XYZ company and prove its reliability, the accounting agency will have to face certain challenges. They may include social contradictions, negotiation processes, the company’s staff relations, problem-solving and decision-making processes, and the matter of emotional resonance and the corporate culture.
The management of the company that has decided to involve Arthur Andersen to its accounting must do its best to preserve of the foundations of the conflict actors. At the same timeFirst, Arthur Andersen employees should be open to a variety of negotiations in to gain XYZ trust and show its visibility in conducting business. Furthermore, Arthur Andersen should outstrip the XYZ management and offer cooperate with the company accountants. The company should also use such method of settlement of conflicts as problem solving. Therefore, the accounting firm will be able to show that it does not buck-pass its responsibilities but is eager to look for the best variant of the decision of a conflict situation. An important part and a responsible step in the administration of conflict are to make a decision by a manager, which must be shown to the management of the XYZ organization on the part of Arthur Andersen’s workers. In addition, the managers of Arthur Andersen should exhibit a high emotional resonance. It will assist the personnel in seeing that the leaders can recognize their affective state and the state of other people and interact with staff. Finally, Arthur Andersen should show that it respects the XYZ’s corporative culture, follows it, and does not intend to leave a negative and harmful impact on it.
