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Chapter 7. Mistakes in Judgment

Chapter 7. Mistakes in Judgment

When Arthur Andersen adopted a sales culture, the shift unbalanced many of Andersen’s traditional values and practices, increased the level of risk Andersen was willing to take with its clients, and raised the possibility for conflicts of interest. After the partner purge of 1992, Arthur Andersen became involved in a number of litigations that included Sunbeam Corporation, Baptist Foundation of Arizona (BFA), Waste Management, Inc., Boston Market Trustee Corp., Department 66, and Colonial Realty. Most of these cases were settled with little media attention. The general opinion among Arthur Andersen staff was that the vast majority of auditors were trying to do the right thing but there were a few bad apples. It can also be argued that Andersen’s increasing emphasis on getting and keeping clients may have clouded the judgment and pressured partners to accommodate clients.

External business pressures also played a part. Through the 1990s, the accounting profession came under increasing pressure to move from historical transaction reporting to forecasting and other emerging accounting manipulations. Organizations were even hiring PhDs in mathematics to create complex financial models that could take advantage of largely unregulated derivatives and SPEs. In the process, these companies created financial structures that few could understand. Disturbed by these trends, one accounting professor reminded everyone of a 1970s joke characterizing these practices as Cleverly Rigged Accounting Ploys (CRAP), rather than Generally Accepted Accounting Principles (GAAP).[1]


  

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