Question

The Arthur Andersen auditors did not notice how low Enron had fallen in terms of its unethical decisions over a period of time. This is an example of?

1) Lack of expertise in auditing
2) Ineffective auditing procedures
3) Failure to detect red flags
4) Collusion with Enron management

Answer 1

Arthur Andersen's failure to identify the issues at Enron can be attributed to a combination of ineffective auditing procedures and a broader failure of corporate governance, similar to what occurred in the Lehman Brothers collapse.

Step-by-step explanation:

The situation with Arthur Andersen and Enron is an example of failure to detect red flags that should have been identified by the auditors. It is not explicitly indicative of a lack of expertise, but rather a mix of ineffective auditing procedures, potential collusion with Enron management, and a broader lapse in corporate governance. Drawing parallels to the Lehman Brothers case, the lack of oversight by the Board of Directors and the emphasis on short-term gains without adequate risk assessment can lead to significant corporate governance failures. Auditors play a crucial role as part of corporate governance, along with the board of directors and large investors, to ensure accurate financial information is available and to prevent unethical behavior that may lead to a company's downfall.