Reference no: EM133266849

Before their demise, Enron was the 7th largest public corporation in the United States, and Arthur Anderson LLP was one of the big five accounting firms, employing 85,000. The energy giant's collapse into bankruptcy cost investors billions of dollars, left the accounting firm a mere shell of its former self, and exposed massive fraud by management, consultants, and auditors.

The Enron affair highlighted the many conflicts of interest that arise when a corporation's external auditors also act as its accountants, business advisors, or management consultants. In theory, a corporation's auditors are appointed by its shareholders; their task is to objectively review the financial management of the corporation's affairs and to report any irregularities to the shareholders. In reality, the auditors are usually selected by the management, and the shareholder appointment is a formality. They consequently all their position to the very people they are meant to supervise, an obvious conflict of interest.

A second conflict of interest arises when the auditors are themselves members of affirm that also has contracts to supply accounting and management services to the audited corporation. If auditors judge the directors too harshly, the jeopardized those contracts and risk an important source of income to their firm. This was Arthur Andersen's situation.

To address these conflicts of interest another governance problems, the United states passed the Sarbanes-Oxley act of 2002 (SOX), which prohibits a company from hiring the same accounting firm to provide both auditing and consulting services, and places auditor selection under the control of independent directors who do not work at the company.

Are there other possible solutions to minimize conflicts of interest? Is it appropriate for American legislation to apply to Canadian corporations? (100 wrds minimum)