Question

Arthur Andersen, once a major international accounting firm, was indicted for obstruction of justice, lost its auditing license, and eventually closed its U.S. offices based on the actions of a few employees even though they were performing in a manner contrary to corporate policy and their employer's directions. This is an example of the principle called respondeat superior or ____.

a. let the buyer beware.
b. let the punishment match the crime.
c. the die is cast
d. let the master answer.

Answer 1

The Arthur Andersen case exemplifies the principle of respondeat superior (let the master answer), in which a company is held liable for its employees' actions. Corporate governance, through the board of directors, auditing firms, and external investors, plays a crucial role in oversight. Bureaucratic oversight is key internally, but it may conflict with personal costs for those reporting misconduct.

Step-by-step explanation:

The principle of respondeat superior or let the master answer is applicable in the case of Arthur Andersen, where the company was held accountable for the actions of its employees, despite those actions being contrary to corporate policies and directives. The indictment of Arthur Andersen for obstruction of justice and the subsequent loss of its auditing license, leading to the closure of its U.S. offices, underscores the severity of consequences that can befall a corporation due to the actions of a few individuals within it.

Corporate governance plays a critical role in preventing such outcomes, with the board of directors, auditing firms, and outside investors serving as vital institutions for oversight and checks and balances. However, as seen in the case of Lehman Brothers, failures in corporate governance can result in a lack of transparent and accurate financial information for investors, leading to significant negative repercussions for the company as a whole.

Internally, bureaucratic oversight is essential as those within the organization are often best positioned to identify and report misconduct. However, these internal watchdogs can face a daunting challenge when confronted with the choice between reporting corruption and the personal cost associated with doing the right thing.