CASE STUDY

ENRON CORPORATION

Submitted by:
Cielo R. Tolibas

ENRON CORPORATION
Enron is a company that reached dramatic heights, only to face a dizzying collapse. The
story ends with the bankruptcy of one of America's largest corporations. Enron's collapse
affected the lives of thousands of employees. To this day, many wonder how a company so big
and so powerful disappeared almost overnight.

The Enron debacle created what one public official reported was a crisis of confidence on
the part of the public in the accounting profession. List the parties who you believe are the
most responsible for that crisis. Briefly justify each of your choices.

Enrons senior management namely CEO Kenneth Lay, COO Jeffrey Skilling and CFO
Andrew Fastow has an obligation to shareholders to maximize the value of the shareholder's
stock. Although this is not inconsistent with making a significant amount of money for
management, Enron's management appears to have lost sight of its fiduciary duty in a rush to
maximize its own profits, rather than those of the company. They focused too much on becoming the
worlds biggest company. They used the mark-to-market practice led to schemes that were designed
to hide the losses and make the company appear to be more profitable than it really was. If there
is to be blame assigned in this situation, it is clearly first and foremost with management because
its philosophy of unbridled competition created the environment in which there were incentives
to manipulate information and deceive the public.

Second is the Internal Audit Committee in Enron. One of the most important duties of
internal audit committee is to analyze and give the guide or advice of the companys internal
control. However, from the scandal, we can see that it used a lot of SPEs to maintain
paperwork healthy. Enron scandal happened proves that the internal auditors were not performing the way
an audit group should.

Lastly, is the Arthur Anderson Accounting Firm. The independence of the outsider
auditors should be questioned. They didnt present itself with professionalism and responsibility.
They already noticed the suspicious financial report. Auditors are hired by the organizations
which they audit. If the auditing firm wishes to retain the business, it will attempt to satisfy
its client's financial statement needs and desires. This does not mean that auditors will
simply (1) accept all of the positions taken by management or (2) try to help management
"cook the books". By far the majority of auditors carefully consider the financial statements

being audited and will not sign off on positions that they do not feel "fairly present" the
financial position of the client. But there is a dynamic tension which exists.

List three types of consulting services that audit firms have provided to their audit clients in recent years. For
each item, indicate the specific threats, if any, that the provision of the given service can pose for an audit
forms independence.
Design the accounting procedures. They helped them alerting the accounting systems within
the company. There will be an increasing threat for the independence. In this case, the creators of
the accounting procedures fabricated the financial statements by using a complex procedure that
users could not understand. Also the SPEs strategy indicated that some manipulation from the
part of the audit firm that also with prior knowledge of accounting ethics, which at most times
makes it more risky, given the legal involvement.

Review the financial statement. Financial statements are an important to the company
revenue and all the financial processes. The auditors have easier access to misstating financial reports
and statements. Manipulations of these data may be disclosed if the auditors process an appropriate
precise audit to decrease the detective risk. In this situation, a review service of financial
statement would be an increasing threat of independence.

Provide professional consulting services such as tax or other accounting procedures. This
is obviously a great risk of independence of the audit firm. Those consulting service may have
associated with the auditing service they provided. In this case, the manipulation is also very
likely and comes as one of the biggest threats to audit consultancy services and its credibility that

can hurt the reputation of the audit firm. And they are not able to perform their duties as an
external auditor to the best of their ability. Their opinions are subject to change based on biases.

For purposes of the question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide
accurate descriptions of Andersens involvement in Enrons accounting and financial
reporting decisions. Given this assumption, do you believe that Andersens involvement in those
decisions violated any professional auditing standards? If so, list those standards and briefly explain
your rationale.

Independence. Andersen earned around $52 million from Enron during 2000, but only
$25 million was payment in reference to the 2000 audit. Andersens interests were not
independent of the company, but he invested himself in solidifying the security of the
company and its success.

Planning and supervision. Anderson should be supervised when performing the auditing
service to keep independence. However the lacks of planning and supervision made
Anderson become too involved in client accounting and financial reporting decision.

Internal control evaluation. Anderson should have a sufficient understanding of the

clients internal control especially about their SPEs.

Reporting. Because Anderson didnt maintain its independence, they should issue a
disclaimer of opinion on its financial statement.

Reference:
Knapp, M.C. (2013). Contemporary Auditing: Real Issues and Cases (9 th Ed). Mason,
OH: South-Western Cengage Learning.