Enron Scandal

For the final exam lab audit, my lecturer gave the class an assignment to make paper about the enron scandal. We should look that case according to our position as an auditor. So this time, I want to share it with you. As usual, I share my paper, hope that it will give more benefit to my reader. Before I forget, I took the reference related with that case from Wikipedia.com . Happy reading :)

Taken from Google

ENRON’S SCANDAL

                Enron Corporation (former NYSE ticker symbol ENE) was an American energy, and services company based in Houston, Texas which was formed in 1932 in Omaha, Nebraska. It was reorganized in 1979 as the leading subsidiary of a holding company, InterNorth which was a highly diversified energy and energy related products company. InterNorth was a leader in natural gas production, transmission and marketing as well as natural gas liquids and an innovator in the plastics industry. It owned Peak Antifreeze and developed EVAL resins for food packaging. In 1985, it bought the smaller and less diversified Houston Natural Gas. The name of Enron originally selected by Nancy McNeil (CEO’s secretary at that time) as Enteron, but when it was pointed out that the term approximated a Greek word referring to the intestines, then the name was quickly shortened to Enron. The final name was decided upon only after business card, stationery, and other items had been printed reading Enteron.

                Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world’s leading electricity, natural gas, communications, and pulp and paper companies with claimed revenues of nearly $101 billion in 2000. Fortune Magazine named Enron as “America’s Most Innovative Company” for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the Enron Scandal. Since then, Enron has become a popular symbol of willful corporate fraud and corruption. The scandals also brought into question the accounting practices and activities of many corporations throughout the United States and was a factor in the creation of the Sarbanes Oxley Act of 2002. That scandal also affected the wider business world by causing the dissolution of the Arthur Andersen accounting firm.

Then, what is exactly Enron Scandal is?
In the Enron’s case there was found fraud which is committed by the Enron’s employees and the auditor from KAP (Accounting Firm) Arthur Andersen who did manipulation through their financial statement to report their profits about $600 million whereas the company getting loss. That manipulation caused by the company’s desire to keep their stock investor demand. Even in the beginning that fraud is undetected and gives some benefits to the company but in the end it just dissolve the credibility of Enron and KAP Arthur Anderson.

There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen as auditor but also as consultant to Enron; then the lack of attention shown by members of the Enron board of directors to the off-book financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operation. In some ways, the culture of Enron was the primary cause of its collapse. The senior executives believed Enron had to be the best in everything it did and they had to protect their reputations and their compensation as the most successful executives in the U.S. Then when some of their business and trading ventures began to perform poorly, they tried to cover up their own failure.

According to the case above, as an auditor I can conclude that Enron and KAP Arthur Andersen have violated the professional ethics that should be guide the auditor to perform their duties. As a public accounting firm, KAP Arthur Andersen should be have independent and avoid doing the fraud, because in the end they both just reap the destruction which Enron went bankrupts with leaving debts of billion dollars, while KAP Arthur Andersen losing the public’s confidence and independency. Besides that, I believe accounting regulations should be altered to prohibit ownership of both auditing and consulting services by the same accounting firm. Accounting firms are already moving to server their consulting businesses. As the result of the scandal above, the government of U.S was made legislation which is authorized by President of United State George W. Bush on July of 30, 2002 which set new or enhanced standards for all U.S Public company boards, management and public accounting firms. Then the aim of this regulation is as a response in the high profile financial scandals which is aimed to protect the shareholders and the general public from accounting errors and fraudulent practices in the eneterprise. Then one of SOX’s point is company responsibility whereas the CEO (Chief Executive Officer) and CFO (Chief Financial Officer) of company should make attestation that the financial report is true and fairly presents, then if there is unfairness with the financial report, they have responsibility with it and will be fined about $5 million and imprisoned not more than 10 years. SOX also obligated the companies to assess whether their process for workings with financial data are established, documented, and structured to contain control against risk. They have to do the same for information system that manage financial data. They have to assess whether they have adequate security control to ward off theft or corruption of data. They also have to determine whether their employees’ roles, responsibilities, access rights, and permissions could allow material fraud or misrepresentation of financial data. SOX also concern about the destruction, alteration of falsification of record. Even today, there is legislation such as SOX that will protect the shareholders, but in the final analysis, the solution to an Enron-type scandal actually lies in the attentiveness of directors and in the truthfulness and integrity of executives, because clever individuals will always find many ways to conceal information or to engage in fraud.