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Enron Crisis: Key Responsible Parties

The document discusses Enron's accounting scandal and the parties responsible. It identifies Enron executives like Lay and Skilling who misstated earnings to benefit themselves, and Arthur Andersen for ignoring accounting issues to continue receiving fees from Enron, damaging public confidence. It also discusses the SEC allowing Enron's mark-to-market accounting that enabled its Ponzi scheme.

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Maryam Malik
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35 views2 pages

Enron Crisis: Key Responsible Parties

The document discusses Enron's accounting scandal and the parties responsible. It identifies Enron executives like Lay and Skilling who misstated earnings to benefit themselves, and Arthur Andersen for ignoring accounting issues to continue receiving fees from Enron, damaging public confidence. It also discusses the SEC allowing Enron's mark-to-market accounting that enabled its Ponzi scheme.

Uploaded by

Maryam Malik
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Q#1.

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.

ANSWER: Executives of Enron - Kenneth Lay, Jeffery Skilling, and Andrew Fastow were all accountable
for the catastrophe. The executives of Enron composed the big earnings and pushed up the stock prices
for their own advantage. When misstatements and indiscretions appeared and were made vibrant to
the public, the executives of Enron lost the confidence of the stakeholders in the corporation and the
crisis of confidence spread. Arthur Andersen - The auditing firm did not present itself with the
professionalism and responsibility that an audit firm should. When the firm noticed that the amounts
recorded on Enron’s financial statements were misstated, it was ignored in order to continue receiving
the enormous amounts of fees and payments from the corporation. In doing so, the confidence that the
public had in the company was diminished. SEC - The government agency who allowed Enron to use
Mark-to-Market Accounting practice. This kind of creative accounting practice allowed the Enron CEO to
perform his Ponzi scheme “legally” and led to the sudden collapse of Enron.

Q#2. 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 form’s independence.

ANSWER: “Internal Auditing” should be conducted within a company instead of having an outside audit
firm to perform the service. If an outside audit firm was hired then it will present a threat to the
legitimacy of the internal audits. An audit firm should not be “Designing Accounting Systems” for a firm
while performing audit services to the same firm. It is too easy for the audit firm to alter the accounting
systems within a company, an auditor can fabricate the financial situations of a corporation and make it
appears to be more profitable or more attractive to investors. An outside audit firm should not provide
“Professional Consulting” and auditing service to a same company. Auditors involved in the dealings of a
business are at risk for becoming subjective to the success of that organization. When an auditor is
involved in such 21 happenings, 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.

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

ANSWER: Yes, Andersen’s involvement in the accounting and financial reporting decisions violated
professional auditing standards of the independence in mental attitude. Andersen’s interests were not
independent of the company, but the audit firm invested themselves in solidifying the security of the
company and its success. The significant amount of earnings that Andersen received when performing
accounting services to Enron goes against auditing standards.

Q#4. Briefly describe the key requirements included in professional auditing standards regarding the
preparation and retention of audit work papers. Which party “owns” audit work papers: the client or
the audit firm?
ANSWER: The key requirements included in professional auditing standards regarding the preparation
and retention of audit work papers are:

i) The auditor must state in the auditor’s report whether the financial statements are presented
in accordance with GAAP.

ii) The auditor must bring to light an instances in which the GAAP were not consistent during the
current period.

iii) When informative disclosures are not adequate, the auditor must state so in the report.

iv) The auditor must state an opinion in regards to the financial statements. If the auditor cannot state
an opinion, this much be noted in the report. If the auditor is taking any responsibility in relation to the
financial statements, it must also be stated in the auditor’s report. The audit work papers belong to
auditing firm. The auditor does hold responsibility for the evidence and reports, and is to make sure
that the information is not misused in any way

Common questions

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The Enron scandal exposed the SEC's shortcomings in monitoring and approving accounting practices like Mark-to-Market accounting, which facilitated Enron's financial manipulations . It highlighted the need for stronger regulatory mechanisms and oversight to prevent companies from exploiting accounting loopholes for misleading financial statements, ultimately driving reforms to tighten corporate governance and financial disclosure standards .

Mark-to-Market accounting allows companies to value and report assets and liabilities at current market prices, which can lead to potential misrepresentation and volatility in financial statements. In Enron's case, it was exploited to inflate asset values and hide debts, misleading stakeholders regarding the company's true financial health . This practice demands rigorous scrutiny as it can be improperly used to obscure financial realities .

Independence is critical for auditors to provide objective and impartial evaluations of financial statements, ensuring stakeholder trust in their credibility . Financial incentives, such as those gained repeatedly from a single client, can lead auditors to overlook discrepancies and compromise their duty of impartial evaluation in favor of financial benefits, as seen in Andersen's relationship with Enron .

Yes, Andersen violated professional auditing standards by not maintaining independence in their mental attitude. Their financial interests were intertwined with Enron's, threatening their impartiality and the credibility of their audits . The substantial earnings from Enron for accounting services compromised Andersen's independence, violating auditing standards that demand auditors remain unbiased and detached from their clients' financial outcomes .

Audit firms should adhere to the principle of independence, ensuring services do not create conflicts with their obligation to provide unbiased audits . This includes avoiding involvement in designing client accounting systems or participating in internal audits that could lead to compromised objectivity . Implementing stringent ethical guidelines and separating consultancy from auditing operations can help maintain professional integrity and public trust .

The executives of Enron, including Kenneth Lay, Jeffery Skilling, and Andrew Fastow, were primarily responsible as they manipulated earnings and inflated stock prices for personal gain, resulting in stakeholder mistrust when their unethical practices were exposed . Arthur Andersen, the auditing firm, failed to uphold professional standards by ignoring financial misstatements to maintain lucrative fees from Enron . The SEC's allowance of the Mark-to-Market Accounting practice enabled the legal execution of Enron's misleading financial reporting, contributing to the crisis .

Auditing standards require that auditors specify whether financial statements adhere to GAAP, highlight inconsistencies, disclose inadequacies, and clearly state their opinion or the absence thereof in their reports . Audit work papers are owned by the auditing firm, reflecting their responsibility to maintain the integrity and confidentiality of the evidence and reports .

Improper reporting decisions erode public trust as stakeholders perceive a lack of integrity and transparency in financial disclosures. The Enron scandal exemplifies this, where Andersen's disregard for auditing standards and alignment with Enron's misleading practices led to a broader crisis of confidence in the profession . When audit firms prioritize clients' interests over public accountability, it damages their reputation and the perceived reliability of financial reports .

The Enron scandal underscored the importance of transparency in financial reporting as integral to maintaining public trust and ensuring accountability. It demonstrated that lack of transparency allows manipulation and concealment of financial realities, urging corporations and regulators to enhance disclosure requirements, strengthen oversight mechanisms, and restore credibility in the corporate governance process .

Consulting services such as internal auditing by an external firm may compromise the legitimacy of audits due to potential conflicts of interest . Designing accounting systems for audit clients can lead to manipulation of financial results to appear favorable, compromising the auditor's objectivity . Providing both professional consulting and auditing services risks auditors becoming biased towards the success of their clients, thus compromising their ability to provide an independent opinion .

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