Case Study One: Enron Corporation
Case Study One: Enron Corporation
The Enron debacle created what one public official reported was a "crisis of confidence" on the part of the public in the accounting profession. Lists the parties who you believe are most responsible for the crisis. Briefly justify each of your choices.
Enron proves to be a classic example of all that glitters is not gold. In 2001, Enron was hailed as America’s most innovative company and its CEO at the time, Jeffrey Skilling was singled out as the No. 1 CEO in the entire country, and its CFO, Andrew Fastow was awarded the Excellence Award by CFO Magazine for his pioneering work on unique financing techniques. But soon after, the Company collapsed, jobs lost, stakeholders panicked, and caused what is now described as the biggest crisis since 1929. There are many parties that can be held responsible for the crisis: 1. Chairman of the Board and the Board of Directors
The Board of Directors were concerned with making Enron the nation’s greatest company and refused to see the truth and facts behind their accounting and financial reporting decisions. When Sherron Watkins, the former VP of Corporate Development offered to show the problems in accounting decisions, Ken Lay, the Chair of the Board refused and said “He rather not see it”. 2. Regulatory Agencies, SEC and FASB
Enron was able to hide their losses behind their SPEs or Special Purpose Entities by omitting an SPE’s assets and liabilities from its consolidated financial statements and both SEC and FASB failed to provide formal guidelines for companies to follow in SPEs accounting and reporting. As a result of the minimal legal and accounting guidelines for SPEs, Enron along with other companies was able to divert huge amounts of their liabilities and losses to off-balance sheet entities. 3. Management and Accounting team of Enron
Both management and accounting team of Enron manipulated the revenue recognition principle by making vague assumptions that inflated the profits booked on Enron’s commodity contracts. There attempt was to keep the stock prices high by showing inflated financial statements in order to receive high credit ratings and increased lender cash flow into the company. 4. Anderson Accounting Firm
The Anderson firm, an independent audit firm failed to provide a more transparent financial statements of Enron. Anderson firm audited the company for 15 years where its auditors failed to perform their duties and professional standards of accounting. In fact, Anderson made efforts to restructure Enron’s SPEs to continue to qualify as unconsolidated entities once they became aware of Enron’s rapidly deteriorating financial condition. Anderson firm was more interested in retaining Enron as their client to provide consulting services hence creating a conflict of interest. Lists three type of consulting services that audit firm have provided to their audit client in recent years. For each item, indicate the specific threats, if any, that the profession of the given services can pose for an audit firm independence.
Auditor’s independence is considered a cornerstone in the accounting profession since they are entrusted by the general public to provide true picture of a company’s financial position. It is believed that non-audit services provided by audit firms impair auditor’s independence to fairly attest the financial statements produced by the client company. Consulting and audit a same firm causes conflict of interest. Anderson firm earned approximately $52 million in fees from Enron in 2000, less than half of which was directly related to the auditing, rest were for non-audit services. Audit firm may provide many types of consulting services such as: 1. Tax consulting services
2. Accounting system design services
3. Bookkeeping or other related services
4. Financial advice services, including internal audit consulting service....
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