Enron Fraud

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Enron

One of the main issues with this scandal was that Arthur Andersen provided consulting services for Enron in addition to performing their external audits. Andersen had a reputation of being an extremely ethical company. Furthermore, they had a very strong relationship with Enron and were immersed in their daily business operations – so much that they practically became part of the company. Enron was a large account for Andersen and therefore, they were willing to make sacrifices. Given that Andersen provided consulting and auditing services, Enron was a large account for their firm. In the end, Andersen failed to perform an accurate audit of Enron’s books and did not make any attempt to question the numbers they were seeing.

As a result of the Enron collapse, Congress passed the Sarbanes Oxley Act. This act contains 11 titles, one of which is Auditor Independence. In an effort to prevent the same firm from providing auditing and consulting services, auditor independence now requires that audit services must be provided by a different firm than the consulting services, if done at the same time. Additionally, auditor independence also states that the audit lead must rotate off the account after five consecutive years. This potentially minimizes the risk involved in developing personal relationships between the company and auditing firm.

After watching the film Bigger than Enron one of the most disturbing issues that I saw was the conflict of interest in the pay of the firm’s chief executives. The principle method of compensation for these executive was to give them stock options. On the surface this seems like a novel approach to paying an executive, giving the executive an investment in the company that they are running and a stronger incentive for success. What is less obvious about the use of stock options is the fact that the company is not required to claim the value of the stock option against company’s yearly revenue. This fact...
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