Professional Development Article:
The CPA Journal
Enron Ten Years Later: Lessons to Remember
Acct 4501W- Auditing Concepts
March 11, 2013
In the article entitled Enron Ten Years Later: Lessons to Remember, the authors Anthony H. Catanach Jr. and J. Edward Ketz discuss the importance of learning from the mistakes made by the senior executives of Enron. The “off-balance sheet” that Andrew Fastow, the CFO of Enron, created to funnel tens of millions of dollars into executives and investors pockets and also hide corporate losses contributed immensely to the demise of the corporation in 2001, which had once been valued at $60 billion. Fastow states in a recent article that "the net effect of all these deals was to create a misrepresentation of the company."
The intent to deceive the public and Enron, Inc. investors by concealing the true value of the corporation’s stock and by management’s willingness to commit fraudulent acts while directing subordinates to participate.
Critical factor #1: Increase in management compensation a major incentive in creating fraudulent financial reports. By making the managements incentives focal to the ‘dramatic rise’ in stock options, the Enron senior execs gave their managers all incentive to manipulate the earnings report so that their compensations would be greater. John Coffee, the author of “What caused Enron? A Capsule Social and Economic History of the 1990s” states that a major flaw in the corporate governance as that Enron management ‘compensation schemes that encourage managers to manipulate accounting reports to gain more compensation.’ Enron’s senior execs had not taken on the responsibility of planning for this potential business risk by setting up the “inappropriate objectives and business strategies” as explained in the text Auditing & Assurance Services. Thus, by making the managements incentives based upon their financial statements stating an...
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