Zhiying Liao (Sileen)
Dr. Laura Maley
Summary of Enron Case
The collapse of Enron’s business empire was just a well-designed accounting game. The failures mainly included the concealment of assets and liabilities (off of the balance sheet), the nondisclosure of related party transactions, corporate governance problems, and the overstatement of assets and equity. In its off-balance sheet transactions, Enron had employed SPEs to conceal debts and overstate profits using certain GAAP rules. In short, Enron simply did not meet the 3% threshold outlined in EITF 90-15, and it should have consolidated two entities: Chewco Investments and LJM1. What’s more, the consolidation of Chewco implied that the JEDI investment also needed to be consolidated. In its related-party transactions, Enron declared Chewco as its related party. However, Enron’s disclosures about these related-party transactions were cryptic and obscure, making it very hard for a reader of the financial statements to discern their true nature. The audit failure of Arthur Andersen was an assignable cause of this scandal. The failures principally included destroying the audit files, clinging to the mistakes instead of correcting them, lack of independence in auditing, issuing misleading audit report and internal control report. “With so many accounting scandals arising during the early years of the 21st century, most observers abandoned the bad apples theory and began criticizing the gatekeepers for doing a poor job” (Catanach, Jr., Ketz, 2012). The Enron event had enormous impacts on the U.S. accounting supervision system, accounting ethics and international accounting harmonization. It caused people to reexamine the audit committee carefully and there was no doubt that there have existed serious defects of accounting supervision system of USA. At the same time, the event brought a huge question mark to the U.S. accounting ethics. As everyone knows, independence is the core of the...
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