Case 1.1 - Enron Corporation
Case 1.1 - Enron Corporation
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Discussion 1
The parties we believe to be most at fault for the crisis in this case are a) the Audit Firm engaged in the Enron audit (Arthur Andersen); b) Enron Management (Kenneth Lay, Jeffrey Skilling, Andrew Fastow; and c) the SEC.
The Public Accounting Firm: Arthur Andersen
The auditor has the responsibility to evaluate the risk of material fraud, including: * Incentives and motives for fraud : Enron was a fast growing company with many start-ups projects, such as the Energy Wholesale Services (a B2B electronic marketplace for the energy industries) or the Enron Broadband Services (an operating unit serving as intermediary between users and suppliers of broadband services,) that constantly needed huge amount of money to succeed. * The opportunity to commit fraud: Enron internal controls were weak and the management was promoting a culture that encouraged fraud rather than honesty. * Rationalizations that might allow someone to commit fraud: the management at Enron believed that they were only trying to grow the company and increase their stock price by misrepresenting their financial statements. Once their new ventures would succeed, they would be able to cover the losses previously incurred.
All the ingredients were present for Anderson to uncover the fraud.
Moreover, the auditors have a responsibility to disclose material fraud and illegal client acts to the audit committee and the Board of Directors. If the financial statements are not restated, the auditor should issue a qualified, an adverse opinion or consider withdrawing from the engagement. The team auditing Enron should have followed the guidance when the management acted with scienter.
As mentioned in the case, Arthur Andersen was being paid exorbitant amounts of money to audit Enron and attest to the validity of its financial statements. The firm failed on every front to catch any of the fraudulent
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Discussion 1
The parties we believe to be most at fault for the crisis in this case are a) the Audit Firm engaged in the Enron audit (Arthur Andersen); b) Enron Management (Kenneth Lay, Jeffrey Skilling, Andrew Fastow; and c) the SEC.
The Public Accounting Firm: Arthur Andersen
The auditor has the responsibility to evaluate the risk of material fraud, including: * Incentives and motives for fraud : Enron was a fast growing company with many start-ups projects, such as the Energy Wholesale Services (a B2B electronic marketplace for the energy industries) or the Enron Broadband Services (an operating unit serving as intermediary between users and suppliers of broadband services,) that constantly needed huge amount of money to succeed. * The opportunity to commit fraud: Enron internal controls were weak and the management was promoting a culture that encouraged fraud rather than honesty. * Rationalizations that might allow someone to commit fraud: the management at Enron believed that they were only trying to grow the company and increase their stock price by misrepresenting their financial statements. Once their new ventures would succeed, they would be able to cover the losses previously incurred.
All the ingredients were present for Anderson to uncover the fraud.
Moreover, the auditors have a responsibility to disclose material fraud and illegal client acts to the audit committee and the Board of Directors. If the financial statements are not restated, the auditor should issue a qualified, an adverse opinion or consider withdrawing from the engagement. The team auditing Enron should have followed the guidance when the management acted with scienter.
As mentioned in the case, Arthur Andersen was being paid exorbitant amounts of money to audit Enron and attest to the validity of its financial statements. The firm failed on every front to catch any of the fraudulent