Case 1.1 - Enron Corporation
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 accounting transpiring and many critics questioned whether Anderson was involved with “cooking the books”. Given the scale of the compensation and how entrenched the firm was in Enron’s financial operations, it is hard to believe that the Andersen auditors, CPAs, failed to notice such obviously illegal accounting treatments of transactions. As so well said by the auditor of Accounting Today, “if a firm accepts and collects the audit fee, then it should be prepared to accept the blame, otherwise it is not part of the solution, but part of the problem”. The fault not only goes to the auditors, but to the company’s management as well. Enron’s management
Kenneth Lay turned a blind eye to anything that could obstruct Enron’s growth. He said that his ultimate goal was to make Enron “the world’s greatest company.” This is a great goal for any CEO to have; however, in his attempts to reach this goal, he developed a case of tunnel vision that led to unexpected consequences. When Sherron Watkins wrote him a letter questioning the treatment of certain accounting transactions and puzzled disclosures, he ignored her and stated that “he’d rather not see it”. Kenneth Lay even failed to acknowledge or address the issues after most of the Enron scandal had fully unraveled by refusing to testify before Congress in 2002. Jeffrey Skilling basically followed in the footsteps of Kenneth Lay and brought with him a similar approach to running a business. Skilling shared the same tunnel vision approach as Lay as evidenced by their “laser-focus on earnings per share”. They both were willing to ignore any wrongdoing in the company as long as earnings per share continued to increase. Skilling also developed a certain level of arrogance after being singled out as the number one CEO in the country. He would make “brassy and tacky” comments regarding Enron’s competitors and critics. This arrogance likely aided in his ability to shield out the negative aspects of Enron’s operations...
Please join StudyMode to read the full document