Enron Inherent Risk Factors

Topics: Risk, Enron, Auditing Pages: 2 (577 words) Published: June 20, 2012
One inherent risk factor that would impact my audit procedures of Enron were the large number of highly complex accounting entries. For example energy traders were required to book all the projected profits from a supply contract in the quarter in which the deal is made. Such accounting procedures are inherently risky as they make assumptions about price forecasts which can drastically affect earnings.

Another inherent risk factor is the frequency of related party transactions. The special purpose entities Enron was trading with were created by Enron and even when the irrational 3% rule appeared to be met frequently Enron indirectly had a stake in that percentage. Furthermore the SPE's were often capitalized with Enron stock. Transactions between Enron and these entities are inherently risky as transaction between related parties are easily exploited, as they were by Enron, as vehicles through which to generated inflated sales. While the exact use of the SPE's may not have been known by Anderson in previous audit years they should have adjusted their audit procedures in order to account for the potentially suspect relationships that existed between Enron and the entities which it controlled.

A third inherent risk factor as Enron's dependence on maintaining positive financials and a high stock price. Enron's growing need for capital finance new endeavors, such as its internet based operations, required the company to maintain impressive financial statements. Furthermore, Skilling is quoted as saying that Enron was ""laser focused on earnings per share". Many of the SPE loan agreements Enron entered into contained price triggers where if Enron's stock dropped below a designated level, Enron was required to provide additional stock to collateralize the loan and make significant cash payments. In the worst case scenario Enron might have been forced to dissolve and SPE and consolidate its assets and liabilities thus revealing losses. Such pressure to...
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