Enron Scandal

Topics: Enron, Big Four auditors, Enron scandal Pages: 7 (2547 words) Published: September 22, 2012
Abstract - The Enron scandal is one of the biggest financial scams ever to take place and its root’s lie in the desire of the senior members of Enron to earn as much for themselves as possible and were assisted in this greatly by the negligence shown by their auditor’s and consultants, Arthur Andersen. Most of the debts and tangible assets of Enron were on the balance sheet of partnerships that were run by high-ranking officials within the corporation and these partnerships were recorded as related parties, but were never consolidated so that the debt never showed up on Enron’s financial statements, as it would have if statements were prepared according to GAAP. Arthur Andersen chose to turn a blind eye to these discrepancies by certifying their financial statements as true & fair, and therefore failing miserably in their duty as an auditor which ultimately led to their decline. This scandal made way for many changes including the Sarbanes-Oxley Act which requires companies to re-evaluate its internal audit procedures and make sure that everything is running up to or exceeding the expectations of the auditors.

Introduction –
Arthur Andersen and Enron - two names that will forever live in infamy because of the events leading up to and including the debacle of December 2001, when Enron filed for bankruptcy. These two giants in the utility and accounting industries, and known throughout the world, took advantage of not only investors, but also the government and public as a whole, just so that those individuals involved could illegally increase their personal wealth. How could the backlash from the actions of the management of these two organizations have a positive influence in the accounting industry as a whole? The fallout from Enron’s bankruptcy and the SEC investigation that followed resulted in many changes to the industry to make standards tougher, penalties harder, and the accounting industry more reliable. At first glance, these “improvements” just seem like they are making more work for the many honest accountants in the industry, who are already doing the right things. However, these changes actually are positive for the industry. 

Objectives –
1.) To have an understanding of the Enron scandal.
2.) To try to determine why these scandals took place and the changes that occurred due to these scandals. 3.) To determine the role of the auditors (Arthur Andersen) and whether they were effective or ineffective.

Major Findings –   Prior to the fall of Enron and their accountants, Arthur Andersen, there were many different types of safety measures in place to help protect the investors and the public as a whole. These safety measures included Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and all professional ethics. The use of GAAP by accountants is standard protocol.  An accountant follows these principles as a matter of daily routine.  According to Several accounting texts, GAAP is identified as a “dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements.” During yearly audits performed by external, independent auditors, checks are performed to make sure that a business is following GAAP consistently. If they are not, then the business must show why they are not, and present rationale to demonstrate that what they are doing is both ethical and appropriate in their specific situation.  Enron took these rules and circumvented them to allow certain individuals within the company to make money from the increased investments from stockholders. They did this by bolstering their balance sheet with inflated asset values, and dispersing their liabilities to subsidiaries that they just didn’t consolidate, meaning that Enron didn’t include these companies in their financial statement accounts at the end of their fiscal years,...

Bibliography: –
a.) CBC News - http://www.cbc.ca/news/business/story/2006/05/25/enron-bkgd.html
b.) The Economist - http://www.economist.com/node/940091
c.) TIME Magazine - http://www.time.com/time/business/article/0,8599,263006,00.html
d.) Wikipedia - http://en.wikipedia.org/wiki/Enron_scandal
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