The Fall of Enron
1 Why did the external auditors and the board fail to detect the company’s true economic condition?
For external auditors, the failures could be largely attributed to the lack of independence between external auditors and Enron and the existence of conflicts of interest. From 1993, Enron started to outsource its internal audit functions to Anderson. Besides, conflicts of interest gets aggravated when the cross-selling of consulting services by auditors increases a lot. And consulting fees to auditors are much lucrative than the audit fees. As a result, Enron could easily threaten Anderson to give a favorable opinions to the public and otherwise Anderson couldn’t maintain a good relationship with Enron. Most importantly, there is a significant lack of independence because a number of Anderson employees joined Enron, including accounting officer, treasurer and the chief financial officer over the years. Those employees in management level are more likely to be confident with the financial report of Enron and lack professional criticism when considering the accounting methodology used by Enron because of their possibly previous audit involvement. Equal important aspect of failure comes from the inefficient and lack of shared concerns with Enron’s audit committee or management. Auditors didn’t fulfill their responsibilities to discuss with the audit committee the significant risks (risky employed accounting techniques) identified during the audit risk assessment procedures and their own concerns regarding retaining the Enron as a client.
For the board of directors, they breached a duty of care, loyalty and candor because it allowed Enron to engage in high risk accounting, inappropriate conflict of interest transactions and excessive compensation. In the face of complex and high-risk transactions, the board must be diligent in monitoring financial results and controls and monitoring the approval of transactions where there are actual of potential conflicts of
For external auditors, the failures could be largely attributed to the lack of independence between external auditors and Enron and the existence of conflicts of interest. From 1993, Enron started to outsource its internal audit functions to Anderson. Besides, conflicts of interest gets aggravated when the cross-selling of consulting services by auditors increases a lot. And consulting fees to auditors are much lucrative than the audit fees. As a result, Enron could easily threaten Anderson to give a favorable opinions to the public and otherwise Anderson couldn’t maintain a good relationship with Enron. Most importantly, there is a significant lack of independence because a number of Anderson employees joined Enron, including accounting officer, treasurer and the chief financial officer over the years. Those employees in management level are more likely to be confident with the financial report of Enron and lack professional criticism when considering the accounting methodology used by Enron because of their possibly previous audit involvement. Equal important aspect of failure comes from the inefficient and lack of shared concerns with Enron’s audit committee or management. Auditors didn’t fulfill their responsibilities to discuss with the audit committee the significant risks (risky employed accounting techniques) identified during the audit risk assessment procedures and their own concerns regarding retaining the Enron as a client.
For the board of directors, they breached a duty of care, loyalty and candor because it allowed Enron to engage in high risk accounting, inappropriate conflict of interest transactions and excessive compensation. In the face of complex and high-risk transactions, the board must be diligent in monitoring financial results and controls and monitoring the approval of transactions where there are actual of potential conflicts of