Sidi (Fiona) Chen
Wei (David) Yu
In June of 2001 Enron’s new CEO, Jeff Skilling, was heralded as the “No. 1 CEO in the entire country and Enron was saluted as “America’s most innovated company.”1 Just six months later, in December, Enron filed for bankruptcy. The failure shocked the public and angered investors. How could this have happened? Did no one see this coming? Where were the accountants? Where were the controls?
Enron’s public troubles began on October 16th of 2001 when management released a third quarter earnings report with a “mysterious $1.2 billion dollar reduction.” The following month the company restated earnings for the previous five years and erased $600 million in profits.2 It turned out that the October report began to reveal Enron’s gross abuse of special-purpose entities (SPEs) and the mark-to-market accounting method. The company used SPEs to keep enormous amounts of losses off its books while inflating earnings from supply contracts by booking all profits from a contract in the quarter the deal was made.3 What also became clear was that Enron did not accomplish their gross manipulations without the help from their accountant’s at Arthur Andersen.
Enron shareholders and executives were not the only groups negatively affected by Enron’s aggressive accounting practices. Arthur Andersen was also unraveled because of the role it played in Enron’s materially misstated financial statements. In a letter to Kenneth Lay (, Enron’s CEO before and after Jeffrey Skilling’s short term) shortly after Jeffrey Skilling resigned, Sherron Watkins, a VP at Enron, expressed her concern with the state of the company and expressed stated concerns about Enron’s accounting practices even though they were “blessed” by Arthur Andersen.4 Because of these “blessings” Arthur Andersen (AA) personnel was deemed to be deeply involved in the corruption at Enron at all levels was not able to survive the aftermath of the scandal. By evaluating the business risks and fraud triangle associated with the Enron Scandal, one can begin to understand the gravity of the misdeeds committed by Enron executives and the AA audit and consulting teams and thus understands the extensive changes to the accounting industry as a whole that were a result of this scandal.
Business Risk Analysis
Enron Corporation started as Northern Natural Gas Company in 1930 and grew as an asset based natural gas company through acquisitions and pipeline infrastructure. In 1986, the growing company became known as Enron and quickly developed into much more than an asset-based natural gas supplier. The company evolved into a large wholesaler of natural gas through its EnronOnline division, served as an intermediary for broadband internet access with its Enron Broadband Services, operated a retail unit with Enron Energy services, and continue to manage its pipeline operating with Enron Transportation Services. Needless to say, in the 70 years following the foundation of the company, the company’s scope expanded immensely by investing in ventures outside of the natural gas industry, including oil exploration, chemicals, coal mining, and fuel-trading operations, thus increasing its overall business risk.5 One of the reasons that Enron began to expand the scope of the company was the highly regulated nature of the industry. The U.S. government had regulated the natural gas industry to varying degrees since the mid-1800s and at the time of the case, was likely to continue to closely monitor the sales of all types of energy. This careful eye on energy, and specifically energy pricing was likely one of the factors that pushed Enron into diversifying its business practices.6 In addition to the close government eye on the prices in the industry, Enron was also closely watched by analysts and the media who had high expectations for the company’s performance and even went so far as to applaud it performance and...
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