Preview

The Enron Collapse: Audit of Related Party Transactions

Powerful Essays
Open Document
Open Document
1563 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Enron Collapse: Audit of Related Party Transactions
April 21, 2003
The Enron Collapse

Was Enron’s collapse due to a failure in the standard setting process? Why or why not?

The Enron collapse was by no means due to a failure in the standard setting process instead, the collapse resulted from Enron’s fast growing rate and its highly “creative” management team who at one point just lost control of the business. The company stopped doing what it was known for doing best, energy generations, and began exploring and operating in a new and unknown business segment and a new industry. The standard setting process was indeed effective; however management kept finding ways to go around the system. Finally, the collapse can also be attributed to management integrity and Andersen’s failure to detect accounting irregularities. Auditors should have looked closer at the complex and complicated SPEs transactions in whish the company was venturing.

What is the Emerging Issues Task Force (EITF)? Is it the same as FASB? Does a Consensus of the EIFT have the same power of GAAP as an FASB Statement?

No they are not the same. The EITF was formed in 1984 in response to the recommendations of the FASB’s task force on timely financial reporting guidance and an FASB invitation to Comment on those recommendations. Task Force members are selected from public accounting firms but also include representatives of industry nominated by the Financial Executives, the Institute of Management Accountants, and the Business Roundtable. The chief accountant of the Security Exchange Commission attends Task Force Meeting regularly as an observer with the privilege of the floor.
EITE tries to develop a procedure for something new before it is embedded in FASB. In regards to the EIFT Consensus, they don’t have the same power of GAAP as per FASB Statement. Although they are usually accepted by FASB and become rulings in some instances they have been declined and veto.

Should the FASB revise the “3 percent rule” that now governs the



References: 1) Jenkins, J. Grefory, The Enron Collapse 2) Arens A. Alvin, el all. Auditing and Assurance Services, ninth edition 3) WWW.aicpa.org 4) Whittington, Ray and Fischbach, Gretchen, “The New Audit Documentation Requirements”, Journal of Accountancy, Online Issue, April 2002.

You May Also Find These Documents Helpful

  • Good Essays

    Enron Case Analysis

    • 827 Words
    • 4 Pages

    Some investors that are misled lost chunk if not all of their investments. The public, investors, employees, pension holders and politicians were so outraged and wanted to why Enron's failings were not spotted earlier. Enron did not do these all alone, they have accomplice in the name of another giant accounting/auditing company called Arthur Andersen where they helped the firm overlooked significant debts that are not the Enron’s financial statement. They knew that Enron was over its head but they let the company conceal its debt over a long period of that which eventually led to the downfall of the company. The highlight of this section is that Enron’s top managements self interest, greed led to presenting the investors and board of directors misleading financial statements. Because of their greed and self interest, a crime was committed that led to prosecution of some of the Enron’s top managers. For example, Former Enron executive Michael Kopper pleads guilty to conspiracy to commit wire fraud and money laundering conspiracy. While Andrew Fastow Former CFO was charged with securities fraud, wire fraud, mail fraud, money laundering and conspiracy. To avoid another Enron, the US Congress passed a law called Sarbanes-Oxley Act 2002…

    • 827 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Enron Case Study

    • 964 Words
    • 4 Pages

    What happened to Enron was just its founder at the time Ken Lay was greedy and unethical right from the beginning, and that was how he steered the boat to that direction. Instead of firing traders who were pocketing profits for themselves, manipulating reports which showed steady financial trends, he managed to keep them, because they were making a lot of money for the company. So he was giving opportunities for this staffs to do underhand works and he only cared if it made profits for the company. Later, when Jeff Skilling joined Enron, he developed what Lay had…

    • 964 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Enron: Tone at the Top

    • 1288 Words
    • 6 Pages

    Enron, one of the largest corporations in America and once ranked Fortune magazine’s “Most Admired Companies” went down in 2001 after they were exposed of defrauding their investors in a series of creative ways. Enron was known for being an innovative company in the energy, technology space but much of their innovation seemed to lie in how they managed to hide their debts and cover their losses through unscrupulous means. They would book hypothetical profits on projects and joint ventures that had not yet launched and on the day a deal was signed. They would hide their debts through the use of complex Special Purpose Entities (SPEs). They would solicit support from top tier investment banks by giving them lucrative deals to work on. All this and more was conducted with one clear objective in mind: to make as much money as possible through manipulation. Everyone was happy as long as there was money to be made. Ethics was out the window. Manipulating financial books and records, exploiting deregulated markets became their predominant strategy -all in the name of maximizing profits and pushing up the company’s stock price. When indicted, the chief executives of Enron, Kenneth Lay (former Chairman and CEO) and Jeffrey Skilling (CEO), amongst others, continually denied their involvement.…

    • 1288 Words
    • 6 Pages
    Better Essays
  • Powerful Essays

    Whether it be government regulation, legal specifications, or merely consumer expectations; “corporate normalcy” in the form of policies, procedures, standards, patterns, and the status quo is sometimes the only option. The collapse of Enron is a very tangible example of how dysfunctional “orbiting” can lead to a company’s demise. Utilizing creativity in its business procedures, executive decisions and accounting practices, Enron has become a symbol of willful corporate fraud and…

    • 1928 Words
    • 8 Pages
    Powerful Essays
  • Satisfactory Essays

    Business Failure Paper

    • 430 Words
    • 2 Pages

    The collapse of Enron is known as one of the biggest corporate scandals in the twentieth century lead by greed, lack of leadership and bad investment. Employees of Enron loss their retirement saving, jobs and some even committed suicide as a result to the down fall of Enron. Enron known as the world’s largest energy companies in the United State failed due to unethical accounting techniques and poor leadership. One may wonder how this is possible with the cleaver work of chief executive officer of Enron this transformation of making Enron a financial trade company done by hidden huge amount debt and inflating earning. Companies put lots of trust in their key employees many time no question ask in their decisions. In Enron this form of one man show leadership contribute to its demise. In a well structure business everyone is consider a key employee and decisions are made to benefit every employee. In the case of Enron failed to intervene in the wrong doing of the management staffs because sales were increasing which is…

    • 430 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    In 1973, the private sector International Accounting Standards Board (IASB) was formed. The IASB is a natural extension of a global market that has been evolving over the last three decades. The IASB formulates and publishes accounting standards to be observed when presenting financial statements and promote their global acceptance. As an overarching mission, the IASB works to improve and harmonize accounting standards, regulations, and procedures as it relates to financial statements. IASB standards provide a reference model and set of examples for financial reporting in developing countries. The IASB has no authority with the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC) in the United States at this time. Even though the FASB and SEC are not members of the ISAB, the SEC has ruled formally that public companies that have adopted the IASB standards can list their securities on the United States stock exchanges (Schroeder, Clark, & Cathey, Chapter 1, 2011).…

    • 1160 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Evidence of the FASB working with the SEC to set standards has been obvious since the FASB’s establishment in 1973 where it is known that they discussed the development of new standards. Even if one were to believe the FASB and SEC did not work together, evidence still points in the direction of the FASB being aware of what the SEC wanted and setting standards to appease the SEC. The views and opinions of the SEC’s chief accountants and members were given in speeches and the SEC publishes its accounting positions therefore the FASB knew what the SEC wanted in its standards. Members and chief accountants from the SEC have also become members of the FASB’s advisory council and obtained other positions working with and for the FASB which shows behind closed doors the SEC and FASB were collaborating.…

    • 497 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Gaap vs Ifrs

    • 6672 Words
    • 27 Pages

    The generally accepted accounting principal (GAAP) and international financial reporting standard (IFRS) are standards governing how economic events are reported. In the United States, the Securities and Exchange Commission (SEC) relies on the FASB, the accounting standard-setting body of the US, to develop accounting standards that public companies must follow when publishing financial statements. On the other hand, many countries outside of the Unite States have adopted the International Financial Reporting Standard (IFRS) which is issued by the International Accounting Standard Board (IASB). In recent years, the FASB and IASB have worked closely to try to minimize the differences in their standards and principals and to merge the two systems in the future.…

    • 6672 Words
    • 27 Pages
    Powerful Essays
  • Better Essays

    In 1973, the Financial Accounting Standards Board (FASB) was created and their mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.” (FASB.org, 2009a). The FASB is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. Therefore, the FASB plays a vital and important role in protecting the financial well being and the overall stability of our economy.…

    • 1757 Words
    • 8 Pages
    Better Essays
  • Good Essays

    References: Clay, M. E. (2007). IASB and FASB Working Together to Converge Accounting Standards. Proceedings of…

    • 883 Words
    • 4 Pages
    Good Essays
  • Better Essays

    In addition, a comparison and contrast will be discussed on the relationships between the board, executive management, middle managers, and the organization contributed to the failure. Many people assumed that creative accounting was the major downfall of Enron but according to Stewart (2006) “the more fundamental causes appear to have been matters of organizational design” (p. 116).…

    • 1062 Words
    • 5 Pages
    Better Essays
  • Powerful Essays

    The International Accounting Standards Board (IASB) was created after the Financial Accounting Standards Board (FASB) to establish a single set of accounting procedures and standards for both boards. The process has not always been an easy one, but the goal of merging the accounting standards globally overrides the disagreements. Overcoming impediments, such as language, culture, economic and political environments has made the process problematical. The IASB and FASB continue to labor on the short term goals agreed upon at the Norwalk Summit, held in Norwalk, Connecticut, on September 18, 2002 [ (Business Wire, 2002) ].…

    • 1475 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Enron Case

    • 650 Words
    • 3 Pages

    With Enron, the responsibility and blame started with Enron’s executives, Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. Their goal was to make Enron into the world’s greatest company. To make this goal a reality, they created a company culture that encouraged “rule breaking” and went so far as to “discourage employees from reporting and investigating ethical lapses and questionable business dealings” (Knapp, 2010, p. 14). They insisted the employees use aggressive and illegal accounting procedures.…

    • 650 Words
    • 3 Pages
    Good Essays
  • Better Essays

    The purpose of this paper is consider three possible rationales for why Enron collapsed—that key individuals were flawed, that the organization was flawed, and that some factors larger than the organization (e.g., a trend toward deregulation) led to Enron’s collapse. In viewing “Enron: The Smartest Guys in the Room” it was clear that all three of these flaws contributed to the demise of Enron, but it was the synergy of their combination that truly let Enron to its ultimate path of destruction.…

    • 1830 Words
    • 8 Pages
    Better Essays
  • Good Essays

    Week 4 Assignment

    • 875 Words
    • 4 Pages

    The FASB and IFRS continually improve upon accounting standards and rulings in an effort to converge GAAP with international standards. In fact, several standard and ruling updates are being contemplated at this moment through pending discussions and through exposure drafts (PWC, 2011-2015); we will review a few of these in the next few paragraphs…

    • 875 Words
    • 4 Pages
    Good Essays