Question

case study Enron: a classic corporate governance case . Enron's external auditor,Arthur Andersen, earned substantial consultancy fees from the company as well as the audit fees . Enron also employed several former Andersen partners as senior financial executives.Could the external auditors really be considered independent?

Answer 1

As evident in the Enron case and also a few other recent cases across the world, it has become increasingly clear that the so called independent auditors are no longer independent in their true sense.

In Enron case, it was argued by Enron that having both internal and external audit performed by Enron, Arthur Anderson was better placed to identify issues for Enron. It was argued that this encouraged greater knowledge sharing between the 2 audit teams and Hence, better productivity and efficiency.

But having such an arrangement often given too much power to the management to rather control this so called auditors both internally and externally. Also, for the accounting firm one company becomes a very big Account and hence, potential loss of business is huge. This potential loss of business drives teams with in the audit department to get entangled and work in conflict to the true interest of the public shareholders. They become more of a puppet of the management. This is what led to the case of Enron. Government should rather learn from these mistakes and enact rules and regulations for these independent auditors to be truly independent.