Question

What lessons can auditors learn from the Enron scandal and in particular from the behaviour of Arthur Andersen? (750 - 900 words)

Answer 1

ANSWER:

Enron was a company that thrived use of latest technologies and had a code of ethics that prohibited managers and executives from being involved in another business entity that did business with their own company. However, the codes of ethics that was voluntary and was set aside by the board of directors and the top management. The legal structure allowed top management to enter these arrangements, that constituted a conflict of interest and while it's a fiduciary duty the managers and executives had to behave and act in the best interest of the company and its shareholders. But there was discretion for them to exercise their own business judgment regarding what was in the best interest of the company. A path filled with unethical and illegal activities was followed. Management was succumbing to greed and dishonesty by secretly exercising stock options and constructed faulty falsely financial report which enabled to hide billions of dollars of debt. Enron management abandoned the basic accounting standards of integrity and created a noncompliance that existed different than GAAP or SEC reporting standards.

The collapse of Enron has had a very negative impact on the perception of auditor independence. For instance, both the auditing as well as accounting function in Enron was unclear. If the client and the audit firm mutually agree with the suspected accounting, they may agree with other suspect behaviour, example of this is Enron and Arthur Anderson

Some of the fundamental accounting and auditing practices that eventually contributed to the fraud performed by Enron were the fact that Andersen’s auditor over looked the companies that were created by Enron that produced equity all while allowing to borrowing to occur without acquiring any debt. It enabled a chance to Enron to look at their balance sheet and release its newly restated financial results. In these report it was clear that the total revenue from the past four year was sufficiently lower than the prior four years. At the time of these finding, the fundamental practice demands Andersen should have been raising the red using the audit process to ensure that all financial practices were being conducted correct as per the best knowledge. At this point it was seen as a complete and total failure in the auditors and the audit process.

Enrons bankruptcy scandal not only not effected Enron and it shareholders but it affected the market as well lower company’s values that were in the same industry. The scandal surrounding Enron bankruptcy has its impact on their competitors because of them being in the similar industry the thought that they too were doing the same thing that lead to the downfall of Enron. The ripple effect also has its effect on any company that Andersen handle since auditing the trust couldn’t be placed into the company because his practices weren’t ethical. Andersen did auditing for 91 of the Fortune 500 companies spreading the affect to multiple companies across multiple industries.

To limit errors and risks when auditing special projects, external auditors must ensure that the company gives detailed disclosures of the financial transactions occurred in the special projects along with detailed substantial communication that provides proper detailed description on the relevancy of the financial interest involved. Moreover should be strict adherence to proper corporate governance principles. It will help senior leadership to act in the interest of the shareholders of the company instead of self interest. The government must regulate the constitution of the board of directors by including professionals such as accountants and auditors. Government can tighter regulation and monitoring on rogue board members by requiring for individual audits of the members. In certain ways, the culture of Enron was the main cause of the collapse. The company must advocate is strict adherence to proper corporate governance principles; and encourage their employees to act in the best interest for the company. A proper implemented and formulated structured control procedure also helps in minimizing the risks. Furthermore, to limit errors and risks when auditing special projects, external auditors must ensure that the company gives detailed disclosures of the financial transactions occurred in the special projects along with detailed substantial communication that provides proper detailed description on the relevancy of the financial interest involved.

To summarize, the most important ethics lessons in Enron and Arthur Andersen were that financial cleverness is no substitute for an efficient corporate strategy. A business earns money in the new economy in the similar ways as in the old economy by providing goods or services that have real value. The arrogance of corporate executives who themselves to be the best and the brightest, "the most innovative," needs to avoid such acts and behave in an appropriate manner