Arthur Andersen And Enron Scandal Essay

One major scandal revealed in 2001 was Enron, a major energy company located in Houston, Texas (Auerbach, 2010, pp. 6). This organization collapsed because of their deceptive accounting practices and mismanagement. In 2001, Enron fraudulent practices became a public scandal, and because of these practices, shareholders lost $74 billion and thousands of employees (pp. 2). Unfortunately, investors lost their retirement accounts and because they lost many employees, it left many people unemployed. Essentially, Enron kept huge debts off their balance sheets. There were so many businesses and investors that were linked to Enron, and its bankruptcy was a major movement in Congress to make a legislative initiative towards the Sarbanes-Oxley Act of 2002.

Greg Whalley, (former Enron President and Chief Operation Officer) had six to eight conversations last fall with the Treasury’s Department Peter Fisher, including one in which he asked Fisher to call Enron’s lenders as they decided whether to extend credit to the company.

Ray Bowen, a Citigroup banker at the time and now Enron's chief financial officer, once asked Mr. [Andrew Fastow] about a batch of complex equations that filled a whiteboard in the conference room next to the Mr. Fastow's office. "You can't tell me you understand those equations," Mr. Bowen commented to Mr. Fastow. Mr. Fastow replied: "I pulled them out of a book to intimidate people."

Arthur Andersen (AA) contributed to the Enron disaster when it has failed to the management by failing to have Enron establish and enforce its own internal control. There has been flaws to AA‘s internal control. There has been assumption that AA partners were too motivated by revenue recognition thus, overlooking several criteria when providing their services to Enron. Additionally, AA also recognised the retention of audit clients as vital and a loss of any clients would be disadvantaged to an auditor’s career. In AA internal control, the person who is able to make most of the decisions is the person who is most concerned about the revenue or losses of the client’s company.

The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.

Companies such as Enron from approximately 1996 to 2001 were thriving and the stock price rising constantly. Such a move on the company’s stock was attracted millions of investors who wanted to invest in a stable company they could trust. Little did they know that the company with over 60 Billion dollars in market capitalization at one point, was about to collapse. The company’s stock reached a high of approximately 90 dollars per share in 2000, and the following year shares plummeted to less than one dollar. As one can imagine, investors were terrified, millions lost the entire retirement savings, and other were just afraid to trust the financial markets. Enron, and others were taking advantage of the loose accounting regulations to recognize revenue improperly, make use of special purpose entities to create “fake” revenue, and weak corporate governance.

The Sarbanes-Oxley Act of 2002 was the result of a number of large financial scandals in the United States in the late 1990s and early 2000s. One of the most well-known corporate accounting scandals was the Enron scandal, which was exposed in 2001. Enron, an energy company that was considered one of the most financially sound corporations in the United States before the scandal, produced false earnings reports to shareholders and kept large debts off the accounting books (Peavler, 2016). Enron executives also committed fraud by embezzling corporate funds and manipulating the stock market. Enron shareholders lost around $74 billion dollars, Enron employees lost their retirement accounts, and some Enron employees even lost their jobs (The 10 Worst Corporate Accounting Scandals of All Time, n.d.).

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. Briefly justify each of your choices.

The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Accounting standards assist analysts, potential investors, and corporate figures in determining and comparing the financial performance of a corporation. In recent years, a wave of accounting scandals broke, and a number of companies admitted to following fraudulent accounting procedures to defer attention from the company’s financial performance. Enron Corporation, a natural gas provider, led the pack with dubious accounting practices, a series of off-balance sheet transactions, and a series of investigations that ultimately led to beginning of accounting

Enron and “Arthur Anderson LLP (AA)” both started out as reputable companies, but in the end both became unethical (Brooks & Dunn, 2015, p. 98). Many experts believe this was due to a paradigm shift in their “corporate cultures” (Brooks & Dunn, 2015, p. 1-608). This shift in employee behavior can be observed from the many questionable strategies that Enron carried out with the enablement of AA. Therefore, this paper will examine the elements that contributed to Enron and AA’s demise through answering two sets of case study questions, provide a “current update on Enron and AA’s” condition, and will give a “final conclusion/recommendations for Enron” and AA (WBU, 2016). Thus, making this type of an examination should enhance the knowledge of both the academic and business communities.

Most of the world has heard of Enron, the American, mega-energy company that “cooked” their books (Gupta, Weirich & Turner, 2013) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?

The case is about Arthur Andersen 's role in accounting fraud at Enron which was one of its major clients. The criminal charges faced by the firm in the Enron case and how the Enron case eventually led to the closure of Arthur Andersen company. The company was convicted in 2002 of one count of obstruction of justice because of its role in Enron’s auditing. After the conviction, the firm could no longer provide public accounting services.

A year before filing for bankruptcy, Lehman Brothers reported revenues of about $60 billion with earnings of over $4 billion. The stock price of Lehman Brothers crashed to less than $4 from a high of $65.73 in January 2008 within months.

Enron and Arthur Anderson were both giants in their own industry. Enron, a Texas based company in the energy trading business, was expanding rapidly in both domestic and global markets. Arthur Anderson, LLC. (Anderson), based out of Chicago, was well established as one of the big five accounting firms. But the means by which they achieved this status became questionable and eventually contributed to their demise. Enron used what if often referred to as “creative” accounting methods, this resulted in them posting record breaking earnings. Anderson, who earned substantial audit and consultation fees from Enron, failed to comply with the auditing standards required in their line of work. Investigations and reports have resulted in finger