Audit and Party Transactions

During fraud period, Arthur Andersen did not provide any adverse opinion or disclaimer of opinion (Freddie Mac 2002). It also failed to place a condition or qualification on its statement as well; for example, “the financial statements present fairly, in all material respects, the financial position of Freddie Mac … for each of the three years in the period ended December 31, 2001, in conformity with GAAP” (Freddie Mac 2001). Arthur Andersen’s reputation was damaged due to its handling of the auditing of Enron, and it filed for bankruptcy at last. On March 2002, PwC took over auditing duties from Arthur Andersen, and refused to certify the company's books (Barta et al. 2003). It identified that these accounting policies were incorrect, prompting the Board an investigation. Also, PwC notified company of material weaknesses that existed in its internal controls over financial reporting during 2003 (Freddie Mac). According to the audit reports for 2004, 2005, and 2006, the financial statements fairly represented the performance except for some weaknesses of internal control pointed out by

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

Andersen – Although Enron committed the fraud, Andersen allowed Enron to get away with it. An audit firm has to be independent from their client and act in the best interest of the public. For this reason, I think that Andersen was the most responsible for the Enron crisis. Andersen could have declined continuing their relationship with Enron as their client, considering some Andersen representatives did not agree with Enron’s “aggressive” accounting and financial reporting decisions in the early months of 2001. Andersen also assisted Enron in restructuring some of the SPEs so they would still be considered unconsolidated entities. Andersen not only audited Enron, but they also went beyond the scope of what the quality audit should entail. It was also telling when personnel in the Houston office destroyed documents related to Enron and

This event was unprecedented. The seventh largest company in the United States disintegrated from an annually profitable company in business for over sixteen years to a company claiming to be bankrupt over a period of a few months (O’Leary). Ultimately, fraudulent accounting and misstatements of revenues and debt obligations orchestrated by the CEO, CFO, and other senior managers were to blame. These revelations roiled stakeholder trust in public companies' financial reporting, accounting methodology, and overall transparency. In addition to Enron’s admissions, their accountant and auditor, Arthur Andersen LLP, was determined to have conspired to assist in the inflation of stated profits mainly by not disclosing Enron's money-losing partnerships in the financial statements (PBS). Arthur Andersen eventually surrendered the practices’ CPA licenses in the United States after being found guilty of criminal charges relating to the firm's handling of auditing for Enron

Arthur Andersen was Enron’s auditor. There were no checks and balances to ensure that Mr. Andersen’s financial statements and bookkeeping were correct. Enron and potential investors were drawn in by Mr. Andersen’s reports reflecting that Enron was a financially stable and investors should invest with Enron. Andersen’s integrity had not come into question in regards to accuracy and accounting procedures.

1. Arthur Anderson (AA) should have been able to help prevent to some extent the Enron disaster, however, they either missed or ignored Enron’s manipulations allowing the fraud to continue as long as it did. AA contributed to the disaster by approving the structure of many Special Purpose Entities (SPE), which Enron used for off-balance sheet financing. The SPEs did not meet the requirements of an independent company and should have been consolidated with Enron’s financial statements. Shares transferred to SPEs were not valued on the financial statements in compliance with GAAP, and side deals between Enron and banks were not brought to the attention of the board of directors; these issues should have been

Arthur Andersen was one of the Big 5 accounting firms and the most respected. It was co-founded by Arthur Andersen in 1913. The change in culture and personalities at Arthur Andersen forced the company to involve in scandals. Over the time, profit pressure was increased due to which Arthur Andersen manipulated Enron’s false profits and cash flow statements. Arthur Andersen generated fake profit, hid the losses and kept financing off the Enron’s consolidated financial statements. It also failed to recognize the Generally Accepted Accounting Principles. Also many transactions between Enron and Special Purpose entities were not in the interest of Enron’s Shareholder. Their profits were manipulated by falsely boosting management bonus arrangements.

It created so-called special purpose entities (SPEs) like the Chewco and JEDI partnerships to get assets like power plants off its books. Enron was able to do this because, under standard accounting, a company is allowed to spin off its assets -- and related debts -- to an SPE if an outside investor has put up capital worth at least three per cent of the SPE 's total value. These methods also stretched across the lumping of assets into its trading business and the booking as operating revenues the proceeds of the sale of fixed assets.

The collapse of Enron was entirely related to the accounting practices adopted by the company. It is a number of these questionable, and in some cases straight out fraudulent, accounting practices that pertained to the most dramatic collapse of a major company in years. An analysis of some of these accounting practices brings to light the problems with the use of concepts such as mark-to-market accounting and the use of special purpose entity’s (SPE’s). To say that the collapse “seemed to be a thumb in the nose of the efficient market hypothesis (EMH)” is a statement misguided in the understanding of this concept. One can explain this through the fact that a number of the basic principals of the EMH were satisfied during the time of the

On the surface, the motives behind decisions and events leading to Enron’s downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of

The downfall of Enron also illustrates both the importance of corporate governance to corporate performance, and the inherent susceptibility to corruption present in any system of corporate governance. Further, from an international perspective, one is tempted to ask whether the Enron debacle could happen in Europe or Japan or whether it demonstrates a vulnerability unique to the U.S. system of corporate governance. I have three observations to make on this issue. First and foremost, the Enron fiasco demonstrates the acute pressure felt by U.S. corporate management to produce superior performance results. As discussed later in this Article, Enron 's financial maneuvering, which led to the company 's massive 2001 restatement of earnings, was prompted only in 1997 when Enron came under significant pressure from investors. Essentially, Enron 's corporate performance was consistent for a considerable period of time prior to 1997. 4 However, between 1996 and 1997, the firm 's profits and return on equity each declined by ninety percent. 5 The sudden deterioration in performance pressured management to engage in transactions that increased revenue and moved debt off of the firm 's

Assigned auditors were more than aware of the accounting misrepresentation of financial statements, overstating net income. Still instead of walking away from the client and resign, Andersen in pursuing short-term goals stayed with the company and moreover played by the Giant’s rules. More and more accounting firms at that time started to provide consulting services along with auditing to the same companies which always indicates a conflict of interests. Auditors are the guardians and rules players where consultants are giving advices and showing how to avoid some accounting oversights. Andersen also in order to make good profits stepped on the side of combining two contradicting to each other services. Waste Management had lots of former Arthur Andersen employees which also led to close ties between two companies. That situation undoubtedly led to inability to turn down fraudulent accounting practices Waste Management was exercising at that time for a long period of time.

This case vividly illustrates the important role of trust, reputation, and confidence in corporate America, since the fall of both Enron and Andersen resulted from the loss of these critical elements. Because the Enron/Andersen debacle involves one of the largest bankruptcies and perhaps the single most significant audit failure in U.S. history, the level of student interest in this case is high. Thus, the case provides an excellent venue for discussion of many different topics ranging from auditor independence to the nature and intent of financial accounting standards. This case is ideal for use as an out-of-class written assignment or as a basis for class presentation and/or discussion. Either way, an in-class discussion of the issues is critical to vividly highlight the lessons of this case. If the case is to be used for an in-class discussion, we recommend having students read it prior to the in-class discussion, as the case is fairly lengthy. In class, students can meet in pairs or small groups to discuss and compare their conclusions. Once all students have had an opportunity to share their ideas and arrive at a group consensus, the instructor can randomly call on individual students to share their group’s answers with the class. Randomly calling on individual students to share their

Needed for the Houston office of Andersen, an audit partner that understands the role of being a "public watchdog" with "ultimate allegiance to the creditors and shareholders" . Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including the failure to consolidate, failure of Enron to make $51million in proposed adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries . Another example is Lord Wakeham joined Enron as a non-executive director in 1994 and also sat on Enron's audit and compliance committee. In addition, Andersen also provides internal audit service to Enron, which in fact impact

WorldCom acquired Arthur Andersen as the independent external auditing for the company. As WorldCom grew after the merger with MCI, Andersen began to invoice less than they should have. The charges were defended as an opportunity to prolong business with WorldCom. (Kaplan and Kiron, 2007). This is an immediate red flag for a company. Where were the ethical practices of the independent auditor? If the auditor has no ethics, how can one possibly be assured that the company is performing its intended function appropriately? The board of directors should have immediately been informed of Andersen’s practices and made a decision to confront Andersen’s practices and possibly obtain new independent auditors.