Enron Corporation and Andersen, Llp Analyzing the Fall of Two Giants

These crises along with their claim that their problem with the Enron audit was due to a few “bad partners” was merely the result of an unsound organizational structure along with policies and practices that the firm implemented. The unsound organizational structure of Arthur Andersen changed the motivation of employees within the firm and changes within the firm over the years one of which was the compensation of partners did not allow for integrity when work was being done for these public companies.

Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,

Arthur Andersen LLP is one of the “Big Five’ accounting firms. The firm was accused of shredding documents and getting rid of e-mail messages that pertained to their audit of Enron. This occurred after finding out that the Securities and Exchange Commission had begun an investigation of Enron’s accounting. The firm was

Those with close ties to Enron in the areas of banking, auditing, and law also had much to do with its’ demise. A banking firm by the name of Merrill Lynch has been accused of assisting Enron in their endeavors to cover up their financial reports. Merrill Lynch was said to have bought millions in Nigerian barges sold by Enron, which also happened to be greatly financed by Enron. Because of Enron’s investment in Merrill Lynch, there was great fear of losing “ins” on stocks based on Merill Lynch’s behalf.

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.

The Enron corporation was formed in 1985 by the merging of two natural gas companies, Houston Natural Gas, and InterNorth; In the following year Kenneth Lay was appointed Chairman and CEO.2 Enron began its escapade of fraud and corruption in April of 1987 when it was discovered by Enron executives that Louis Borget and Thomas Mastroeni, traders in their Valhalla, New York office, known as Enron Oil, had been misappropriating funds; traders were “gambling beyond their limits, destroying trading reports, keeping two sets of books and manipulating accounting” (PBS, 2015) to make it appear as if the company’s profits were legitimate. The shocking yet not surprising response from CEO Kenneth Lay was not to fire the two

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.

When many people hear the word Enron, they immediately associate it with the most important accounting scandal of our lifetimes. Enron was an American gas company that began as the Northern Natural Gas Company in 1931. Internorth, a holding company in headquartered in Omaha, Nebraska, purchased the Northern Natural Gas Company and reorganized it is 1979. Enron arose from the 1985 merger of Houston Natural Gas and Internorth. After building a large, new corporate headquarters in Omaha, the new Enron named former Houston Natural Gas CEO Kenneth Lay as CEO of the newly merged company, and soon moved Enron 's headquarters to Houston, Texas. After becoming the newly created top executive, Lay later became chairman of the board

Enron was one of Andersen’s largest customers that relied on the Arthur Andersen’s firm for accounting, auditing, and consulting advice. Arthur Andersen violated its legal responsibility when company officials directed employees to shred all documents relating to the Enron audits, after its lawyers determined an SEC investigation into their accounting practices was inevitable. As it turned out, this had a very adverse effect on the firm’s ability to continue practicing, its reputable reputation was publicly dismantled, and led to the eventual collapse of the firm. This impacted its management planning because the firm initially adhered to the company’s file retention policy, but only destroyed the Enron documents when it knew these documents will become potentially damaging to the firm. The firm knew of its legal obligation and shoul have followed the legal guidance that would have prevented the destruction of documents having knowledge of of the potential or impending litigation.

Enron Corporation was established in 1985, by Kenneth Lay as a result of a merger between the natural gas pipeline companies of Houston Natural Gas and InterNorth (Healy and Palepu, 2016). Later, it expanded into 1,800 more products or contracts and thirteen currencies (which included bandwidth, paper and pulp, and contracts such as weather and credit derivatives), a majority of them were not subjected to the regulatory oversight of the United States Commodity Futures Trading Commission (CFTC) (Dembinski et al., 2006).

Enron was once one of the world 's leading energy companies by reshaping the way natural gas and electricity were bought and sold. They filed the largest corporate bankruptcy in American history in 2001. Enron Corporation was an energy company running out of Texas that was started when two companies, Houston Natural Gas and InterNorth, merged together in 1985. By 1992, Enron became the largest seller of natural gas in North America and began to offer other services like wholesaler trading and risk management. The company’s popularity and profitability continued to increase throughout the 90s and in 2000 was named number 7 on the fortune 500 list bringing in over 100 billion dollars of revenue. Enron shares were worth $90.75 at their peak in August 2000 and dropped to $0.67 in January 2002. Enron announced a third quarter loss of $618 million on October 16, 2001. A couple days later, the SEC opened a formal investigation into Enron’s transactions (Link 2). What caused this shocking fall of Enron? The fall of Enron was caused primarily by the following three factors; the systemic failure by the Securities and Exchange Commission, hiring auditors who were already affiliated with the company, and violating a code of ethics.

On June 15, 2002, Arthur Andersen was convicted of obstruction of justice for shredding documents related to Enron’s audit which resulted in the Enron scandal. The impact of the scandal combined with the findings of criminal complicity ultimately destroyed the Arthur Andersen LLP. The company was accused of destroying thousands of Enron documents that included not only physical documents, but also computer files and Email files. By giving it the role of consultant along with their original role as external auditors, Enron made Arthur Andersen LLP a key player in Enron auditing.

Enron was formed following a merger between two natural gas companies in 1985, Houston Natural Gas and

The accounting scandal committed by Enron is somewhat complex and involves many serious problems, but at a very high level, it stemmed from a few key areas, relating to improper financial reporting and internal and external audit issues.

The reason of Enron Corporation downfall for audit failure is conflict of interest and accounting fraud. This is because it has been suggested that conflicts of interest and a lack of independent oversight of management by Enron's board contributed to the firm's collapse. Some have suggested that Enron's compensation policies engendered a short-sighted focus on earnings growth and stock price. In addition, recent regulatory changes have focused on enhancing the accounting and strengthening internal accounting and control systems. In these issues, it begin with Enron's board. The conflict of interest between the two roles played by Arthur Andersen, as an auditor, he also as a consultant to Enron Corporation. While investigations continue, Enron Corporation has sought to salvage its business by spinning off various assets. As that, Arthur Andersen actually has admitted some