Enron Scandal And The Corporate Financial Frauds

1374 Words Jan 2nd, 2016 6 Pages
One of the biggest corporate financial frauds in history was Enron scandal, where the relationship between the company governance and their auditors - Arthur Andersen was one of the factors that helped the company hide its frauds, which eventually led Enron’s bankruptcy. The accounting firm was accused of not acting independently and misstating Enron 's accounts such as keeping huge debts off balance sheets. Some believe that the auditors had gone along with Enron’s questionable accounting practices in order to maintain their work. As a result, the shareholders lost $74 billion further (further depressing the stock market), thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. In addition, …show more content…
However, this current law of rotating audit firms doesn’t address the real conflict in the auditor/audited relationship. Recent academic studies in both the U.S. and other countries suggest serious disadvantages to mandatory audit firm rotation. Key among them is the loss of the current auditor 's cumulative knowledge of the company 's business, processes, systems, people, and risks (Pwc.com). In the case of mandatory rotation of an audit firm rotation can be very expensive for both the audit firm and their client. Indeed, the expenses of this change could outweigh its benefits. So how can we further strengthen auditors’ independence?
I would like to suggest a new policy that would prohibit companies from hiring managers and internal auditors from their external audit firms. Currently, SEC requires a one-year cooling off period before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role (SEC.gov). I would suggest making it at least 5 years. Considering the fact that Enron’s executive vise president and chief accounting officer Rick Causey was a former Andersen audit manager, we can boldly state that the relationship between Arthur Anderson auditors and their “friend” could have impaired auditors’ independence and objectivity preventing them from providing strong and independent verification of Enron’s financial reports. Therefore, there is a need for stricter regulations
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