Enron Scandal and the Importance of Reliable Financial Statements and Auditing

COMPANY AUDITING

(a)
In the history of the US economy, Enron and its auditor, Arthur Andersen & Company is
considered as one of the most destructive accounting scandal. It is a symbol of corruption. The
Enron scandal is often considered as a White Collar Crime which is a criminal activity in the
eyes of law where the high level management retains the important information for the purpose
of earning financial gains. The executives of the company were involved in the unlawful
activities. They were fattening their bank accounts with the monies of the investors and used to
represent fruitful future earnings in the reports so as to attract more investments from the
potential investors (Fridson & Alvarez, 2012).
Such investors include almost thousands of Enron's employees who invested billions of dollars in
the company. However, the company later on showed a decline in the stock that fell to almost
nothing in terms of value. Thus, numerous doubts arose about the profession of auditing that
affected the trust and confidence of such stakeholders both in the financial statements and the
auditors (Mattessich, 2016). Some of the worst results that took place were:
 Loss of employment of almost 4500 employees
 70 billion dollars were lost which could have been someone's entire life monies, or
someone's old age security
 the pension fund of the company was liquidated
 Losses due to worst stock value loss resulting in the downfall of the financial market.
Such worst outcomes shook the citizen's trust in American economic system and the confidence
of the investors in the accounting management system and loss of faith in the auditing &
accounting profession (Paul, 2014) . The fact that in spite of having poor quality accounting
information by Enron, it's auditor Arthur Anderson signed the corporate reports and approved it
with its stamp which was enough for the investors and various employees to trust and make their
investment decisions. This scandal that affected the financial world largely shows us how much
it is important to make reliable financial statements as the effects of non reliable information can
shake the entire financial market & economic market and can affect the innocent investors in
terms of both monetary and emotional terms (Wahlen, 2012)s.

Though the Enron scandal took place in 2002, its effect remains. As stated in our case study, the
AISC chairman Greg Medcraft expressed his concern about recurrence of such Enron case. He
stated that the best way to not have another Enron scandal is to make sure that the auditors do
their jobs and that they express reasonable assurance about the true and fair presentation of
financial statements.
The Enron case shows how the trust can be played with and how it affects someone’s life. The
thousands of employees had trusted the reports of the company and invested billions of monies
in the company. Similarly the investors, with an expectation of earning high returns on their
investments, invested their monies into the company. Such trust brought massive destruction in
the lives of thousands of investors. Such losses question the ability and integrity of both the
accounting and auditing standards. The accounting & auditing industry definitely doesn’t aim
for such destructions. As such destructions not only results in losses but also affects the financial
markets and degrades the reputation of the auditing profession.
As a result of this, the accounting industry formulated a number of new rules and regulations that
aimed at detailed disclosures in the financial statements. The various tax laws were framed to
stop corruption. Such actions were taken to win back the trust of the community.
Financial statements are the most important documents as these statements are the reflection of a
company’s performance and position. Such financial statements are accompanied by Notes to
Accounts which are often considered as complex. A wide number of explanations are stated in
such notes explaining the financial policies used, accounting standards applied, management
discussions and such other factors having a bearing on the activities of the business. It is often
like the official financial statements are of 5-6 pages but the notes to accounts extend to 40
pages. In spite of being so complex, informative and detailed in nature, these notes to accounts
are considered as an integral part of every book of accounts (Girard, 2014).
The question usually arises about the relevance and reliability of such financial statements. The
users of such statements are managers, employers, employees, financial institutions, banks,
investors, other companies for comparison purposes, stock exchanges, media, directors,
government authorities, tax authorities, and general public (Taillard, 2013) . Every group of
users have their own requirements and expectations from the financial statements. Therefore, it is