Audit and Legal Liability in the Enron Scandal: A Detailed Analysis

This report provides a comprehensive analysis of the Enron scandal, examining the failures in audit, assurance, and compliance that led to the company's downfall. It explores the root causes of the scandal, including the use of mark-to-market accounting, the role of Arthur Andersen, and the lack of corporate governance. The report details the parties responsible for the damages, the legal and reputational consequences, and the relevant issues in auditing and accounting, such as pension and corporate governance issues. It also outlines the recommendations for audit strategy and programs to prevent similar incidents in the future. The report emphasizes the importance of adhering to accounting standards and ethical principles to maintain professional integrity and prevent financial fraud, highlighting the lessons learned from the Enron case.

AUDIT, ASSURANCE AND
COMPLAINCE

Overview
 Enron Corporation which was company based in Houston have
their services in commodities, services and American energy. Enron
was founded in year 1985 by the merger of Inter North as well as
Houston natural gas that was two regional small companies
 Enron Corporation has gained the success very fast and it has
faced downfall with the same speed of the success. The downfall of
the company has affected thousands of people and the employees
of the company.
 The share was at the worth of $90.75 at the peak of the Enron, but
it was at $0.26 at the time when it was declared bankrupt.
 This has created the buzz around the world that how one of the
world’s largest company was disintegrated almost over the night.

Issues Behind the Case
 Enron has started for crumbling under their own weight. Financial
losses of company’s operations and business trading were
intentionally hidden by the company’s CEO Jeffrey Skilling with
the accounting method of mark-to-market.
 In case of Enron, the company builds the asset, for example
power plant and even though they have only made small amount
of money, they immediately claimed for the projected profit on
their books.
 If in the case the company has suffered losses from power plant
than what it was actually projected, then it that case company
transferred the assets to corporation of off the books in which
losses was not reported.

Continued…
 The company intentionally engaged in writing off the unprofitable
business activities without doing the bottom line changes.
 The practice of mark-to-market has led to scheme, which was
specifically designed for making the company for appearing more
profitable that in actual reality it was.
 The company’s CFO, Andrew Fastow has deliberately made plan
for doing the fraudulent activities.
 This plan was made for showing the company was in the sound
financial positions, despite of the fact that the subsidiaries of the
company were losing the money

Parties Responsible
 The auditor of the company Arthur Andersen was responsible for the
damages of the company. There was great amount of his negligence for not
noticing the issues.
 There was involvement of the company as well as Arthur Andersen for
breaching the standards for the presentation of the financial statements,
which is unfair as well as it was not in accordance with the ASB and ACA
requirements
 Material misstatements, overstated price of stock and manipulations of the
fact has indicated that the Arthur Anderson did not perform the substantive
tests. The auditor has also failed for detecting the lack of internal control.
 Arthur Anderson was not having directly involvement for assisting for the
manipulation of the accounts of Enron; however, their negligence has
resulted into loosening of the reputations for being one of the most reputed
auditor firm around the world.

Continued…
 The failure to detect fraud by Arthur Anderson has resulted into
bankruptcy of their auditing and accounting firm. They have not
followed the accounting ethics principles for presenting unbiased
as well as true and fair auditing of the financial reports.
 Several independence threat has occurred in between the Arthur
Anderson and the Enron. Both engage themselves in making
profits with the help of hiding of the facts as well as non-
compliance with the standards.
 Fraud of Enron in the preparation of financial statements and
unreasonable assurances by the Arthur Anderson has caused the
inevitable collapse of the Enron.

Damages Imposed
 The damage that has incurred to the auditor was loss of their
reputations around the world, who was known for their best
services to their client.
 They have to be indulged in the legal proceedings for the charges
of negligence.
 During the year 2002, the auditing firm has voluntarily
surrendered their licenses to the practice as the Certified Public
Accountant in United States, which was after the firm was found
guilty of the criminal charges in relations to auditing firm of
Enron.

Continued…
 During the year 2005, the Supreme Court of United States have
reversed the conviction of Arthur Andersen because of the
serious errors in trial of instructions of judges to the jury who was
convicted the firm
 Arthur Andersen has fired their partners who were charged for
auditing Enron Corporation. The consideration of imposing
penalties on the imposition of damages was appropriate.

Relevant Issues in Auditing
and Accounting
 Pension Issues- Enron has provided the scheme of retirement plan to
their employees for contributing the part of their salary on tax deferral
basis. 62% of the total assets of the company as on Dec. 31, 2000, were
held in the retirement plan that consisted Enron’s Stock.
 Issues of Corporate Governance : In case of Enron scandal, the
board of directors of the company was subject to the major critical
scrutiny. The chief duty of board is to represent the duty of shareholders
interest, has failed for detecting and preventing the management fraud.
 Securities Analyst Issues: Securities analyst are responsible for the
providing suggestion regarding making investments, holding shares or
selling the securities. The Sarbanes-Oxley Act directed the SEC for
establishing the rules for addressing the conflicts of interest of the
analysts .

Continued…
 Banking Issues: The fallout from the demise of the Enron
involves the relationship with the banks. The prominent banking
companies especially JP Morgan Chase and Citigroup was
involved in the commercial banking and investment banking with
the Enron.
 Energy Derivatives Issues: The part of the core energy
business of Enron has involved in dealing with the prices of gas,
oil, electricity and the other variables such as Enron use to sell
long-term contracts for buying and selling energy at the fixed
prices. These type of contracts have allowed the buyer for
avoiding, hedging the risk, which increases or drop the prices of
energy that was imposed to their businesses.

Root causes of Issues
 The root cause that has turned the Enron into the major financial scandal
and their issues was the response of the company to its problems. The
deregulations of the traders of the energy have led for overconfidence in
the investments made by Enron because they thought that they were in
control.
 The root cause that has turned the Enron into the major financial scandal
and their issues was the response of the company to its problems. The
deregulations of the traders of the energy have led for overconfidence in
the investments made by Enron because they thought that they were in
control.
 The company has falsified their accounts rather than disclosing the true
and fair conditions to the public investors as required by the law. They
have assigned loses of the business as well as near-worthless assets for
consolidating partnership as well as “special purpose entities”

Misrepresentations by
Defendants
 Mark-to-Market: At Enron, Skilling was early contributor of
accounting transition from traditional accounting to the mark-to-
market method; this was approved in year 1992 by SEC official.
This method helps in measuring accounts at fair value that
changes over time as assets and the liabilities.
 Blockbuster Accidental Role: In the scandal of Enron,
Blockbuster has also played the important role as unwitting
players. For entering in the market of VOD in the year 2000,
Block buster as well as Enron Broadband has made the
agreement for partnership. The market of VOD was the sensible
pick, but Enron started doing manipulation by logging expected
earnings based on expected growth rate of VOD market.