Audit 1: Auditing Theory and Practice - The Enron Scandal Analysis

This report provides a comprehensive analysis of the Enron scandal, a major case of corporate fraud and bankruptcy. It begins with an introduction to the scandal, outlining its origins and the role of key figures like Kenneth Lay and Jeffrey Skilling. The report delves into the accounting practices employed by Enron, particularly the use of mark-to-market accounting and special purpose vehicles (SPVs) to hide debt and inflate profits. It examines the role of the auditor, Arthur Andersen, and their failure to detect or report the fraudulent activities. The report details the consequences for various stakeholders, including investors, trading partners, employees, and the US and global stock markets. It also discusses the present condition of the individuals responsible for the fraud. The report concludes by highlighting the key takeaways from the Enron scandal and its impact on auditing and financial regulations. The report uses several sources to analyze the Enron scandal including the role of the auditor, the financial fraud, and the consequences for stakeholders.

Auditing Theory and Practice
8/4/2019
Enron Scandal

Audit 1
Contents
Introduction......................................................................................................................................2
Organisation, time, and place..........................................................................................................3
Overview of Enron Scandal.............................................................................................................3
Example of fraud.............................................................................................................................4
Stakeholders and their consequences...............................................................................................5
Auditors and their role in Enron scandal.........................................................................................6
Present condition of responsible person for fraud...........................................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

Audit 2
Introduction
The aim of the report is to conduct the research on one of the major scandal that involves the
auditors in some way. The selected scandal for this the report is Enron scandal that lead to
bankruptcy of Eron company which was an American energy business founded in Houston,
Texas. This report provides understanding of the major points of affairs along with role of
accountants in entire scandal that took place that involved the discussion of event, Stakeholders,
and its assigned consequence and many others.

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Organisation, time, and place
Enron Corporation was one of the well-known American energy business that is founded in
Houston, Texas and came into existence in the year 1985 next fusion of two small regional
energy businesses in order to the enhance the profitability. After the merger, Kenneth lay, had
been the Houston Natural Gas became Enron CEO as well as chairperson (Smith, 2018). Then
the company was rebranded into the suppliers as well as the energy trader. It has been found that
deregulation of energy market permitted the businesses to place bets on upcoming charges as
Eron was composed to avail benefit in market. The boon in the market offered many
opportunities to Eron during 1990s. The growing needs of the market made the company to form
the contract for diverse variety of commodities that include cool, paper, steel, weather and many
others. Eron deals with the rise in competition in energy trading business and profit of the
company was shanking rapidly which leads to the numerous changes in accounting practices due
to stakeholders that ultimately led rise to scandal that involves auditor.
Overview of Enron Scandal
The impact of competition that affected profit made the company to select new accounting
practices in market. Enron selected MTM accounting that is mark to market accounting practice.
The implementation of accounting practice was done after the approval from the authorized US
Securities and Exchange Commission (SEC) agreement in the year 1992 (Corporate Finance
Institute, 2019). This method of accounting allowed Enron Company to worth their monetary
condition according to the reasonable worth of assets of business that might change with the
change in market conditions (Boddy, 2017). The auditors of Enron used this technique of

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accounting majorly for overinflate the predicted profit of business and mislead to numerous
investors.
The company hide the mounting debt for which they used the different purpose vehicles that
include the SPVs: shell businesses capitalised completely by the stock of Enron to borrow the
currency on behalf of Enron Company. It has been witnessed that by the year 2001, the company
used the hundreds of SPVs majorly to hide its debt. In end of same year, confidence of investors
decline. The business kept huge debt off the balance sheets that was trapped when interior
whistle-blower of company that is Sherron Watkins turned in with the high stock prices that
fueled suspicious (Accounting Degree Review, 2019). Jeffrey skilling took over role of CEO just
afterward Kenneth Lay was retired in the month of February due to the different personal
reasons. Accordingly, on October 16, Enron registered that the company is facing the quarterly
loss (CNN, 2019). Thus, afterwards SEC proclaimed that it was investigation in Enron and its
SPVs. Then, later company declared that they are able to make earnings and this is exposed that
they had $628 million in debt and $591 million in losses. After all the issues, Dynegy company
who had some of the plans to get merge with Enron got failed and considering the condition of
the company they backed out the deal. In the end, Enron filed for the bankruptcy.
Example of fraud
It has been found that there are many people involved in the fraud of company which include
auditor Author Anderson, Enron founder Kenneth Lay and former CEO Jeffrey Skilling. One of
the examples of fraud that is clearly witnessed in the scandal of Enron includes financial
manipulation that was done by the auditor Author Anderson. The fraud symptoms that are found
from the investigator more conclusiveness is in sales revenue that is growing, yet the net income

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was lesser than other businesses who had fewer income but said more net revenue (Medium
Corporation, 2019). The auditor Author Anderson acquired more than 50 million bucks for his
own services. The services provided by Anderson leads to the massive fraud in the financial
statement by forming the misstated financial figures. It has been found that he was the sole
auditor of company due to which the actions of fraud was easy to conduct. This leads to the
reason behind retaining his power and status with the firm for genuine pay-out of 50 million
dollars.
Stakeholders and their consequences
 Investors: - In the scandal of Enron, investors faced loss who require a extensive amount
of Enron stock normal depositors. Under the law of US after bankruptcy filing, the assets
of Enron’s will offer the importance in a manner to pay duties, paying back the credits of
bank, and many other payments due to which investors faced loss (Bhaskar & Flower,
2019).
 Trading partners: - Major stakeholders of Enron include their dealing associates and the
giant monetary corporations. As per the statistics, in case of bankruptcy of Enron, the
company with name of Duke Group lost 100 million US bucks, Dino lost 75 million US
bucks, and Mirren Company lost 80 million US bucks.
 Employees and customers: - The employees and customers of the company were also
affected due to his bankruptcy of Enron in the market. The employees of the company did
not receive the payment and were obliged to leave their jobs. In addition, this lead to the
influence on their future job opportunities (Peavler, 2019). In addition, the customers
were unable to get the products that were provided by company.

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 US and global stock market: - Stakeholders that were affected also include US and their
global stock market. The confidence of the investors declined in US, the market of Wall
Street stock fell repeatedly with the stock index that lead new low in the market. After
this incident, the market of US stock shrunk by 2.5 trillion US dollars that was equal to a
quarter of US GDP (Kumar & Aldous, 2015).
Auditors and their role in Enron scandal
In entire case of Enron, Author Anderson auditor of the company has performed the vital role in
which despite not presenting any warning, signs the investors issues the warning for early
emergence of the symptoms of fraud as they gave the reasons behind the escalation of concern.
This emerged due to consolidated balance sheets below company formed an edited balance sheet
for its stockholders. Enron’s examiner Author Anderson took obligation of work on business has
corrected stability (Dibra, 2016). The alteration was worth at 586 million bucks of net revenue
that interpreted in the loss of 1.2 billion bucks in proprietor’s justice. The fraud that was done by
the auditor includes covering up the billion in harms at energy business that makes auditor
shamefaced of hindering justice.
Present condition of responsible person for fraud
In entire case, most of the people of Enron Company were involved in the case that include
Jeffrey Skilling, CEO of Enron Corp who was punished to 24 years in prison majorly for his
opinion on custodies stopping from company’s remarkable failure. Skilling, 65, was relocated in
August 2018 from a prison of Alabama to resident for re-entry the benefits (Whitcomb, 2019).

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In addition, founder Kenneth Lay was also determined as shamefaced due to numerous totals of
conspiracy and fraud but the person expired with heart disappointment just after the six weeks
after the end of trial. Moreover, Enron’s auditor Author Anderson was shamefaced of obstacle of
fairness for hiding the true picture of company at time of Audit. However, the convinction was
later overtuned by one of the US Supreme Court because of the injury not being taught on
custody in contradiction of Andersen. Supreme Court governing apparently left Andersen
permitted for proceeding with further operations but there was damage of name of company
(Wojdacz, 2009).

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Conclusion
In the end of the report, this can be said that Enron scandal is considered as one of major case of
bankruptcy. This report shows the way through which the entire event took place which involves
different people such as Auditor Author Anderson, Enron founder Kenneth Lay and former CEO
Jeffrey Skilling. The fraud is done by all three but majorly the financial auditors has contributes
a lot. The major shareholders are identified with the consequences faced by them. Moreover, this
can be said that auditor is one who has performed the major role. In the end, present condition of
those accountable for fraud is highlighted.

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References
Accounting Degree Review. (2019). The 10 worst Corporate Accounting Scandals of all Time.
Retrieved from: https://www.accounting-degree.org/scandals/
Bhaskar, K., & Flower, J. (2019). Financial Failures and Scandals: From Enron to Carillion.
New York: Routledge.
Boddy, C. R. (2017). Enron Scandal. Encyclopedia of Business and Professional Ethics, 1-4.
CNN. (2019). Enron Fast Facts. Retrieved from: https://edition.cnn.com/2013/07/02/us/enron-
fast-facts/index.html
Corporate Finance Institute. (2019). Enron Scandal. Retrieved from:
https://corporatefinanceinstitute.com/resources/knowledge/other/enron-scandal/
Dibra, R. (2016). Corporate Governance failure: the case of Enron and Parmalat. European
Scientific Journal, 12(16).
Kumar, H., & Aldous, D. (2015). Exploratory Data Analysis of Enron Emails. University of
California-Berkeley.
Medium Corporation. (2019). Financial Statement Fraud in Enron, WorldCom Scandals, Fraud
Motivation Triangle And The SOX Act 2002. Retrieved from:
https://medium.com/@MontangeUpdate/financial-statement-fraud-in-enron-worldcom-
scandals-fraud-motivation-triangle-and-the-sox-act-f055a507f89
Peavler, R. (2019). The Enron Scandal That Prompted the Sarbanes-Oxley Act. Retrieved from:
https://www.thebalancesmb.com/sarbanes-oxley-act-and-the-enron-scandal-393497

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Smith, R. (2018). The Enron Scandal. Retrieved from:
http://large.stanford.edu/courses/2018/ph240/smith1/
Whitcomb, D. (2019). Former Enron CEO Jeffrey Skilling released from federal custody.
Retrieved from: https://www.reuters.com/article/us-people-skilling/former-enron-ceo-
jeffrey-skilling-released-from-federal-custody-idUSKCN1QA2ZK
Wojdacz, M. (2009) Innocent after Proven Guilty: Supreme Court throws out Arthur-Andersen
conviction. Retrieved from: https://www.legalzoom.com/articles/innocent-after-proven-
guilty-supreme-court-throws-out-arthur-andersen-conviction