What Could Have Been Done To Prevent The Enron Case?

BAUTISTA, JOSHUA
2018-100463
BS Accountancy
The start of the 21st century unraveled devastating and bemusing challenges for the
accountancy and auditing profession. WorldCom, Madoff, Dell, and a lot more of fraud
cases has resurfaced over the past two decades. Professionals tasked with the financial
aspects of businesses are drawn in hot waters as these billion-dollar fraud schemes
posed a huge risk on their careers. One of the notable cases of the early 2000s was the
Enron case. It was considered alarming that a year later after the scandal, late president
J.W. Bush signed the Sarbanes-Oxley Act (2002).
Enron’s case was a clear-cut example of a financial statement fraud. The company’s
financial statements reflected “theoretical” income which led many investors,
stockholders and even their own employees on believing that the company is
performing well despite the growing competition and market challenges brought by the
start of the 2000s. Added to this FS fraud, the connivance of its management and the
company’s auditors, Arthur Andersen LLP, endangered the stakeholders even more.
1. What could have been done to prevent the Enron Case?
One cannot oversee the fact that Arthur Andersen, the company’s audit partner,
also provided consultancy service to the business. Such interdependence between the
two created a conflict of interest. In turn, the collusion of the management and the audit
team became inevitable. The problem can be prevented if auditors practiced their
independence in providing assurance service. Likewise, internal control and effective
risk management could have detected early signs of fraud as well as provide a different
course of action for the firm’s growing problem. Furthermore, if internal audit were
constituted with stringent detection and reporting in mind, the collusion may be avoided,
and the BOD could have accessed the information and provided other safeguards to
mitigate the effects to the company.
2. As an internal auditor in that situation would you have reported the earliest sights of
Fraud to the Top Management?
Yes. With regards to the purpose of the auditing profession, I personally think that in the
given situation of Enron, the internal audit team could have been an important part in
avoiding what had conspired. Early detection of fraud could not have only saved the
company but also the stakeholders relying on the information that the business
provides. Reporting on the BOD could have prompted actions to correct what had
happened and prevent future scenarios like this to happen even before the participation
of outside parties.
3. Discuss the events that led to the fall and exposure of Enron.
By the end of 90s, Enron was one of the key players of the energy market. It traded
numerous forward contracts for commodities. However, as the market responds to the
strategies baited by Enron, competition also took off. Enron’s advantageous grounds
slowly erode as the 2000s came. Jeffrey Skilling, who was then leading the company
was faced with numerous risks from the emerging market competition and market
movement. However, unlike what we would expect, the company posted surprisingly
high profits despite all of what is happening. This drew speculations and probes from
analyst and experts with what strategy is posed by the energy company. However good
a sounding lie is, the truth will always resonate. As the spotlight was drawn to the
company, the public in turned found out that the company was declining in contrast to
what they are reporting. Utilizing their “mark-to-market” accounting method, Enron’s
books reflected incomes from contracts even before they were realized. However, if
such contracts revealed to be unprofitable, they were easily transferred to books outside
that of Enron. Skilling was also said to have used the shell companies in acquiring debts
for Enron and later on declaring This practice was “condoned” by the company’s
auditors (Arthur Andersen LLP) as it was also unearthed that they provide management
consultancy to the company. It was said that the legal counsel even asked for the
obliteration of FSs.
What had bought the downfall of Enron was a series of unscrupulous acts. From hiding
the true financial standing of the company, to the collusion of external and internal
parties. Ineffective internal control and operations management also took a toll on the
business. Such problems could have been resolved internally if controls were taken into
consideration. Hopefully, businesses will take Enron as an example to nip such
problems in the bud to avoid similar incidences from happening.
References:
Segal, T. (2020, May 04). Enron Scandal: The Fall of a Wall Street Darling. Retrieved August
19, 2020, from https://www.investopedia.com/updates/enron-scandal-summary/
Thomas, C. (2002, April 01). The Rise and Fall of Enron. Retrieved August 19, 2020, from
https://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html

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