The Rise and Fall of Enron: A Reaction Paper

Louis Drei Candia, BSA 3B

In 1985, Enron was born yet started from scratch. Undeniably, Kenneth Lay and
Jeffrey Skilling’s prowess and experience elevated the company’s status from zero to
hero. Enron’s innovative and revolutionary business strategies pushed them to the top
in just a short span of time. During that time, financial reporting, auditing, and corporate
governance possess some loopholes that companies could take advantage of.
Particularly, there has been a debate about how to value and disclose energy-related
contracts for many years. With the opportunity presented, Enron dominated the market
by employing the mark-to-market accounting and milking the standards through the
utilization of “special purpose entities” (SPEs). Dismally, Enron fell into the abyss of
greed and wasted the potentials and geniuses in the company. The article focuses on
the big five accounting firms, AICPA, and the SEC’s response to the scandal by
proposing improvements to financial reporting, auditing, and corporate governance.
One of the reasons that propel the change and addition of the standards was the
exploitation of such not only by Enron, but also by other companies such as the Waste
Management Inc. Moreover, with the advent of technology, the standards must keep up
with its rapid changes. The response of the big five accounting firms, AICPA, and the
SEC aimed at updating the financial reporting and disclosure system. Consequently,
they were hoping to redeem themselves, especially the profession, and win back the
trust of the people to the system, mainly the investors and players. Aside from that, the
modifications were done to make a proactive and responsive system that could disclose
real-time data. Thus, the transparency would improve since the transactions from
related parties and complex special purpose entities are relatively disclosed.
Another reason was to keep in check of the roles of auditors, both internal and
external, to abolishing the doubts and reestablishing the credibility of the whole audit
process. In Enron’s case, Andersen was both working as an internal and external
auditor for the company. Furthermore, he had previous executives employed by the
business as internal accountants, controllers, and CFOs. Additionally, he destroyed
paper and digital records, and notified the SEC of the company’s problems too late. On
another perspective, he also failed to review the status and plans of the company in
comparison to the actual conditions of the industry. It was clear that the company was
declining due to the entry of competitors but still the earnings targets, practices, and
transactions of Enron was unusually and excessively aggressive. The actions of the
auditor were explicitly illegal and unprofessional. Hence, the changes would impel the
auditors to perform their responsibilities competently and independently.
Not only the US, but the whole accounting industry and the world were
concerned by the Enron scandal's fallout. With that, an idea for the modernization of the
financial reporting system has been suggested. Furthermore, improvements were
opened up such as audit standards and SEC requirements. On the other end,
restrictions were also put in place that stop audit companies from providing internal
audit outsourcing and systems design and implementation for clients in the public audit
sector. Though the moves of the primary stakeholders were reassuring at that time, I
believe that there will always be malpractices in the profession of accounting and audit.
Despite implementing a very comprehensive qualifications and standards for
professionals and firms, unexpected and unprecedented events could still happen.
Nevertheless, the fact that we are constantly moving forward shows that we all care for
the growth and integrity of the profession. It’s just that the actions should be more of
proactive rather than reactive to anticipate issues that need to be addressed.
To conclude, the changes to the financial reporting, auditing, and corporate
governance in general benefits the stakeholders in the business world. However, the
trauma that the scandal brought will always be remembered such that some might still
doubt the integrity and credibility of the accounting and auditing profession. The
modifications won't result in a perfect set of rules, but they will at least eliminate
problems and provide closure on hotly contested subjects. Since deficiencies will
always exist, defining standards is essentially a never-ending cycle of ongoing
improvement. The WorlCom, Tyco, and Bernie Madoff scams are only a few of the
professional malpractice scandals that erupted between 2000 and 2010 as was seen
around the world. As a result, the profession is up against an insurmountable obstacle
that can only be overcome with perseverance and professionalism.

References:

Segal, T. (2022, July 13). Enron Scandal: The Fall of a Wall Street Darling. Investopedia. Retrieved
September 7, 2022, from https://www.investopedia.com/updates/enron-scandal-summary/

Thomas, C. W. (2002, April 1). The Rise and Fall of Enron. Journal of Accountancy. Retrieved September
7, 2022, from https://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html

Top Accounting scandals. Corporate Finance Institute. (2022, January 30). Retrieved September 7, 2022,
from https://corporatefinanceinstitute.com/resources/knowledge/other/top-accounting-scandals/