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About Enron Scandal

This is about Enron scandal, Enron was a Houston-based natural gas pipeline company formed by merger in 1985. Some consider this as the largest energy company in the world at their peak time. Enron is the product of Kenneth Lay merging the two natural gas pipeline companies of Houston Natural Gas and InterNorth and formed Enron. In the year 2000, a Fortune magazine survey names Enron "The Most Innovative Company in America" for the fifth consecutive year, Enron's rank among the nation's best employers is 24th (Fortune - "100 Best Companies to Work for in America. ). The Energy Financial Group ranks Enron the 6th largest energy company in the world at the beginning of the same year. Just over a year later, in August, 2001 Enron chief executive officer (CEO) Jeff Skilling resigns after running the company for just six months. Chairman and former CEO Ken Lay returns to his position atop Enron. In October 16, 2001, Enron reports a $638 million third-quarter loss and announces a $1.2 billion reduction in shareholder equity, partly related to diverse partnerships run by Andrew Fastow, its' chief financial officer. A few days later Enron acknowledges that the Securities and Exchange Commission (SEC) made an inquiry into a possible conflict of interest related to the company's operations with those partnerships. Just two days later Enron breaks off its relationship with Fastow's partnership and fires him. October, 27, 2001, Enron borrows more than US $ 3 billion, in a move that is supposed to boost the confidence of the investors and customers. Four days later, on October 31, Enron announces that the SEC inquiry has been advanced to a formal investigation.

What was the participation of the independent auditors?

This is about critically evaluating the role of the accountancy profession in recent corporate scandals such as Enron. It is expected that the accountancy profession would play quite an important role in scandals such as Enron, as all they all deal with the financial accounts not showing a true and fair view the company. Hence it is the role of accountants to prepare and check the financial statements. Therefore analyzing who exactly in the accountancy profession was responsible for each action in scandals, and show how 'accountants move easily from watchdogs in their capacity as auditors to being the architects of clever deals and frauds as CFO's and CEO's. is worth thing to do. Authur Andersen LLP (Enron's auditors) was therefore responsible in providing shareholders with 'reasonable assurance' that the financial statements presented a true and fair view of the company's financial position. Consequently one could argue that because they failed to do this that they were entirely responsible, as far as the public is concerned, in Enron's scandal. The fact that thousands of pages of documents were shredded proves on itself that Andersen was guilty of fraud, as this is a violation of the law and Justice Department. In response to these accusations Andersen stated that their only role in this scandal was to 'express an opinion on the financial statements prepared by the company, and therefore will hold themselves responsible for any errors in the auditing. In addition to this it has been publicly acknowledged that there was one error of judgment in the treatment of one partnership. Though in another partnership matter, they have defended their case in saying that they were not provided with the necessary information by Enron. According to SAS

600 it was Andersen's role to qualify the financial statement, and thus disclaim it if the effect of this limitation of scope was pervasive enough to make the statements as misleading as they were. As accountants Andersen had an obligation to be neutral in examining the company's financial statements, and making sure that all financial transactions were duly reported. Therefore we should question Andersen's motive to accept such manipulated accounts. The reason been simple, they were paid $52 million last year, hence not only were they been paid for auditing work and consulting services but their role was also 'to make Enron profits and stock prices appear much more attractive than they really were' and therefore become an accomplice in Enron's fraudulent projects.' (Enron was a corporate icon) An interesting aspect in Enron's account was that Andersen was paid more for consulting than for the actual auditing. This on itself is suspicious, as it can be suggested that the money that was been used to bribe them, was appearing as consulting fees in Enron's accounts. Therefore Andersen found them in this agreement with Enron. Enron 'evolved from being a company with rather dull set of physical assets in a regulated market into a financially sophisticated risk management company that shaped its own trading environment.'(SEP) This was achieved by investing in a large number of risky projects and so the problem arose when its investments and new markets were not proving to be as successful as they thought they would be. Therefore Enron found itself in a precarious situation where they found themselves dependent on their continuing management credibility and creditworthiness. As a result they ended up resorting to the manipulation of financial statements. The first major fraud was 'Enron's executives apparent use of Special-Purpose Entities (SPEs) to deceive shareholders and to enrich themselves.' (Accounting issues at Enron) In other words Enron was applying for the loan through the SPEs meaning that these debts would not appear on their financial statements. Not only was this but investors willing to accept a lower interest rate because to them it appeared that the repayment of their loan was a sure thing, since the SPE would have no other debt. Consequently Enron found itself in a situation where they needed to increase the number of SPEs to keep moving debt off the balance sheet and so began using its own stock as collateral. This resulted in the SPEs recording 'an increase in Enron's stock as income, which would thereby allow Enron to increase income by utilizing the equity method of accounting' (Accounting Issues at Enron). $30 million in profits on investments in Enron SPEs transactions was the result of this fraud. Profits generated from the SPEs were been used in order to structure off-balance sheet treatment of assets and liabilities, meaning that Enron was able to carry such transactions because of the fact that the accounting standards had not kept pace with new techniques in off-balance sheet financing. This meant that off-balance sheet items were been used to keep liabilities of its books. All this was possible because Enron managed its SPEs by making sure that at least one SPE investor had put up at least 3% of the SPE's equity. According to the US GAAP this meant that the company could contribute the rest and still qualify for off-balance sheet treatment. In the 1990s Enron began to take many of its assets and liabilities off its reported balance sheet, because they continued using off-balance sheet vehicles to access capital and to reduce risk. As long as they followed various accounting rules in would not have to reveal many details about these financings. The nontransparent financial statements and Enron lied about its profits and was accused of a lot of dark dealings including misrepresent earnings and modify the balance sheet and show wrong information in

the company s accounts. When all the deception and all the issues rose, it led to the bankruptcy of the company. Unethical behavior of Independent Auditors that leads to the Enron Scandals: -Lack of attention Members of the Enron directors are not paying attention on the financial entities and all the reports with which Enron did business. This gave the party involved easily created a nontransparent statements and make all sorts of lying in the balance sheet in company s account. -Lack of Truthfulness There are lack of truthfulness in the management about the financial statement of the company and its business operations. They tend to make changes in the accounts statement and use all accounting limitations to misrepresent earnings. According to McLean and Elkid in their book The Smartest Guys in the Room, "The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control." -Bad culture imposed Some believed that Enron had to be the best at everything it did and they had to always protect their image and reputation as the most successful executives in America. That is why when some of their business or trading started to perform poorly, they will cover up their own failures. This will cause more and more failure in the corporate and finally brings to the bankruptcy of the corporation. Lesson behind the Enron Scandal: Enron Scandal is playing a morality role in economic as every corporation takes it as an important ethics lessons. One of the lessons is it reminds corporation to provide goods and services that have real value instead of making fake information in financial accounts. Besides that, government regulations and rules must be updated from time to time. Lastly, an healthy ethical culture in an organization should be imposed into every employee to prevent misleading in working environment.

What is the latest about the participating independent auditors?

The collapse of Enron raised consideration of the following points namely that contribute revisiting certain accounting principle so practice of fraud will be lessen: i) The regulation of auditors: Enron highlighted the fact that self-regulation and peer review in the US were no longer enough. It was also suggested that the US Public Oversight Board should be turned from a selfregulatory body appointed and financed by accountants into a Statutory one which was independent and which reported to the Securities and Exchange Commission (SEC). Additional powers to the Public Oversight Board to ban or fine auditors for wrong doing were also proposed;

ii) Eliminating conflicts of interests in accounting firms; iii) Compulsory rotation of auditors as Andersen had audited Enron since its establishment in 1983; and iv) Revisiting America's Generally Accepted Accounting Principles. The collapse of Enron also led to suggestions that the Securities and Exchange Commission (SEC), its standardsetting body the Financial Accounting Standards Board may have to look to embracing international accounting standards. Other Issues arise after Enron Scandal that participates the improvements of independent Auditing up to now: Audit committees to the fore - The Enron scandal has spotlighted the role of audit committees in preventing abuses in financial reporting and disclosure, although to function properly, the audit committee should focus on its own company rather than worry excessively about Enron-specific problems. The audit committee members bear the same fiduciary duties as other directors, and for NYSE- and Nasdaq-listed companies, the requirements for independence generally minimize the breach-of-loyalty risks. Because of the committee s special functions (and although an accounting background is not prerequisite for membership on an audit committee), duty-of-care concerns predominate over breaches of loyalty in any assessment of potential fiduciary liability. Informed judgment thus becomes the gravamen of the member s responsibility. A constructive skepticism should inform the director s approach to analyzing data that management formulates. Hound s-tooth clean - The audit committee should ensure that board and management relationships do not compromise financial integrity through undisclosed related-party or off-balance-sheet transactions. The SEC published guidance in January 2002 for reporting off-balance-sheet transactions. Audit committees and boards generally should take a broad view of what constitutes disclosable related-party dealings, severely limiting the occasions for approving them. The committee should consider policies to limit relationships between directors and managers (such as professional services, or political and charitable associations), even where current law does not require disclosure, on the theory that the public may look on them with disfavor in the wake of unfortunate developments. The committee can take a leading role in beefing up and enforcing codes of conduct that do not compromise management s actual or perceived integrity and its financial reporting. Auditing the auditors - The audit committee should, probably at every meeting, meet with external and internal auditors to review key accounting policies, issues in reporting, and auditor/management relations, as well as the adequacy of audit staffing. It needs to impress on outside auditors that the latter report to the committee and the board, rather than to management. Members should solicit from the auditors candid assessments of the company s financial management. Prompted by the SEC s recent statements, the committee may seek information on any accounting recommendations that management has declined to follow. At the same time, it stands responsible for establishing limits on what, if any, nonaudit services the auditors may perform for the company, to foster their true independence.

Communicating with management - The audit committee s tasks include regular conferences with the chief executive and financial officers, both to discuss financial management and audit-review issues and to evaluate management s response. A well-functioning committee will sniff out information on financial and reporting issues long before they escalate. Establishing a direct line of authority from the internal auditing staff to the committee seems useful, even to the point of interest in the working conditions and career management of the internal auditors. Committee schedules ought to adjust to accommodate these varied tasks; for example, hold audit committee meetings a full day ahead of regular board meetings. Rotation of directors on and off the committee will also contribute to a freshness of view and avoid the routinization of tasks. Latest updates on Enron Liquidation Distribution Information: May 2011 Enron Creditors Recovery Corp. distributed approximately $100 million to creditors in May 2011, bringing the total amount recovered to date to $21.738 billion. There are a limited number of pending litigation and collection matters and contingent liabilities that continue to affect the timing of the closure of the Enron bankruptcy case. The Reorganized Debtors recently settled litigation in which defendants (both of whom were obligated to share recoveries with the Reorganized Debtors) previously received summary judgment in the United States District Court for the Southern District of New York (the District Court ), referred to as the Bammel Litigation. The Reorganized Debtors have also settled litigation with the Lay Estate, subject to mutually acceptable documentation and any court approvals required. In addition, on March 31, 2011, the District Court entered an order affirming on appeal the denial by the Bankruptcy Court of a motion filed by National City Bank ( NCB ) which would have required the payment of certain additional monies in the approximate amount of $8.6 million to creditors holding the Allowed ETS Debenture Claim under an agreement which NCB purports to provide most favored nations status in these particular circumstances which the Reorganized Debtors have opposed.

Research Paper About Enron Scandal

Prepared By: Mark Anthony Aguinaldo