Salmabad, Kingdom of Bahrain

College of Administrative & Financial Sciences

Instructions:
1 Conduct a research based on the topic given to you. Submit your narrative report at least one
week before your presentation.
2 Prepare your presentation once the narrative report is approved. NO APPROVED NARRATIVE
REPORT, NO PRESENTATION, ZERO GRADE IN THE FINAL PROJECT.
3 Presentation is 15 minutes per group. Mastery of the topic is important. No reading of the
slides. Make a smooth transition of your report.
4 You will report on the scheduled date and time. No changes will be allowed. No presentation,
ZERO GRADE for the FINAL PROJECT.
5 Complete this cover sheet and attach it to your activity output.

Students’ Declaration:
I declare that:
I understand what is meant by plagiarism (illegal copying of one’s work)
The implication of plagiarism is tantamount to cheating
This project/activity is all my own work and I have acknowledged any use of the published and
unpublished works of other people.

Total number of pages including this cover page

Program Course Section Due Date Date Submitted

Time/Days
BSIB BSIB622
Course Title International Accounting
1.
Students’ Full Name & 2.
Signatures 3.

Professor’s Name DR. MARIA CECILIA P. LAGARAS, CPA

FOR OFFICIAL USE ONLY
Marking Scheme
The students must be able to: Raw Scores Scores
PART 1 – 4 20
PART 5 a-d 20
PRESENTATION 10
50
Prepared by : Reviewed / Checked: Verified by: Approved by:

MR. EMAD SADEQ DR. JAYENDIRA SANKAR DR. VINODH NATARAJAN DR. MARLUNA L. URUBIO
Course Coordinator Dept. Head, BSIB Associate Dean, CAFS Dean, CAFS
Date: : Date: : Date: : Date: :
 Salmabad, Kingdom of Bahrain
College of Administrative & Financial Sciences

BSIB622 – INTERNATIONAL ACCOUNTING

FINAL PROJECT RUBRICS

20-16 15-11 9-6 5-1

 knowledge of issue is
exceptionally accurate
and is explained clearly
and effectively during
explanation using details
and little reliance on
Analysis of notes
the Case  exceptional critical
(Part 5a –d) comments and analysis
of issue / interpretations
/ impact /  effect / using
details, insight, evidence
from comprehensive
thought
 issue is accurately  issue is explained  issue needs to use
explained and  uses with some accuracy more accurate
many details and but need more details information and
various sources in and more variety in details or
presentation with sources and less examples
some reliance on reliance on notes heavy reliance on
note  some critical notes during
 proficient critical comments given to presentation
comments and issue and effects  lack of critical or
analysis of issue  more details, insight analytical thought
/interpretations and and critical thought in comments and
impact using many needed little to no insight
details and evidence used
and some insight

10-8 7-5 4-3 2-1

Presentation  exceptional delivery and  proficient delivery  -elivery and timing of  poor delivery and
of timing of information and timing of information needs to timing of
Report  exceptional discussion information be more smooth (too information
(10 initiated and  proficient discussion much reading)  discussion needs
Marks) maintained  to further started and  more active to be more
student learning maintained interaction and controlled and
  discussion dynamic

20-16 15-11 9-6 5-1

Report   Report is exceptionally  Report is detailed,  Report  is somewhat  Report needs to
Manuscript detailed, organized, organized, logical organized and be more organized
(20 logical and includes and includes images, includes some images and logical
Marks) images, clear and large clear and large font
font

COMMENTS:

MR. EMAD SADEQ DR. JAYENDIRA SANKAR DR. VINODH NATARAJAN DR. MARLUNA L. URUBIO
Course Coordinator Dept. Head, BSIB Associate Dean, CAFS Dean, CAFS
Date: : Date: : Date: : Date: :
 College of Administrative and Financial Sciences

IN-COURSE PROJECT

General Instructions:
1. Form a group with 3 members.
2. Conduct a Research on The Enron Scandal

Part of the Report:

Part 1. Brief Overview of Enron

Part 2. Enron’s Fraudulent Acts
Part 3. The External Auditor’s Involvement
Part 4. Regulations As a Result of the Enron Scandal
Part 5. Analysis of the Case
a. Impact of the Scandal on Wall Street
b. IFRS Response on ENRON aftermath
c. Corporate Governance – Sarbaney Oxley Act
d. Ethical Standards on Auditing

3. Write proper citation and referencing in your report.

4. Write your report in A4 paper and the font is COURIER NEW.

Side left margin is 1.25 and the right side margin is 1.0

5. Upload your narrative report to the Moodle.

6. Present your research output within 10-15 minutes.

7. Your Final Project marks will be based on the given rubrics.

8. The group has to write their own project.

COPIED PROJECT will be mark ZERO.

Prepared by : Reviewed / Checked: Verified by: Approved by:

DR. MA. CECILIA LAGARAS DR. MA. CECILIA LAGARAS DR. VINODH NATARAJAN DR. MARLUNA URUBIO
Course Coordinator Dept. Head, BSIB Associate Dean, CAFS Dean, CAFS
Date: : Date: : Date: : Date: :

Part 1. Brief Overview of Enron:

 College of Administrative and Financial Sciences

 In the early 2000s, the Enron Case was seen as one of the most remembered white-

collar scandals in American history. Several key Enron executives and accountants were

persecuted for their crimes after the disclosure of the scandal. Enron's unethical policies and

falsification of documents led to the passage of the 2002 Sarbanes Oxley Act, the Securities and

Exchange Commission's increased involvement, the passage/guidelines of the General Agreed

Accounting Principles (GAAP), the death of Arthur Andersen, and the political status of

publicly traded companies.

Due to a merger between the Houston Natural Gas Company and InterNorth Inc, Enron was

formed in 1985. Kenneth Lay, former CEO of the Houston Natural Gas Corporation, will

become CEO and chairman of Enron following the merger. In October 1999, Enron started

trading products by setting up Enron Online (EOL). Enron was dubbed Fortune's "America's

most innovative company" between 1996 and 2001. The earnings of Enron started to drop

dramatically by 2000. Enron CEO Jeffery Skilling discovered ways to mask Enron's financial

losses, contributing to the collapse of Enron (Investopedia, 2016).

Part 2. Enron's Fraudulent Acts :

 The California energy crisis came about because of Enron's failure. They took plants

offline to overcharge their customers to make more cash with the tapes between Enron revealed
 College of Administrative and Financial Sciences

at the trial (democracy now, 2006). "These recordings revealed that Enron "manipulated

Canada's energy markets and intended to rig the California market... to cause an energy crisis in

2000 and 2001 that cost billions of dollars in surcharges to citizens (Borcher, "Tapes")." Enron

sold numerous assets to save business, including the following:

Some of its profits will be shared by UBA Warburg's energy trading arm company.

For 96.4 Euros, Centrica bought Enron's European arm.

1. Dynegy, Enron's smaller competitor, gained a U.S. pipeline after merger negotiations fell

through.

2. Power project in the Maharashtra region of India: India's most important foreign investment

project is still on offer.

Key Enron executives and accountants were persecuted because of the leak of the recordings

(BBC, 2002).

In the White House, Enron had key political donations until the exposure of the Enron scandal.

It was a substantial campaign donor to the election of George W Bush. In addition, it was

reported that Kenneth Lay was Bush's personal friend, but after the discovery of the scandal,

Bush quickly distanced himself from Lay. It has also been shown that Enron executives met

with then-Vice President Dick Cheney to address the energy strategy of the administration

(BBC, 2002). Therefore, before the passage of the Sarbanes Oxley Act of 2002, the

strengthened position of the SEC (Securities and Exchange Commission), GAAP, and the

formation of the PCAOB (Public Company Accounting Oversight Board), it can be concluded
 College of Administrative and Financial Sciences

that in the past, publicly traded corporations such as Enron have been able to influence key

White House policymakers to advance their agenda.

Part 3. The External Auditor's Involvement :

When more knowledge emerges about the failure of the giant Enron Corp., some sobering
lessons can be learned from regulators and other companies. Corporate auditors are one of the
most prominent.

In this unfolding saga, Enron's auditing firm, Arthur Andersen, is looking increasingly dire. It
said it was surprised by the failure of Enron because some details of its off-balance sheet
transactions involving private companies had been covered by Enron. It fired David Duncan, its
partner in charge of the Enron audit, this week, alleging that despite understanding the U.S., he
inappropriately shredded several Enron records. An inquiry was initiated by the Securities and
Exchange Commission. The acts of Mr. Duncan will make it difficult for regulators to assess
what Arthur Andersen knew before the collapse of Enron.

Mr. Duncan has not yet shared his side of the tale and, certainly, there is much more to come
out of it. But the accounting company is already tainted and in the Enron drama, is becoming an
increasingly important player. Its participation is made more complicated by the existence of
possible conflicts of interest.

As it turns out with Enron, Arthur Andersen played various roles. Enron paid the company $27-
million (US) for tax and consultancy work in 2000. It paid $25-million for audit work as well.
For a feature known as "internal auditing," which is very different in purpose from external
auditing, the $25 million included a portion — Arthur Andersen has not said how much —.

Every year, external auditors closely review the financial statements of a corporation to confirm
with shareholders that the public financial statements represent the current financial condition of
the company. Auditors also have to make judgement decisions on whether the economic
 College of Administrative and Financial Sciences

processes of an organization are proper and are sufficiently impartial to not be coerced into
accepting dubious accounting.

Internal audits are used to plan and monitor the financial management processes of a company.
External audits are meant to verify whether the internal audit processes of the company detect
fraud or irregularities effectively. But there is reason for concern if the inner systems are
constructed by the same company doing the external audit.

The Enron case should revive this dilemma and gain wider support for these overlapping
positions to be completely segregated. In Canada, where there is also no ban on accounting
firms performing multiple positions with businesses, the lessons are valid. Possible Canadian
amendments were debated by the Ontario Securities Commission in 2000, but no laws were
enforced.

Until now, there have not been pressing reasons for regulators to investigate the matter. But
Enron remains the most important corporate failure in U.S. history, and a slew of inquiries and
investigations have been initiated by lawmakers and regulators. Audit controls are a logical
place to begin if they are searching for suggestions that may help avoid similar situations in the
future. And the accounting sector may find little support for its objections this time.
Part 4. Regulations As a result of the Enron Scandal :

The key provisions of the Sarbanes-Oxley Act included the creation of the Public Company
Accounting Oversight Board to create requirements for audit report preparation; the prohibition
of the provision of certain non-auditing services by public accounting firms during auditing;
provisions for the independence of members of the audit committee, requiring executives to
sign off on financial statements

Due to corporate malfeasances and accounting irregularities, the SEC proposed amendments to
the rules of the stock exchanges on February 13, 2002. A new governance plan approved by the
 College of Administrative and Financial Sciences

SEC in November 2003 was announced by the New York Stock Exchange in June 2002. In the
final NYSE plan, the key clauses include:

1. All businesses must have a majority of directors who are autonomous.

2. An comprehensive definition of independent directors must be complied with by
independent directors.
3. Independent directors shall be composed of the pay committee, the nominating
committee, and the audit committee.
4. The members of the audit committee should all be financially literate.
5. Additionally, at least one member of the audit committee must have experience in
accounting or related financial management.
6. The board should hold additional meetings without leadership, in addition to its daily
sessions.

Part 5. Analysis of the Case

The Scandal's effect on Wall Street

1. Enron was in freefall by the summer of 2001. In February, CEO Kenneth Lay

retired, turning the position over to Jeffrey Skilling. Citing personal reasons, Skilling

resigned as CEO in August 2001. At around the same time, analysts started to

downgrade their Enron stock rating, and the store dropped to a 52-week low of

$39.95. The company announced its first quarterly loss on October 16 and closed its

Raptor SPV. This action drew the attention of SEC.16.16.

 College of Administrative and Financial Sciences

Enron changed pension plan managers a few days later, effectively forbidding

workers to sell their shares for at least 30 days. The SEC announced shortly after that

it was investigating Enron and the Fastow-created SPVs. That day, Fastow was fired

from the company. The organization has reaffirmed profits going back to 1997.

Enron had $591 million in losses and had debt of $690 million by 2000. When

Dynegy (NYSE: DYN), a corporation that had previously announced that it would

merge with Enron, backed out of the agreement on November 28, the final blow was

dealt. Enron had filed for bankruptcy as of December 2, 2001.

a. IFRS Response on ENRON aftermath

There are IFRSs, as the rest of the world is well on the way to implementing IFRS,
Two realistic ways to achieve a single collection of norms: either the FASB
U.S. Harmonizes GAAP with IFRS, or the FASB decides to substitute for
US. U.S. GAAP with international specifications. In the footsteps of Enron
Some find the point that international standards are superior to U.S. standards
appealing. GAAP. In particular, the United States Critics of GAAP say
Enron and its auditor, Arthur, may have resisted the IFRS method by making
businesses disclose according to the substance of a case.
Andersen, from preventing the unification of the SPEs in effect regulated by
Enron.13 More generally, the IASB endorsed inventory
Although the FASB does not, choice spending appears to add another point in
support of international standards. The unnecessarily informative U.S. GAAP offers
yet another arrow in the quiver of proponents of international law compared to IFRS.
If IFRS were truly superior to the U.S., for these and maybe other reasons, GAAP, to
replace the U.S. With IFRS, GAAP will clearly minimize the risks of investing in
companies moving to IFRS, thus reducing their cost of capital.
 College of Administrative and Financial Sciences

How true are any of these reasons for the benefit of a single set of accounting
principles and in particular, the use of IFRS worldwide? The globalization of
securities markets, which presents the most robust justification for unified standards,
is necessary to begin with. The extent to which economies have been genuinely
globalized is to a large degree, somewhat overstated.There is still a lot of
competition between national exchanges and indeed, below, we say that even greater
competition could be a positive thing.

b. Corporate Governance – Sarbanes Oxley Act

The 2002 Sarbanes-Oxley Act was enacted following the The Sarbanes-Oxley Act of

2002 was passed following the fall of Enron. It helped govern accounting firms by

creating "management and internal auditors establish internal controls and reporting

methods of the adequacy of those controls (Investopedia, "Sarbanes")."

It also demanded that the published financial statement be reviewed by senior

management (Investopedia, "Sarbanes"). In addition, PCAOB was founded to

supervise accounting professionals who provide publicly traded companies with

independent audits (SEC, "Public"). The impact of the 2002 Sarbanes-Oxley Act is

as follows: 1) accounting firms performing audits are responsible for their audits, 2)

firms should pay for internal control software, higher audit rates, and develop an

internal control plan to track and review their results while auditors spend more time

undertaking audits with due diligence, 3) firms conduct an audit every three years, d)

firms conduct an audit every one-three years, d) (Slaughter, "Impact").

 College of Administrative and Financial Sciences

Arthur Andersen was founded by Arthur Andersen and his partner, Clarence

DeLany, in Chicago in 1913. It provided tax services and other services in its early

stages to resolve other accounting problems. They opened six new offices around the

country during the 1920s, with an annual profit that grew to $2 million. They kept

expanding between 1947 and 1973. Arthur Andersen and Andersen Consultancy,

which later became known as Andersen Worldwide, became independent units in

1989. Andersen Ltd. at the beginning of the 21st century. And he became known as

Andersen to Arthur Andersen. Andersen ceased offering audit services to clients in

the aftermath of the Enron Debacle and sold its overseas properties to other

businesses (Wilson et al., "Andersen").

In a court ruling in 2000, after a dispute over assets, Arthur Consulting, Andersen's

business consulting company, was split from Arthur Andersen. This decision,

however, did not impact the consumers, but was a win for consultants. For the same

customers, it required consultants to compete with Arthur Andersen. This decision

divided the consultancy practice of a corporation from its accounting firms

(Leonhardt, "Andersen").

It can be seen as a form of internal control following the court ruling in 2000, which

split Arthur Consulting and Arthur Andersen into different units providing various

services. The primary cause of Arthur Andersen's downfall, though with the Enron

Fiasco, is their contributory incompetence. Fee conflicts, failure to comply with

accounting requirements, conflict of interest between Enron and Arthur Andersen,

lack of division of duties, insufficient financial disclosures, and tentative opinion of

 College of Administrative and Financial Sciences

the auditor contributed to the discovery of Enron fraud and the death of Arthur

Andersen (Idowu, "Enron").

It can be seen that Arthur Andersen has not used any professional skepticism when

auditing Enron since 1985, due to the lack of internal controls in the auditing of

Enron. Auditors destroyed important records proving the presence and rights and

completeness of the accuracy of the financial statements (Economist, "Lessons"). In

addition, their revenues may have been overestimated by both companies' financial

statements.

c. Ethical Standards on Auditing

1. ES1: honesty, objectivity, and autonomy

2. ES2-economic, business, jobs, and personal relationships

3. ES3-Long connection with the dedication of the audit

4. ES4-fees, programs of remuneration and appraisal, lawsuits, gifts and hospitality

5. ES5-Non-audit services that are offered to audited organizations

6. Additional clarity of management risks, decisions and knowledgeable management
is given in Paragraphs 25 and 26.

conclusion

In conclusion, with the passage of the Sarbanes-Oxley Act of 2002, the Enron Debacle contributed to the
role of ethics and law in the accounting sphere and profession. It contributed to the formation of
PCAOB, which supervises accounting professionals, due to a Lack of internal controls and lack of
 College of Administrative and Financial Sciences

skepticism about professionalism the part of Arthur Andersen. THE Sarbanes-implementation Oxley's
helped govern accounting companies.

Works Cited

1. Berman, Jillian. "Ex-Enron CEO Jeffrey Skilling's Prison Sentence Reduced To 14

Years." The Huffington Post. TheHuffingtonPost.com, 21 June 2013. Web. 01 Nov.
2016. <http://www.huffingtonpost.com/2013/06/21/jeffrey-skilling-prison-sentence-
reduced_n_3480145.html>.

2. Borger, Julian. "Tapes Reveal Enron's Secret Role in California's Power Blackouts." The
Guardian. Guardian News and Media, 04 Feb. 2005. Web. 01 Nov. 2016.
<https://www.theguardian.com/business/2005/feb/05/enron.usnews>.

3. Free, Clinton et al. "Ivey Business Journal." Ivey Business Journal. Ivey Business
Journal, July-Aug. 2007. Web. 01 Nov. 2016.
<http://iveybusinessjournal.com/publication/management-controls-the-organizational-
fraud-triangle-of-leadership-culture-and-control-in-enron/>.

4. Huq, Nushin. "Post-Prison, Former Enron CFO Hits Speaking Circuit." Big Law

Business. Bloomberg Law, 19 Feb. 2016. Web. 01 Nov. 2016.

5. Investopedia. "Enron Scandal: The Fall of a Wall Street Darling." Investopedia. N.p., 07
Oct. 2016. Web. 01 Nov. 2016. <http://www.investopedia.com/updates/enron-scandal-
summary/>.

6. Idowu, Stanislav. "Enron: How Arthur Andersen's Contributory Negligence Led to the

Biggest Corporate Collapses in US History." LinkedIn Pulse. LinkedIn Pulse, 04 Nov.

2015. Web. 1 Nov. 2016. <https://www.linkedin.com/pulse/enron-how-arthur-

 College of Administrative and Financial Sciences

andersens-contributory-negligence-led-idowu>.

7. Leonhardt, David. Andersen Split into Two Firms by Arbitrator. NY Times, 08 Aug.

2000. Web. 01 Nov. 2016. <http://www.nytimes.com/2000/08/08/business/andersen-

split-into-two-firms-by-arbitrator.html>.

8. Wilson, Mark R., Stephen R. Porter, and Janice L. Reiff. "Andersen (Arthur) & Co."

Andersen (Arthur) & Co. N.p., n.d. Web. 01 Nov. 2016.

<http://www.encyclopedia.chicagohistory.org/pages/2547.html>.

9. "BBC NEWS | Business | Enron Scandal At-a-glance." BBC News. BBC, 22 Aug. 2002.
Web. 30 Oct. 2016. <http://news.bbc.co.uk/2/hi/business/1780075.stm>.

10. "Charge Dropped against Accountant David Duncan." Houston Chronicle. Houston

Chronicle, 15 Dec. 2005. Web. 01 Nov. 2016.

<http://www.chron.com/business/enron/article/Charge-dropped-against-accountant-

David-Duncan-1506536.php>.

11. "Enron's "Code Of Ethics"" The Smoking Gun. The Smoking Gun, 30 Jan. 2006. Web.
01 Nov. 2016. <http://thesmokinggun.com/documents/crime/enrons-code-ethics>.

12. "Enron Played Central Role in California Energy Crisis." Democracy Now! Democracy
Now!, 26 May 2006. Web. 30 Oct. 2016.
<http://www.democracynow.org/2006/5/26/enron_played_central_role_in_california>

13. "Enron Whistleblower to Offer Lessons at Jindal School Lecture." Enron Whistleblower

to Offer Lessons at Jindal School Lecture. UT Dallas, 25 Oct. 2016. Web. 01 Nov. 2016.

<http://www.utdallas.edu/news/2016/10/25-32257_Enron-Whistleblower-to-Offer-

Lessons-at-Jindal-Sch_story-wide.html>.

14. "Fastow Pleads Guilty and Agrees to Cooperate in Enron Case." CNNMoney. Cable

News Network, n.d. Web. 01 Nov. 2016.

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15. "Joe Berardino's Fall from Grace." Bloomberg.com. Bloomberg, 11 Aug. 2002. Web. 01
Nov. 2016. <http://www.bloomberg.com/news/articles/2002-08-11/joe-berardinos-fall-
from-grace>.

16. "Public Company Accounting Oversight Board - PCAOB." Investopedia. Investopedia,

25 Nov. 2003. Web. 01 Nov. 2016. <http://www.investopedia.com/terms/p/pcaob.asp>.

17. "The Lessons from Enron." The Economist. The Economist Newspaper, 09 Feb. 2002.
Web. 01 Nov. 2016. http://www.economist.com/node/976011 .