Question

what were the accounting, financial reporting, auditing and control issues, statndards and practices associated with Enron Fraud Case?

Answer 1

The ENRON FRAUD was the main reason for the bankruptcy of ENRON CORPORATION, which was an american energy company located in Houston, Texas. It also led to the dissolution of Arthur Andersen, one of the five biggest audit partnerships in the world.

The financial statements prepared by Enron led to various confusions and errors among the shareholders and the stakeholders of the company. The main issue that came to knowledge was the modification of balance sheet to indicate a more favourable and better position of the firm than it actually was.

AUDITING ISSUES -

Enron's auditing firm, Arthur Anderson,was held responsible for applying auditing standards which were not in compliance with the law.

This was mainly because of conflict of interest over the consulting fees which was generated by Enron. Arthur Andersen earned a total revenue of around $25 million in audit fees and around $26-$27 million in consulting fees.

Enron employed various Certified Public Accountants (CPAs) and in addition bookkeepers who had taken a shot at creating bookkeeping rules with the Financial Accounting Standards Board (FASB). The bookkeepers hunt down better approaches to spare the organization cash, including exploiting escape clauses found in Generally Accepted Accounting Principles (GAAP), the bookkeeping business' guidelines.

Enron's review board was later scrutinized for its short gatherings that would cover a lot of material. In one gathering on February 12, 2001, the board met for 90 minutes. Enron's review board of trustees did not have the specialized learning to scrutinize the evaluators legitimately on bookkeeping issues identified with the organization's unique reason elements. The advisory group was likewise unfit to scrutinize the organization's administration because of weights on the committee.

ACCOUNTING ISSUES -

Enron made a propensity for booking expenses of dropped extends as resources, with the method of reasoning that no official letter had expressed that the task was dropped. This strategy was known as "the snowball", and despite the fact that it was at first directed that such practices be utilized just for ventures worth under $90 million, it was later expanded to $200 million.

In 1998, when experts were given a voyage through the Enron Energy Services office, they were awed with how the representatives were functioning so vivaciously. Truly, Skilling had moved different representatives to the workplace from different offices (training them to claim to buckle down) to make the appearance that the division was bigger than it was. This stratagem was utilized a few times to trick examiners about the advancement of various regions of Enron to help enhance the stock cost.

FINANCIAL REPORTING ISSUES -

To begin with, we look at Enron's monetary execution amid the 10 years before its affirmation of insolvency. This investigation uncovers expanding inconstancy of key execution measures from 1997 through 2000, a period amid which Enron's stock cost for the most part outflanked the NASDAQ composite. These outcomes are especially astonishing on the grounds that they depend on Enron's accounted for money related outcomes, which we presently know were incorrect. This examination proposes that extensive proof existed that ought to have lead investigators, complex speculators, and controllers to scrutinize Enron's money related outcomes and taking off stock cost.

Next, we quickly portray the bookkeeping and money related detailing principles appropriate to Enron's union of SPEs and issuance of stock for notes receivable. We particularly examine three noteworthy arrangements of exchanges in which Enron made SPEs to hold resources, get cash, and support vacillations in the estimation of its venture exercises. For each situation, we distinguish whether Enron's treatment of these SPEs followed or neglected to meet the prerequisites of existing bookkeeping standards. We additionally examine the effect of these exchanges on Enron's actual money related position and how its revealing of these exchanges darkened their monetary substance. A few of these exchanges included Enron trading its very own stock for notes receivable from the SPEs. The budgetary revealing ramifications of these exchanges likewise are examined. We finish up with a rundown of essential issues for thought by bookkeeping standard setters.

CONTROL ISSUES -

The three center mainstays of Enron's administration control framework were the hazard appraisal and control gathering, Enron's execution audit framework and its code of morals.

Hazard Assessment and Control Group: A basic piece of Enron's administration control framework was the Risk Assessment and Control gathering (RAC). RAC was in charge of affirming all exchanging arrangements and dealing with Enron's general hazard. Each arrangement set up together by a specialty unit must be depicted in a Deal Approval Sheet (DASH), which was autonomously surveyed by RAC investigators. Arrangements required different dimensions of endorsement from various divisions, including endorsement from the most senior dimensions, even from the top managerial staff.

Enron's Performance Review System: Another crucial connection in Enron's administration controls was the Peer Review Committee (PRC) framework. The goal of the PRC framework was to adjust worker activity with the organization's vital destinations, holding and compensating unrivaled entertainers on a reasonable and reliable premise. Under the PRC framework, like clockwork every representative got a formal execution audit, in view of formal criticism classifications including income age, and was relegated a last stamp from one to five (the worker's photograph was shown on a screen). Criticism originated from different sources including the representative's manager, and in addition from five colleagues, bosses or subordinates that the worker chose. The last 15 percent, regardless of how great they were, got a "5" which consequently implied redeployment to "Siberia," an extraordinary territory where they had two weeks to endeavor to discover another activity at Enron. On the off chance that they didn't – and most did not – it was "out the entryway."

Code of Ethics: Enron's code filled in as a conduct control planned to disallow a scope of unscrupulous practices. The code focused on the accompanying four key standards: correspondence, regard, honesty and greatness, and included expressions, for example, "we regard others as we might want to be dealt with ourselves", "we don't endure oppressive or discourteous treatment" and "we work with clients and prospects straightforwardly, genuinely and earnestly". The code, which every worker marked on joining Enron and yearly re-insisted, turned out to be of wide intrigue – to such an extent that the political history division of the Smithsonian National Museum of American History procured it for its changeless display of commendable business rehearses.

Enron additionally had set up the typical corporate administration components including a very much credentialed governing body, a review and consistence panel, a Big-5 outer inspector (the doomed Arthur Andersen), an office of the executive of budgetary divulgence, a central hazard officer's office, a back advisory group, and the SEC's ordinary oversight. In entirety, the control foundation inside Enron was deliberately structured, exhaustive and bleeding edge. How this foundation was fundamentally subverted, underestimated and overlooked under the administration of Jeffrey Skilling offers key bits of knowledge for experts and controllers alike.