Question

Summarize the Enron scandal. Describe how you think the elements of fraud were present in this scandal.

Answer 1

Some of the fundamental accounting and auditing elements of fraud that eventually contributed to the fraud performed by Enron were the fact that Andersen’s auditor over looked the companies that were created by Enron that provided equity all while permitting to borrowing to occur without acquiring any debt. It provided a chance to Enron to look at their balance sheet and release the newly restated financial results. In these report it was evident that the total revenue from the past four year was sufficiently lesser than the prior four years. At the time of such finding, the fundamental practice demands Andersen should have been raising the red using the audit process to ensure that all financial practices were being done accurately as per the best knowledge. At this point it was noticed as an entire failure in the auditors and the audit process. Furthermore there were biased banking and investment banking. Weak management was virtually not accountable to anyone as long as the company showed dramatic stock increases that were justified by the growth in the earnings.

During the time of Enron, there existed mainly five large external auditing firms who were referred as professional service firms with their business in diverse line. All such firms had big consulting practices. The internal audit work for Enron was performed by Arthur Andersen. Moreover the consulting fees of several clients dramatically exceeded the audit fees. On the basis of revenue and profitability partners were compensated. To make it worse the auditors were hired by top managers who sometimes succeeded to put pressure on auditors to acquiesce to aggressive financial reporting preferences