Enron Scandals In Auditing

1494 Words 6 Pages
Enron - Scandals in Auditing

In 2000, Enron went from being one of America’s largest company, to filing for bankruptcy in 2001. This scandal is pinnacle in understanding how the regulation of auditing has reformed and how new legislation has been issued in an attempt to prevent such fraud from reoccurring. The number of stakeholders affected by such a scandal is unaccountable, from employees to governmental bodies and leading to the dissolution of the firms’ auditors, Arthur Anderson, which was then one of the largest accounting firms in the world during this time. It was affiliated as being known as one of the ‘Big 5’, however it has now become the ‘Big 4’ due to the severity of the involvement Arthur Anderson had in this fraud
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There are several reasons behind such drastic change. Firstly, the culture was such that there was no encouragement of ‘whistle-blowing’, the management was filled with greed and fame and as a result did not advocate about the true position of the firm. In a study of the scandal of Enron, Li (2010) shows evidence of the corruption of the senior-level employees at Enron when during a conference call, an analyst questioned the balance sheet of Enron and the executive Mr Skilling swore at the analyst. Through a loss of confidence by the public, the departure of Jeffrey Skilling in early 2001 brought about more suspicion in regards to the firm’s truthfulness. Enron Vice President Sharron Watkins memorandum sent to Kenneth Lay set in movement the unrevealing and exposure of Enron’s corruption (Beenen & Pinto, 2009). Shortly following, on the 16th of October 2001, Enron’s announcement of a $618 million loss in the third quarter and a staggering fall in shareholder equity by just over one billion, shocked investors. Ultimately, this led to the investigation by the Securities and Exchange Commission. It was sufficing to say that a long history of lies by Enron was beginning to unravel (Markham, …show more content…
This was committed through the support of the auditors, Arthur Andersen who allowed Enron to falsify their financial statements as they hid their debts and deceived the stockholders to believe that the company was making rosy profits, however in reality was hiding their debts through various mechanisms. This was possible through the use of special purpose entities which Andrew Fastow had produced to do deals with Enron and according to The Independent (2006) theses deals allowed Enron to record profits instantly for assets before cash was even generated. These techniques were to manipulate and deceive the stockholders that Enron was

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