A research of the Enron scandal

To start, Kenneth Lay formed Enron Corporation after merging Houston Natural Gas and
Inter North, 1985.
The downfall of the Corporation was recorded as the largest bankruptcy reorganization in
American history at that time and the biggest audit failure and yet the most infamous case
in the business world.
According to an article I have read, two years after its founding, the company becomes
embroiled in scandal, resulting in suspiciously consistent profits. Enrons then CEO,
Louis Borget, was also discovered to be diverting company money to offshore accounts.
This literally means, executives of the company did not set out to have a positive impact
on the accounting industry thus they set out to make as much money for themselves as
quickly as possible.
Comes the new CEO Jeffrey Skilling with CFO Andrew Fastow who, was believe, misled
the Enrons Board of Directors and audit committee on high-risk accounting practice and
pressured Andersen to ignore it.
When did all of this become a question to the public? Bethany McLean, a Fortune
magazine editor, wrote an article Is Enron Overpriced? In her article she questioned
how Enron could maintain its high stock value? She even argued that analysts and
investors did not know exactly how Enron was earning its income. Then she was drawn
to the companys situation after an analyst suggested that she should, herself, review the
companys 10-K report.
This is the time she found out about the strange transactions, erratic cash flow, and huge
debt of the company. She then discussed this to Skilling but called her unethical for not
properly researching the company. Fastow told two other Fortune reporters that Enron
could not reveal their books because they do not want anyone to know whats on those
books and how theyre making money. A Wall Street analysts, Richard Grubman, was
approached by Skilling telling him, We appreciate thatasshole. Whereas, Grubman
questioned unusual accounting practice of Enron and they are the only company that does
not want to release a balance sheet with its earnings statements.
Whats really in the balance sheet of Enron that they couldnt afford to make it to public?
Ive read this statement at a blog stating that they did this by bolstering their balance
sheet with inflated asset values, and dispersing their liabilities to subsidiaries that they
just didnt consolidate. Meaning that Enron didnt include these companies in their
financial statement accounts at the end of their fiscal years, causing massive
misstatements. Since these partnerships were, in most cases, wholly owned subsidiaries
or partnerships, they should have been shown on the consolidated financial statements
with Enron. When Enron declared bankruptcy they had $13.1 billion in debt on Enrons

books, $18.1 billion on their subsidiaries books, and an estimated $20 billion more off
the balance sheets (Zellner). (Arthur Andersen and Enron: Positive Influence on the Accounting
Industry by Todd Stinson)

Arthur Andersen had a responsibility to the investors and to the public interest under
GAAS. Auditors, according to GAAS, are to remain independent in both fact and
appearance. Meaning that even if an auditor appears to have a connection with their
client, even though they may not have, they should drop the audit immediately. Anderson
took a very active role in Enrons business through both auditing and consulting. This
should have been enough to make anyone question Andersons independence. They did
not execute their duties independently because of the amount of revenue that Enron was
providing them, not only in audit fees, but also in consulting fees. In 2000, Enron paid
Andersen $52 million, including $27 million for consulting services (Weil). This
amount was enough to make Enron Andersens second largest account in 2000. The
major problem was that of collusion. GAAP and GAAS cannot prevent fraud when
people work in collusion to perpetrate that fraud. (Arthur Andersen and Enron: Positive Influence
on the Accounting Industry by Todd Stinson)

This led Arthur Andersen guilty of illegally shredding documents amid an investigation
into covering up billions in losses at the energy firm.
This is why Enron Andersen is a very infamous story in the history of business and by
knowing it meaning it makes us aware that theres always an end to wrongdoings
especially in the accounting industry.
What I learned is that we should never, ever, let our personal greed to take over our
passion at work. We may not be earning bigtime at the corporate world at least we earned
bigtime for our integrity and conscience.

Write-up on how SGV declined its partnership with Andersen and merger with
Ernst and Young.
In 1985, SGV & Co. became a member firm of Arthur Andersen & Co., S.C., one of the
largest professional service organizations in the world. The firm opened its Manila
Offshore Systems Development Center, with assistance from Andersen Consulting, in
1986, and has provided computer software services to foreign clients through Andersen
Consulting's global marketing network and resources. ( http://www.ey.com)
However, in the first sign of a defection in the Asia-Pacific region, SGV, the largest
Philippine audit firm and local partner of Arthur Andersen, said it might partner with
another international company.
Amid overseas developments, the Philippines affiliate of Andersen, SGV, said it had
received partnership offers from other large accounting firms though the partnership with
A.A. LLP was in its 17th year. Its chairman said it would not be affected by the indictment
of Arthur Andersen LLP in the United States (referring to the Enron case), but "moving
forward, SGV may have to decide on an alliance with another global firm".
Thus, Ernst and Young came to the picture. Documents indicated that before SGV could
be an affiliate of Ernst and Young, E&Y made a deal that Punongbayan and Araullo, the
local affiliate of E&Y, need to merge with SGV. The firm agreed that the accounting
firms name needs to be retained. And the document was signed. Therefore, SGV is now
an affiliate of Ernst and Young and a partner of local audit firm P&A.
Meanwhile, SGV was the 12th of the Andersen affiliate that went to bed with E&Y.
A little bit of history indicates that Benjamin Punongbayan of P&A was a former senior
partner of SGV who is also running for chairmanship but then passed by Gloria TanClimaco. This led to the foundation of P&A.
Despite the Enron case, it was said that clients still stick to SGV even though Andersen is
falling.
Clients also believe that P&A was just an alternative to SGV.
Upon reading the articles Ive used as reference to this write-up, I was really in awe with
the fact that our auditing firms are with such great powers. Including Cunanan under
Pricewaterhouse Coopers, KPMG Laya Mananghaya & Co., and CL Manabat & Co
under Deloitte and Touches.
The author was right upon saying that accounting is a practice, a profession, but in reality,
it is a business where one either sinks or swims. This refers to the P&A after being
founded and merged with SGV.