Research About Enron Scandal

Seat no. 13 Prepared by: Mark Anthony Aguinaldo

About Enron Scandal

This is about Enron scandal, Enron was a Houston-based natural gas pipeline company formed by merger in 1985. Some consider this as the largest energy company in the world at their peak time. Enron is the product of Kenneth Lay merging the two natural gas pipeline companies of Houston Natural Gas and lnterNorth and formed Enron. In the year 2000, a Fortune magazine survey names Enron "The Most Innovative Company in America" for the fifth consecutive year, Enron's rank among the nation's best employers is 24th (Fortune - "100 Best Companies to Work for in America.". The Energy Financial Group ranks Enron the 6th largest energy company in the world at the beginning of the same year. Just over a year later, in August, 2001. Enron chief executive officer (CEO) Jeff Skilling resigns after running the company for just six months. Chairman and former CEO Ken Lay returns to his position atop Enron. In October 16, 2001, Enron reports a $638 million third-quarter loss and announces a $1.2 billion reduction in shareholder equity, partly related to diverse partnerships run by Andrew Fastow, its' chief financial officer. A few days later Enron acknowledges that the Securities and Exchange Commission (SEC) made an inquiry into a possible conflict of interest related to the company's operations with those partnerships. Just two days later Enron breaks off its relationship with Fastow's partnership and fires him. October, 27, 2001, Enron borrows more than US S 3 billion, in a move that is supposed to boost the confidence of the investors and customers. Four days later, on October 31, Enron announces that the SEC inquiry has been advanced to a formal investigation.

What was the participation of the independent auditors?

This is about critically evaluating the role of the accountancy profession in recent corporate scandals such as Enron. It is expected that the accountancy profession would play quite an important role in scandals such as Enron, as all they all deal with the financial accounts not showing a true and fair view the company. Hence it is the role of accountants to prepare and check the financial statements. Therefore analyzing who exactly in the accountancy profession was responsible for each action in scandals, and show how's accountants move easily from watchdogs in their capacity as auditors to being the architects of clever deals and frauds as CFO's and CEO's is worth thing to do. Authur Andersen LLP {Enron's auditors) was therefore responsible in providing shareholders with 'reasonable assurance' that the financial statements presented a true and fair view of the company's financial position. Consequently one could argue that because they failed to do this that they were entirely responsible, as far as the public is concerned, in Enron's scandal. The fact that thousands of pages of documents were shredded proves on itself that Andersen was guilty of fraud, as this is a violation of the law and Justice Department. In response to these accusations Andersen stated that their only role in this scandal was to 'express an opinion on the financial statements prepared by the company, and therefore will hold themselves responsible for any errors in the auditing. In addition to this it has been publicly acknowledged that there was one error of judgment in the treatment of one partnership. Though in another partnership matter, they have defended their case in saying that they were not provided with the necessary information by Enron. According to SAS 600 it was Andersen's role to qualify the financial statement, and thus disclaim it if the effect of this limitation of scope was

pervasive enough to make the statements as misleading as they were. As accountants Andersen had an obligation to be neutral in examining the company's financial statements, and making sure that all financial transactions were duly reported. Therefore we should question Andersen's motive to accept such manipulated accounts. The reason been simple, they were paid $52 million last year, hence not only were they been paid for auditing work and consulting services but their role was also 'to make Enron profits and stock prices appear much more attractive than they really were' and therefore become an accomplice in Enron's fraudulent projects.' (Enron was a corporate icon)An interesting aspect in Enron's account was that Andersen was paid more for consulting than for the actual auditing. This on itself is suspicious, as it can be suggested that the money that was been used to bribe them, was appearing as consulting fees in Enron's accounts. Therefore Andersen found them in this agreement with Enron. Enron 'evolved from being a company with rather dull set of physical assets in a regulated market into a financially sophisticated risk management company that shaped its own trading environment.'(SEP) This was achieved by investing in a large number of risky projects and so the problem arose when its investments and new markets were not proving to be as successful as they thought they would be. Therefore Enron found itself in a precarious situation where they found themselves dependent on their continuing management credibility and creditworthiness. As a result they ended up resorting to the manipulation of financial statements. The first major fraud was 'Enron's executives' apparent use of Special-Purpose Entities (SPEs) to deceive shareholders and to enrich themselves.' (Accounting issues at Enron) in other words Enron was applying for the loan through the SPEs meaning that these debts would not appear on their financial statements. Not only was this but investors willing to accept a lower interest rate because to them it appeared that the repayment of their loan was a sure thing, since the SPE would have no other debt. Consequently Enron found itself in a situation where they needed to increase the number of SPEs to keep moving debt off the balance sheet and so began using its own stock as collateral. This resulted in the SPEs recording as an increase in Enron's stock as income, which would thereby allow Enron to increase income by utilizing the equity method of accounting' (Accounting lssues at Enron). $30 million in profits on investments in Enron SPEs transactions was the result of this fraud. Profits generated from the SPEs were been used in order to structure off-balance sheet treatment of assets and liabilities, meaning that Enron was able to carry such transactions because of the fact that the accounting standards had not kept pace with new techniques in off-balance sheet financing. This meant that off-balance sheet items were been used to keep liabilities of its books. All this was possible because Enron managed its SPEs by making sure that at least one SPE investor had put up at least 3% of the SPE's equity. According to the US GAAP this meant that the company could contribute the rest and still qualify for off-balance sheet treatment. In the 1990s Enron began to take many of its assets and liabilities off its reported balance sheet, because they continued using off-balance sheet vehicles to access capital and to reduce risk. As long as they followed various accounting rules in would not have to reveal many details about these financings. The nontransparent financial statements and Enron lied about its profits and was accused of a lot of dark dealings including misrepresent earnings and modify the balance sheet and show wrong

information in the company's accounts. When all the deception and all the issues rose, it led to the bankruptcy of the company.

What was the latest about the participating independent auditors?

Arthur Andersen LLP v. United States

Arthur Andersen LLP v. United States, 544 U.S. 696 (2005) was a United States Supreme Court case in which the Court unanimously overturned accounting firm Arthur Andersen's conviction of obstruction of justice on the basis that the jury instructions did not properly portray the law Andersen was charged with breaking. During the fall of Enron, Arthur Andersen, Enron's accounting firm, instructed its employees to destroy documents relating to Enron after Andersen officials learned they would soon be investigated by the Securities and Exchange Commission. On May 6, 2002, a charge of obstructing an official proceeding of the Securities and Exchange Commission was filed against Arthur Andersen LLP in the United States District Court for the Southern District of Texas. The indictment was served by Michael Chertoff, who was subsequently appointed Secretary of Homeland Security by President George W. Bush. The jury found Arthur Andersen guilty on June 15. Since federal regulations do not allow convicted felons to audit public companies, Andersen surrendered its CPA license on August 31, effectively putting the firm out of business in the United States. Andersen appealed to the United States Court of Appeals for the Fifth Circuit. The Fifth Circuit affirmed the district court's decision. Andersen petitioned for a writ of certiorari to the Supreme Court, which was granted. The issue was whether the jury had been properly communicated the law which Andersen was charged with violating. They were charged under 18 U.S.C. 1512(b)(2)(A) and (B), which made it a crime to knowingly corruptly persuade another person with intent to cause that person to withhold documents from, or alter documents for use in, an official proceeding. Arthur Andersen believed the instructions given to the jury were not proper. The jury was reportedly told "even if petitioner honestly and sincerely believed its conduct was lawful, the jury could convict." This is not true, held the Supreme Court. The statute they were being charged under used the language "knowingly ... corruptly persuade". Arthur Andersen managers did instruct their employees to delete Enron-related files, but those actions were within their document retention policy. If the document retention policy was constructed to keep certain information private, even from the government, Arthur Andersen was still not corruptly persuading their employees to keep said information private. In a unanimous decision by the Supreme Court, Arthur Andersen's conviction

was overturned. Chief Justice William Rehnquist wrote the opinion for the court, and was joined by
all associate justices.

In the court's view, the instructions allowed the jury to convict Andersen without proving that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The instructions were so vague that they "simply failed to convey the requisite consciousness of wrongdoing," Rehnquist wrote. "Indeed, it is striking how little culpability the instructions required." Rehnquist's opinion also expressed grave skepticism at the government's definition of "corrupt persuasion" persuasion with an improper purpose even without knowing an act is unlawful. "Only person s conscious of wrongdoing can be said to 'knowingly corruptly persuade,' " he wrote. Although the decision vacated Andersen's felony conviction, as of 2011 Andersen has not returned as a viable business even on a limited scale.

The Whistleblower: Sherron Watkins

Sherron Watkins is the former Vice President of Enron Corporation who alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company, warning him that Enron might implode in a wave of accounting scandals. She has testified before Congressional Committees from the House and Senate investigating Enron s demise. Ms. Watkins has been lauded in the press for her courageous actions. TIME magazine named Sherron, along with two others, Coleen Rowley of the FBI and Cynthia Cooper of WorldCom, as their 2002 Persons of the Year, for being people who did right just by doing their jobs rightly. TIME magazine concluded that, Democratic capitalism requires that people trust in the integrity of public and private institutions alike. As whistle-blowers, these three became fail-safe systems that did not fail. For believing really believing that the truth is one thing that must not be moved off the books and for stepping in to make sure that it wasnt, they have been chosen by TIME as its Persons of the Year for 2002. In recognition of her outstanding demonstration of ethics in the work place, Ms. Watkins has received numerous honors, including the Court TV Scales of Justice Award and its Everyday Hero s Award, the Women Mean Business Award from the Business and Professional Women/USA Organization, and the 2003 Woman of the Year Award by Houston Baptist University. Glamour Magazine named her one of its 2002 Women of the Year, and Barbara Walters included her as one of the 10 Most Fascinating People of 2002. In 2003, the National Academy of Management presented Ms. Watkins with their Distinguished Executive Award and the Women s Economic Round Table honored her with the Rolfe Award for Educating the Public about Business and Finance. Ms. Watkins is co-author, along with prize-winning journalist, Mimi Swartz, of Power Failure, the Inside Story of the Collapse of Enron, published by Doubleday in March 2003. Currently Ms. Watkins is lecturing around the globe on the leadership lessons from Enron s failure.