ENRON CORPORATION AND ANDERSON: ANALYZING THE FALL OF TWO GIANTS

Grant, Kadeon -0601750 Taylor, Mario -0801489 Marston, Nicholai -0802001

Introduction
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y Enron Corporation was an American company based

in Houston, Texas that specialized in electricity, natural gas, communications and pulp and paper.
y It reported revenues of nearly $101 billion in 2000

yet went bankrupt in December 2001, as a result of one the largest cases of accounting fraud in recent history.

Contd
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y Andersen LLP, was one of the Big Five accounting

firms, and one of their largest clients was Enron.

y They were found responsible of bad auditing and

accounting practices after they approved Enrons financial reports even though they knew they were inaccurate.

Business Risks
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y Using SPEs buried under dense legal language to

keep a massive amount of company debt off the balance sheet.

y Guaranteeing Whitewing investors full

compensation if stocks were sold at a loss. This decision was unknown to Enrons stakeholders.

Contd
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y Expansion under their new economy line of

reasoning severely impacted the company as the growth required large initial capital investments.

Responsibilities of the board of directors

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y Keeps the organizations mission, values, and vision

out front.
y Long range Strategic planning for the organization. y Monitors fiscal management and maintains

accountability to funders and donors.

y Review and approves the annual budget, major

program plans, and organizational policies.

Contd
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y Ensure the adequate resources are available to the

organization.
y Evaluates the organizational effectiveness. y Represents public need and interest within the

organization.
y Represents the organization to the public, especially

to sources of financial support

How BOD could have prevented collapse

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y Failure to report to shareholders of the state of the

company
y High-risk Accounting y Conflicts of Interest y Extensive off-the-books activity y Excessive Compensation y Lack of Independence

Enron & SPEs

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y A financing technique in which a company decreases

its risk by creating separate partnerships, rather than subsidiaries, for certain holdings and solicits outside investors to take on the risk. (financialdictionary.com)
y Enron entered into several business transactions

involving hundreds of SPEs.

Contd
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y Enron used these entities to hide large amounts of

debt from its stakeholders

y Borrowed funds through them were made to appear

as revenue

What is Auditor Independence?

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Auditing Related Issues

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The issues include:

y Magnitude of income to be generated by the

accounting firm from the client

y Inability of the accounting firm to remain unmoved

if the clients produce adjustment propositions deemed illegal or not in accordance with Generally accepted accounting principles

Contd
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y Retaining the same auditing company for long

periods of time.
y Audit company partners accepting employment by

client.
y Audit Committee members often not independent of

senior management.

For
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y Possible arguments in support of an auditor being

allowed to provide these services for the same client include:



Consolidation of services may reduce expenses for the client Provision of these services enhances the auditors knowledge of the client thus increasing the auditors objectivity and independence.

Against
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y Possible arguments against an auditor being allowed

to provide these services for the same client include:



Possible violation of the underlying principle of auditing integrity. Reports may reflect what company executives want it to reflect and not what is. The line between auditor and client may become blurred as the form of payment may vary and include shares in the clients organization

Accounting Principles
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Accounting Principles
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contd
Disadvantage Precise requirements may cause management to manipulate statements to match what is compulsory. Strict rules can cause unnecessary complexity in the preparation of financial statements.

Principle Rule-based

Advantage Increase accuracy and reduce the ambiguity .

Accounting Principles
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contd
Disadvantage Absence of rigid guidelines can produce unreliable and inconsistent information.

Principle Principle-based

Advantage It offers general guidelines that could be used in a variety of circumstances.

Contd
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Dangers Of Removing bright-line

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y bright-line is favoured because in the absence of

these industry regulatory rules an organization maybe be brought to court if their judgement of financial statements were incorrect or inconsistent.
y When there are strict accounting rules being

adhered to the possibility of lawsuits is greatly minimized.

Contd
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y Decreased accuracy in the preparation of statements. y Increased ambiguity by management.

run on the bank

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y Occurs when a large number of depositors, fearing

that their bank will be unable to repay their deposits in full or on time, simultaneously try to withdraw their funds immediately (Kaufan, 2001).

Contd
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y The run on the bank analogy is valid for both

firms; however, it is important to note that this is not the primary reason why these organizations failed.

run on the bank-Enron

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y The internal break down of Enron led to scepticism

and scrutiny over company operations.

y As a result of the corporate scrutiny, the public

(customers) and trading partners of Enron began to lose confidence and therefore; this led to them withdrawing themselves from these industry brand Enron.

run on the bank-Anderson

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y The collapse of Enron adversely affected Andersons

reputation as a consultation and auditing firm.

y Criminal charge against Anderson was listed as

obstruction of justice for destroying important documents after the federal investigation had begun into the Enron case.

contd
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y This formal charge and the nature of it led to a run

on the bank situation for Anderson as most of its clients withdrew themselves. This also included high-profile clients with which Anderson had enjoyed long relationships.

Personal Application of Principles

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Involvement in unethical or illegal activities or appearance of such -- EFFECTS

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y Loss of Job y Loss of Respect from Colleagues y Possible Jail time y Questions may be raised about the validity of

previous work
y Blacklisted and prevented from being rehired

Integrity Being Questioned and Preservation

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Consequences when Integrity is ?? Loss of Trust Loss of Job Loss of Family Support Diminished Friendships

Preservation of Reputation Do not associate with questionable activities Ensure confidentiality becomes another body part Commit to being a teamplayer

Auditor, Client Relationship

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y Audit partners struggle with making tough

accounting decisions that may be contrary to their clients position on the issue due to fees received by the auditor from the client.
y Auditors tend to praise their clients because of the

large amounts of money being paid out to them by their client.

Contd
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y Some changes the profession could make to

eliminate these obstacles are:

y Transparency: Make all phases and progress of audit

accessible to not only internal stakeholders but external ones.

y Establishing a committee independent of the

auditing team to ensure that auditors are following industry regulations and are making neutral and unbiased decisions.

Recommendations
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Recommendations
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contd

ENRON CORPORATION AND ANDERSON: ANALYZING THE FALL OF TWO GIANTS

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Grant, Kadeon -0601750 Taylor, Mario -0801489 Marston, Nicholai -0802001