Enron Case Study

ACC411: Auditing Principles

Short Paper: Enron Case Study

Enron Corporation, was a noteworthy U.S. energy-trading and utilities company that went bankrupt on December 2, 2001, mainly due to the breaking out of its large money related and bookkeeping misrepresentation embarrassment. It is a standout amongst the most famous cases of adamant corporate extortion and corrupt corporate administration. Famously known as the “Enron Scandal,” this embarrassment is recorded as one of the biggest business outrages and Chapter 11 bankruptcy cases in American history. The whole story of how Enron Corporation, one of the world’s real energy and utility goliath’s. This film indicates how the top administration, particularly the Founder and Chairman Kenneth Lay (Ken Lay), CEO Jeffrey Skilling and CFO Andrew Fastow, through “one of its (Enron’s) main strategies for success—manipulating its own stock value as if with puppet strings—resulted in the ultimate downfall of that very stock, as the fantasy bubble burst and public trust evaporated”. This destruction of Enron and brought about the criminal trials for some administrators including themselves. It likewise assumed a unique part of the establishment of the following enactment called Sarbanes-Oxley Act of 2002(SOX) mainly intended to avoid comparable corporate disappointments and bookkeeping outrages.

Because of the Enron scandal, the wealth of investors was adversely/severely affected. It resulted in loss of confidence among the investing community. It was important to re-establish trust and confidence in the operations of public companies operating in the U.S. In order to achieve this, Sarbanes-Oxley-Act was passed in the year 2002. This act provided strict guidelines and procedures that are required to be followed by a company and public accounting firms engaged in providing accounting and auditing services. The act “changes how corporate boards and executives must interact with each other and with corporate auditors.” Each public company is required to file financial statements on a quarterly basis and also on an annual basis which is required to include an internal control report. Management is also required to provide information on the internal controls over financial reporting and the auditor (external) is required to certify the same, thereby, making both the management and auditors accountable for the proper functioning of internal controls, their own actions and conduct. Any non-compliance with the act can lead to imposition of severe penalties, fines and imprisonment. The role of the audit committee and its members in the corporate governance was also identified in the act.

The scandal at Enron took place because of collaboration between the company’s management and its auditors. Sarbanes-Oxley-Act also emphasized the importance of auditor’s independence while performing duties for the clients. Auditors are required to act with integrity in the most ethical manner and in the best interests of the stakeholders who rely on the information provided in the financial statements. An auditor is required to follow the rules established by the act. Any violation or non-compliance can have a severe impact on the accounting firm and its operations. In simple words, SOX Act serves as the rule book for any firm engaged in providing accounting and auditing services.

Enron outrage has facilitated significant changes in the business world. An ever-increasing number of organizations are concentrating on good business. The primary thought process of the organizations has now moved from benefit amplification to riches augmentation. They have underlined the significance of client and accountant relations. However, the Enron embarrassment has frightened the business world and expanded the mindfulness; such exercises still win in the market yet surely with lesser force.