THE FALL OF

GROUP 1
ENRON
An Analysis of Ethical
Issues
 INTRODUCTION
CONTENT
1.

2 . ENRON FAILURE

3 . RECOMMENDATION
1. INTRODUCTION
ENRON SCANDAL

Objectives
• Information about Enron scandal: Enron's collapse
was the biggest corporate bankruptcy to ever hit the
financial world.
• Understanding the consequences of bankruptcy.
• Auditing misstatements from Enron scandal.
• Giving recommendation based on Enron
consequences

3
Enron scandal
• Enron is formed in 1985 following a merger between Houston Natural Gas Co. and
Omaha-based Inter North Inc.
• Industry: energy
• Board of manager:
1. Chairman : Kenneth Lay
2. CEO: Jeffrey Skilling
3. CFO: Andrew Fastow

• Arthur Andersen, was one of the five largest accounting firms,

• Be in charged of auditing Enron’s financials.
• On December 2, 2001, Enron Corporation filed for chapter 11 Bankruptcy, which was
the largest bankruptcy petition in U.S history.
Consequences of Enrol Scandal

• On 02/12/2001, Enrol declared bankruptcy.

• 4,500 employees lost their jobs.
• Investors lost $60 billion in a few days.
• The pension fund for Enrol’s employees was obliterated.
• Losses on financial market amounted to the worst stock value loss in
peaceful times.
• Citizen’s trust in American economic system was destroyed.
• Banks were suspected of collusion.
• Auditing firm – Arthur Anderson lost its accreditation.
• Sarbanes – Oxley Act was enacted in 2002 (sharpen drastically in
company financial reporting).
2. ENRON FAILURE

6
 WEAKNESS IN INTERNAL CONTROL

Year Events & PIC DETAIL ACTIONS RESULTS ACTIONS TAKEN BY VIOLATED
MANAGEMENT PRINCIPLES

1987 Oil traders’ + Gambling + Massive amount of +Maintain the staff of the Principle 1, 4,
misappropriation of + destroying trading loss for Enron project 10, 8
company funds– Louis & reports and cook the + Reduce the loss by bluffing
Tom book the market
From Performance Review Rating staffs from 1 Put pressure on Principle 1, 10,
1991 Committee to 5 and fire 10% of employees and create 4
staffs a intense workplace
Bonus & stock option
- Jeff Skilling

1992 Application of mark-to- Recognize profits Overstated revenue & Conceal losses and cook the Principle 1, 2,
market accounting from unfinished profits and inflate the book 12
method – Jeff Skilling business deals stock price

Year Events
& Person in charge
1999 formulated two limited
partnerships: LJM Cayman. L.P.
(LJM1) and LJM2 Co-
Investment L.P. (LJM2) - Andy
Fastow
2000 Enron Broadband Services and
Blockbuster entered a
partnership to enter the
burgeoning VOD market- Jeff
Skilling
1992 The Dabnol Power Project in
Maharastra State, India – Jeff
Skilling
WEAKNESS IN INTERNAL CONTROL
DETAIL ACTIONS CONSEQUENCES MANAGEMENT’s VIOLATED
REACTION PRINCIPLES
Buy Enron's poorly Loss of Enron was Exempting CFO Fastow Principle 1, 4, 2
performing stocks concealed in these SPE from code of ethics
and stakes to improve
its financial
statements
Enron started logging The failed project Nothing at all Principle 1, 2
expected earnings leave Enron hundred
based on expected of million dollars of
growth of the VOD loss and which lead to
market, which vastly the leaving of
inflated the numbers investors and creditors
Build a power plant in The loss on this Still reward million of 1, 7
India which rise a project alone was dollar to board of
controversy in the enough to put the director to conceal the
India government Enron company into failure of the project
due to the financial difficulties
expensiveness of
imported facilities
Audit failures - The role of Arthur Anderson

1. Employees of Arthur Anderson have close relationship with

Enron’s employees
• David Duncan – Andersen’s lead partner on the Enron
engagement– had close relation with Enron’s chief accounting
officer.
• Chief accountant of Enron, Richard Causey who used to work as a
auditor for Arthur Andersen within 16 years
2. Misuse of non-audit related services
• Provide consulting and audit service at the same time
• Take action in advertising stock of the Enron company
3. Eliminate the related accounting document of Enron
3. RECOMMENDATION

10
3.1 Set up a system
of accurate and
appropriate audit Following Enrol's scandal, the
principles auditing system reform process
was established and issued; for
example: a joint accounting system
and more specific auditing
standards.
→ These reforms have brought
accounting differentiation in the
US and around the world.
 3.2 Building an
effective
incentive system • The incentive system, the
revenues from the cost of
auditing and the quality of the
audit always have a close
relationship.

• The incentive system helps

prevent not only illegal
activities, but also prevents the
audit strategy from
underestimating potential risks.
 3.3 Ensure the
independence of
the audit
• Independence is the core issue
of auditing, also the source of
CPA career development.

• One of the main reasons for

the audit failure in the case of
Enrol and Arthur Andersen was
the lack of independence.
 The Sarbanes-Oxley Act :

- Heavily regulated on independence of auditor

and auditing firm (separate non-audit and audit
work)
- Maintain 7 years of audit papers
- Mandatory Audit Rotation
• 1-year (both audit partner and auditory firms)
3.4 Ensure about
professional
competence and
prudence:  Auditors must perform audits
with the professional
competence, care and
diligence. Auditors need to
improve their knowledge in
practice, in the legal
environment with the
technology advances to meet
the requirements of the work.
3.5 Strengthening supervision of
accounting and auditing firms
• If the management of companies and audits within each
company is the first element to ensure honest and reliable
information of financial statement, independent audit is the last
stage to protect against errors in accounting and frauds.

• If the last stage is skewed inadvertently or deliberately, the

accounting information will be distorted, the stock market will be
chaotic and the whole economy will be affected. As a result,
auditing control should be strengthened.
• First, carry out periodic rotation
audit system.
• Second, enhance the CPA's
professional supervision.
• Third, audit the CPA audit
results.
• Fourth, severe condemnation
and fines strictly the intentional
misconduct by the CPA.
3.6 Enhanced training
for the CPA

• CPA must be proficient in accounting skills,

audit tips and avoid, as well as reduce
errors in accounting - auditing.
 3.7 Business ethics of Management
• In the Enron case, the ethics of management is one of the main factors that lead to
the result of the biggest fraud at the time.
• First, increase the supervision of the board of directors and the audit committee
with the CEO and managers.
• To ensure transparency and independence between the Audit Committee and the
Board of Management, the appointment and nomination of members of the Audit
Committee must be made by the Board of Directors.
→ Board of Management & CEO shall not be subordinate and responsible for this.

• Second, there should be strict, specific regulations, and binding, clear division of
responsibilities within the company.
→ Segregation of Duties.
Thank you Q&A