Case Study:
"Enron: Questionable Accounting Leads to Collapse."
In what ways did Enron's bankers, auditors, and attorneys contribute to Enron's demise?
Enron's bankers, auditors, and attorneys all participated in accomplishing Enron's demise. The auditor at Enron were responsible I ensuring that the financial statement of the company were accurate without any interest, however the auditors became partakers in covering up fraudulent acts and thus misleading the investors who relied on the auditor's report as implied by Wilson and Key (2013).There was massive financial ties between Enron and board members, and in fact, Arthur Anderson provided internal auditing services and at the same time consulting services, a clear breach of audit codes. Moreover, Enron had undisclosed off-the-books activity. The use of Special Purpose Entities permitted the company project false state of the company in the sense that the reported earnings of the company were not the true reflection of the company financial status. By allowing off-the-book partnership, the Enron's bankers and the executives made the company appear more profitable and healthier (Wilson and Key, 2013; Shu-Kun, 2013). There were billions of dollars in the off-the-book assets and liabilities, generating fees and kickbacks that enriched Fastow and othersmillions of dollars. The bankers also allowed annual draining of cash through the 2000 annual bonus and performance unit plan.
On their part, the attorneys led to the crumbling of Enron in the sense that the law firm was tasked with the responsibility of investigating the claims raised against Enron, however, the law firm dismissed Watkins allegations of accounting fraud after conducting its inquiries. The firm went ahead to structure some of the Enron's special-purpose partnerships" (Ferrell, Fraedrich, & Ferrell, 2015, p. 491) and this was the focus of Enron's accounting fraud. Therefore, the attorneys in ignoring the corruption allegations andcommit fraud that aggravated Enron's demise.
Ideally, the external auditor to Enron was, Arthur Andersen LLP, was to ensure that the company had a correct financial statement devoid of wrongdoings however, the auditor colluded to cover up corruptions and failed to provide reassurance in financial statements without any conflict of interest since they become partakers of the massive malpractices (Catanach and Ketz, 2012).
What role did the company's Chief Financial Officer play in creating the problems that led to Enron's financial problems?
The Chief Financial Officer masterminded the creation of special purpose entities (SPE), which were used to conceal the debt from investors. Enron used these SPE to attain its financial reporting goals. Thus, by the year 200, Enron had hundreds of special purpose entities groups. CFO Andrew Fastow helped hide true financial position of Enron and in fact, he concentrated in unconsolidated special purpose entities and partnerships that were later referred to as the LJM partnership. Typically, Andrew Fastowexploited on the main goal special purpose entities, which as to provide methods of raising money without reporting the debts in the balance sheet. Therefore, CFOorchestratedpartnerships and lured them to purchase unproductive assets that include Enron's stocks and stakes.
One of the groups that Fastow orchestrated Chewco, that was controlled by Enron and raised debts, which were Enron assured. However, they were organized in such a way that they would not have to joint venture or merge Chewco or into the financial statements. This allowedcompany (Enron) to acquire the interest of the partnership without committing itself to any debts. According to Ferrell, Fraedrich and Ferrell (2015), Federal prosecutors consented that Fastow was the main orchestrator behind the partnerships utilized to hide some $1 billion in Enron debt (p. 489), that was a major reason for Enron's bankruptcy.
Reference
Catanach, A., &Ketz, E. (2012). ENRON Ten Years Later: Lessons to Remember. The CPA Journal, 82(5), 17-23.
Ferrell, O.C., Fraedrich, J., &Ferell,. (2015). "Business Ethics: Ethical Decision Making and Cases, 10 th ed." Stamford, CT. Cengage Learning. Case Study1: MonsantoAttempt to Balance stakeholder Interest
Shu-Kun, L. (2013). Resisting Corporate Corruption: Cases in Practical Ethics From Enron Through The Financial Crisis, 2nd Edition. Administrative Sciences (2076-3387), 3(2), 6-8. doi:10.3390/admsci3020006
Wilson, A. C., & Key, K. G. (2013). Enron Audit Failures: A Compromise of Ethics?. Feature Edition, 2013(3), 50-68.