Sidi (Fiona) Chen
Wei (David) Yu
In June of 2001 Enron’s new CEO, Jeff Skilling, was heralded as the “No. 1 CEO in the entire country and Enron was saluted as “America’s most innovated company.” Just six months later, in December, Enron filed for bankruptcy. The failure shocked the public and angered investors. How could this have happened? Did no one see this coming? Where were the accountants? Where were the controls?
Enron’s public troubles began on October 16th of 2001 when management released a third quarter earnings report with a “mysterious $1.2 billion dollar reduction.” The following month the company restated earnings for the ...view middle of the document...
By evaluating the business risks and fraud triangle associated with the Enron Scandal, one can begin to understand the gravity of the misdeeds committed by Enron executives and the AA audit and consulting teams and thus understands the extensive changes to the accounting industry as a whole that were a result of this scandal.
Business Risk Analysis
Enron Corporation started as Northern Natural Gas Company in 1930 and grew as an asset based natural gas company through acquisitions and pipeline infrastructure. In 1986, the growing company became known as Enron and quickly developed into much more than an asset-based natural gas supplier. The company evolved into a large wholesaler of natural gas through its EnronOnline division, served as an intermediary for broadband internet access with its Enron Broadband Services, operated a retail unit with Enron Energy services, and continue to manage its pipeline operating with Enron Transportation Services. Needless to say, in the 70 years following the foundation of the company, the company’s scope expanded immensely by investing in ventures outside of the natural gas industry, including oil exploration, chemicals, coal mining, and fuel-trading operations, thus increasing its overall business risk.
One of the reasons that Enron began to expand the scope of the company was the highly regulated nature of the industry. The U.S. government had regulated the natural gas industry to varying degrees since the mid-1800s and at the time of the case, was likely to continue to closely monitor the sales of all types of energy. This careful eye on energy, and specifically energy pricing was likely one of the factors that pushed Enron into diversifying its business practices. In addition to the close government eye on the prices in the industry, Enron was also closely watched by analysts and the media who had high expectations for the company’s performance and even went so far as to applaud it performance and management.
In addition to a high degree of outside pressure Enron’s business operations, also created a large amount of risk for the company. In particular, Enron’s use of SPEs created a large amount of risk for the company, risks that investors were unaware of.
Enron expanded by making substantial investments in a variety of large-scale projects. However, some of these investments are not as successful as predicted, resulting in unsustainability and economic losses. By establishing SPEs, Enron disguise the losses and not report contingent debt. The liability, though contingently liable, would be potential risk because someday they would be actually debt and management is responsible to disclose in Financial Report. According to SAS 109-27, auditors need to assess whether special-purpose entities are accounted for appropriately. Obviously, the SPEs of Enron are not accounted appropriately, which give Enron an opportunity to overstate its profit in financial statement. During the 1990s, Special...