Case: Enron Corporation

1. What are the issues in Enron Case?

Conflict of Interests of Top Management
The top management of Enron was heavily compensated using stock options and the stock
option awards linked to short-term stock price, so they would likely to use the complex
business model of Enron to try to avoid the rules without breaking them in the financial
reporting at the beginning. When the top management loss of moral compass, they becoming
extremely greedy and acting in their economic self-interest. They started to use clever
schemes for getting that share price up rather than running a real business. For instances, the
clever schemes are revalue physical assets using fair value models; and using special
purpose entities (SPE) to reduce perception of too much debt through ignoring accounting
standards and minimal disclosure on its relations with the SPE.
Independence of Audit Committees and External Auditors
The chair of Enrons audit committee was the wife of one of the Enrons key lobbyists to the
US Senate and the lobbyist receives substantial political donations from Enron. Another
member of the audit committee had a consulting contract with Enron. These members of
audit committee are having familiarity risk that threatening their independency in performing
their roles and responsibilities. They failed to challenge several important transactions that
were primarily motivated by accounting goals, was not sceptical about potential conflicts in
related party transactions and did not require full disclosure of these transactions. By the end,
they was effectively just a rubber stamp for the financial statements and appointment of
external auditors.

Arthur Anderson (AA) as the external auditor for Enron was turned a blind eye to
accounting irregularities at Enron for fear of losing the client and lucrative consultancy fee.
(Palepu, 2003)
2. How did the accounting professions involved in the case?
As the share price and earnings of Enron increases follow by revaluation of assets, the
internal auditors and external auditors did not sceptical to acquire full disclosure of
transactions and challenge the top management of Enron. Besides, there are also lack of
knowledge to understand what the business is going on by Enron because its business
framework is too complex.
The external auditors did not fulfil its responsibility to assure that the financial statements of
Enron is true and fair and did not considered that the public depends on their opinion issued.
Despite that, the external auditors was turned a blind eye to accounting irregularities at
Enron for fear of losing the client and lucrative consultancy fees. At the end, AAs fall over
the edge played out in the courtroom. The firm was found guilty of obstruction of justice by
allegedly destroying documents that were vital to the SECs investigation against Enron. On
appeal, the case was overturned. However, the damage was already done; the firm lost the
majority of its clients and most of its talented employees. Andersens reputation was ruined.
Three auditors from Arthur Andersen responsible for Enron audits lost their Texas CPA
license. (Edelman, 2011)
The fund managers were misled by Enrons aggressive accounting or by sell-side analysts.
The investment fund managers failed to recognise or act on Enrons risks because they had
only limited incentives to demand and act on high-quality, long term company analysis.
While, the non-index fund managers do have incentives to undertake fundamental analysis

however they are typically rewarded on the relative performance. They making biased
judgement to follow the crowd.

The investment banks received large amount of underwriting fees from Enron, the sell-side
analysts working in these investment banks received bonuses for their effort in supporting
investment banking. Enron selectively disclosed its information, and the analysts all were
subject to optimistic bias, in order to receive All-Star ratings to receive higher bonuses and
prestige, analysts reluctant to downgrade a stock that is owned by key institutional clients.
3. What are some of the solutions made regarding to the governance of financial
reporting processes based on the Enron Case?
In search of better accounting standards relevant to the fair value measurement and
recognition.
Sarbanes Oxley Act (2002) aim to protect investors from the possibility of fraudulent
accounting activities by corporations and the external auditors cannot provide consultancy
services to one company at the same time.
A review of the UK Corporate Governance Code which applies to all companies with a
Premium listing of equity shares regardless of whether they are incorporated in the UK or
elsewhere. (Kaplan Publishing, 2015)

Works Cited
Edelman, D. (2011). Journal of Finance and Accountancy. Retrieved from Arthur
Anderson Auditors and Enron: What happened to their Texas CPA
licenses? : http://www.aabri.com/manuscripts/11899.pdf
Kaplan Publishing. (2015). ACCA Paper P1 Governance, risk and ethics. Berkshire:
Kaplan Publishing UK.
Palepu, P. M. (2003). Journal of Economic Perspectives. The Fall of Enron, 3-26.