CASE ANALYSIS 1: ENRON AND ARTHUR ANDERSEN LLP

1. Members of Enron management were the individuals who perpetrated the

financial statement fraud. Given this, why do you think auditors were held
responsible when they are not the ones actually making the fraudulent
journal entries?
First and foremost, an auditors are not responsible for the preparation
and presentation of the financial statements. Auditors are only responsible to
express an opinion about the fairness and reliability of the managements
assertions about their own operations. In the case of ENRON scandal, the
auditors of the Arthur Andersen were still held responsible since from the
very start of their agreement, they had the control over the companys
information and documents, whether to tolerate or reveal the fraud found.
Second, it is the auditors who are supposed to be the representative of
the public to provide increased assurance whether the financial statements
are reliable or not, and the public put confidence to their reports. In this
case, it is true that they are not the ones making the fraudulent entities but
because of their purpose mentioned above, it is their task to uncover any
fraudulent act of the management.
And lastly, Arthur Andersen, as the auditing firm who is responsible of
evaluating and having the Enrons financial statements be true have allowed
the formal procedures provided by the standards in performing audit
disregarded in its transactions with Enron and made them accomplice in
Enrons fraudulent acts.

2. Explain why the consulting fees and importance of Enron to David Duncan
and the Houston office of Arthur Andersen might have affected Duncans
independence, and thus the quality of the audits he supervised.
Mr. David Duncan may had developed close ties with their client,
Enron. Even his office was in an Enron building. And receiving $$$ as his
consulting revenue. But given at that time, there were no standards yet
regarding independence to prohibit the Arthur Andersen, as an auditing firm
to provide different audit and assurance services. Thus, Andersen still had
independence from their client, Enron.
Still, having such high consulting fees, it may bring some confusion to
the public that the auditor has no independence in either mind or
appearance as to its evaluation to the fairness and reliability of Enrons
financial statements. In this case, the way Mr. Duncan perceives his service

to Enron may have some repercussions for his actions, Mr. Duncan was an
advocate for his clients accounting options and him being a client pleaser
wants to continue his well-paid auditing and consulting services.

3. Describe the likely users of Enrons audited financial statements. How

were these various user groups likely affected by the fraud?
Very few people were involved with the scandal of Enron and Arthur
Andersen. However, the effect of the actions these people have made greatly
affected many people including its vast and wide users.
Stockholders: The sudden decrease in Enrons stock price caused
tremendous shock to the companys shareholders wherein they lost a great
value of amount in their investment. Even potential shareholders were also
affected by such decrease in the stock price because they doubted the
integrity of the financial statements reported by the company.

initially reaped tremendous gains from their investments in Enron stock, as

the companys price rose much faster than market averages during the late
1990s. In 2001, as the stock price collapsed, investors lost $70 billion in
market value. Both individual and institutional shareholders were hurt.
Particularly devastated were Enron employees whose 401(k) retirement
plans were heavily invested in their companys stock. Even shareholders
who did not own any Enron stock were hurt, as stock prices fell across the
board in the wake of the scandal as investors doubted the integrity of many
companies financial reports.

Employees: Due to the Enron scandal, many employees lost their jobs and if
ever they will employ to another company their credentials or resumes will
be affected since they will be accused to be involved in such fraud
committed by Enron.

as Enron collapsed. About 4,000 were laid off immediately, with more to
follow. Many saw the value of their retirement accounts flop.

Suppliers and Customers. Some transactions made by Enron to their

customers and suppliers were left unfinished.

The full impact of Enrons collapse on customers is not explored in the case.
Students may speculate that some customers that had signed long-term
contracts with Enron for the delivery of certain commodities were left without
a reliable source.

Creditors. Due to the end of Enrons operation, the unpaid loans were not be
collected anymore. Should they be receiving properties instead of cash, it
will be difficult on the part of the creditors to realize them.
Enron had many creditors. Among the largest were J.P. Morgan Chase and
Citigroup, which had loaned the company millions of dollars to finance its
rapid expansion. The bankruptcy court will eventually determine the full
extent of their losses.
Government. Enron is a known company that generates huge profit and the
sudden fall of its operation made the government suffer in collecting taxes
that will be used in building projects for the public
The government suffered a loss of tax revenue, an erosion of confidence in
its capacity to protect the public interest, and assumed the cost of
prosecuting corporate lawbreaking.
Public.
The community of where Enron can be located experienced
unemployment and it affected their ways of living.
The community of Houston, Enrons home town, suffered the social costs
associated with unemployment, a decline in tax revenue, a damaged
reputation, and a loss of charitable giving.

Arthur Andersen. Arthur Andersens auditors who were not assigned to audit
the financial statements of Enron were also put to humiliation because of the
fraud committed by David Duncan. The employees of Andersen were forced
to be out because they have to stop their practice of profession.
Professional service organizations were profoundly affected by Enrons
collapse.
In particular, Arthur Andersens reputation was so severely
damaged that it was forced out of business, devastating the careers of
employees and partners around the world, most of whom had nothing to do
with Enron. Vinson & Elkins, the outside law firm that served Enron, also
suffered reputational damage.

4. How might the sequential list of frauds perpetrated by Arthur Andersen

clients (Waste Management, Sunbeam, and finally Enron) have affected the
decision by the SEC and federal prosecutors to aggressively seek Arthur
Andersens legal demise?
The SEC and federal regulators were likely suspicious of the overall
audit quality of Andersen as an entire firm because of the sequential number
of high-profile frauds that revealed audit failures by Andersen. That, coupled
with the document shredding, likely led to the conclusion that this audit firm
needed to be stopped before it continued to act in a low quality manner.

References:
Anita Raghavan (2002, May). How a Bright Star at Andersen Burned Out Along with Enron. The
Wall Street Journal. Retrieved June 21, 2016 from
http://www.wsj.com/articles/SB1021425497254672480
Eichenwald, Kurt. (2005, March 13). The last days of Enron. The New York Times. Retrieved
June 21, 2016 from
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Reinstein, A. & Weirich, T.R. (2002, December). Accounting issues at Enron. The CPA Journal.
Retrieved June 21, 2016 from
http://www.nysscpa.org/cpajournal/2002/1202/features/f042403.htm
Thomas, C. William. (2002,January). The rise and fall of Enron. Journal of Accountancy, Online.
Retrieved June 21, 2016 from
http://www.aicpa.org/pubs/jofa/apr2002/Thomas.htm