CASABA, Veronica Andrea C.

BSA 3201

The Enron scandal in early 2001 forever changed the face of business. Enron, the once high flying energy trading
company, was exposed as being little more than a slowly unravelling multi-billion dollar financial scheme. Eventually
Enron cost employees and investors billions of dollars after the company was exposed and forced to go into bankruptcy.
But what made the Enron scandal so compelling was the fact that it brought down accounting giant Arthur
Andersen too. It was a truly amazing situation, a conflation of corporate wrong doing which would change the accounting
world forever.

Arthur Andersen’s Role in the Enron Scandal

Due to the sometimes complex nature of financial matters, many may not be familiar with the details of Enron case or
Arthur Andersen’s role. While Arthur Andersen was not implicated in directly assisting Enron in cooking its books, the
company was found to have been woefully negligent in its role of overseeing and auditing Enron’s financials.

Additionally, Andersen was found guilty of obstruction of justice because it shredded documents related to its audits of
Enron. When the scandal broke, the world was shocked that not only could a Fortune 500 company pull off such massive
fraud, but one of the world’s largest accounting firms looked the other way during the audacious crimes.

The Arthur Andersen/Enron case came to light when Enron suffered a collapse in the third quarter of 2001 that resulted in
the largest Bankruptcy to that point in US history and numerous lawsuits alleging violations of federal Securities laws.
Thousands of Enron employees lost 401(k) retirement plans that held company stock. The controversy extended to Arthur
Andersen, which was accused of overlooking significant sums of money that had not been represented on Enron's books.
Arthur Andersen was later found guilty on federal charges that it obstructed justice by destroying thousands of documents
related to Enron. 

Enron reported annual revenues of about $101 billion between 1985 and 2000. On December 18, 2000, Enron's stock sold
for $84.87 per share. Stock prices fell throughout 2001, and on October 16, 2001, the company reported losses of $638
million in the third quarter alone. During the next six weeks, company stock continued to fall, and by December 2, 2001,
Enron stock dropped to below $1 per share after the largest single day trading volume for any stock listed on either the
New York Stock Exchange or the NASDAQ.

Initial allegations focused on the role of Arthur Andersen. The company was one of the "Big Five" accounting firms in the
United States, and it had served as Enron's auditor for 16 years. According to court documents, Enron and Arthur
Andersen had improperly categorized hundreds of millions of dollars as increases in shareholder equity, thereby
misrepresenting the true value of the corporation. Arthur Andersen also did not follow generally accepted accounting
principles (GAAP) when it considered Enron's dealings with related partnerships. These dealings helped Enron to conceal
some of its losses.

Arthur Andersen was also accused of destroying thousands of Enron documents that included not only physical
documents but also computer files and E-Mail files. After investigation by the US Justice Department, the firm was
indicted on obstruction of justice charges in March 2002. After a six-week trial, Arthur Andersen was found guilty on
June 16, 2002. The company was placed on probation for five years and was required to pay a $500,000 fine. Some
analysts also questioned whether the company could survive after this series of incidents.

The legacy of Enron/Arthur Andersen lives on in various changes to the profession. While prior to this case the
accounting field had been supervised considerably by the Public Oversight Board (POB), after this case came to light SEC
Chairman, Harvey L. Pitt, in 2002 made a series of inquiries about the system of self-regulation in the accounting
profession without consulting the POB. This ultimately led to the POB voting to disband in May, 2002. As a result, the
FASB emerged in the public spotlight as the leader of the system of self-regulation and has taken a significant role in the
reform of accounting rules. In January, 2003, the FASB announced new accounting rules designed to force US companies
to move billions of dollars from off-balance-sheet entities into the companies' balance sheets. The SEC has enhanced its
oversight of the profession, as well.

Some of the 85,000 Andersen workers who lost their jobs in the aftermath launched a new San Francisco-based firm,
WTAS, which avoided audit work in an attempt to distance itself from Enron.

WTAS has grown into an international tax giant, and its leaders have now decided to reclaim the old name as Andersen
Tax.
Its chief executive, Mark Vorsatz, said he knows how crazy the move sounds, but he pointed to research among tax-
service professionals in the US, Europe and China, which found that after 12 years out of business, the Andersen name
had a better reputation than all but three of the largest accounting firms.

Although many respondents surveyed by WTAS said they saw how Andersen could be seen as “a tarnished brand”, more
viewed the firm as “high quality” and “ethical”. The surprising results convinced executives that the rebranding was worth
the risk.

As Enron’s auditor, it was Andersen’s job to ensure that the firm told investors the truth in its financial reports. But in
2001, Enron, a Wall Street golden child for its unbelievable results, was exposed as a “mind-numbingly complex” spider
web of financial manoeuvrings and hidden debts.

Andersen had also benefited from Enron’s millions in the form of consulting services. Some Andersen executives even
took jobs on Enron’s payroll.

While investigators were examining Enron’s accounting issues in 2001, a veteran Andersen auditor ordered a marathon of
mass document shredding. The firm was indicted for obstruction of justice, the first criminal charge in history for a major
accounting firm. Although the prosecution was dropped in 2005, the damage to the brand was done.

In a letter to clients sent yesterday, Mr Vorsatz wrote that he planned to “reclaim [Andersen’s] legacy of values”. The firm
has filed for Andersen trademarks across North America, Europe and Asia.

Mr Vorsatz added: “I recognize that discussions about Enron may resurface as a result of this announcement… we
recognise [our] actions are a bold move. We look forward to continuing to work with you as Andersen Tax, and I hope
you share our excitement.”

After the energy firm's collapse, the entire auditing regime needs radical change. A growing body of evidence does indeed
suggest that Enron was a peculiarly egregious case of bad management, misleading accounts, shoddy auditing and, quite
probably, outright fraud. But the bigger lessons that Enron offers for accounting and corporate governance have long been
familiar from previous scandals, in America and elsewhere. That makes it all the more urgent to respond now with the
right reforms.

Sarbanes Oxley and Management Responsibility

In July 2002 the U.S. Congress enacted the Public Company Accounting Reform and Investor Protection Act, also known
as Sarbanes Oxley. By that point there had been a stunning number of corporate accounting scandals, including
Enron, WorldCom, and a developing scandal involving Tyco.
Because many top managers of these companies claimed they had been unaware of the accounting discrepancies,
Sarbanes Oxley required corporate leaders to personally certify the accuracy of their company’s financials.

The rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with
security regulations. The two key provisions of the Sarbanes-Oxley Act are Section 302 and Section 404.

Section 302 is a mandate that requires senior management to certify the accuracy of the reported financial statement.
Section 404 is a requirement that management and auditors establish internal controls and reporting methods on the
adequacy of those controls. Section 404 has very costly implications for publicly traded companies as it is expensive to
establish and maintain the required internal controls.

In addition to the financial side of a business, such as the audits, accuracy and controls, the SOX Act also outlines
requirements for information technology (IT) departments regarding electronic records. The SOX Act does not set forth a
set of business practices in this regard but instead defines which company records need to be stored on file and for how
long. It does not specify how a business should store its records, only that the IT department is responsible for storing
them, according to standards outlined in the SOX Act.

Section 802 of the Act contains the three rules that affect record keeping. The first deals with destruction and falsification
of records. The second strictly defines the retention period for storing records. The third rule outlines the specific types of
business records that need to be stored, which includes electronic communications.

Other Important Components of Sarbanes Oxley

To address the potential conflicts of interest which can arise, Sarbanes Oxley established a variety of requirements which
govern auditing and accounting firms. Some of the notable requirements include auditor reporting duties and a restriction
which prohibits auditing firms from providing non-audit related services to companies which they audit. Provisions were
also put in place to prevent corporate analysts from benefiting from conflicts of interest, including the public disclosure of
any potential conflicts of interest.
The Legacy of a Scandal
The legacy of Enron and Arthur Andersen will live long after the public has forgotten about the scandal. Especially in
light of the 2007-2009 financial crises, lawmakers are likely to continue to keep companies on a relatively short leash.
And in the case that enforcement becomes lax, and the public forgets the lessons learned, there will surely be another
giant corporate scandal to remind us all to remain vigilant.