Information about Enron Case
The issue involving Enron Corporation focuses on professional independence. Enron was a natural gas company that was on the rise to becoming something big when in the 1990s, Kenneth Lay, the CEO of Enron and his subordinate, Jeffrey Skilling began to transform the company into energy trading. They were too focused on having strong earnings performance when they began to use Special Purpose Entities (SPE) to strengthen Enron’s financial condition and operating results. This ultimately led to Enron filing for bankruptcy on December 2001. The issue at stake was who was responsible for this bankruptcy and Arthur Andersen & Co. was one of the main people held responsible.
The condition that was not adhered wo which led to the ultimate problem of Enron filing for bankruptcy is the establishment of professional independence.
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The major risk and impact I believe that happened was the reputation of Arthur Andersen & Co. went down the drain because they were on a high pedestal of honesty and integrity within the world of accounting firms.
The root cause of this issue I believe stemmed from the fact that Enron was driven to becoming the most successful energy trading company which led them to twisting the books and Arthur Andersen & Co. being responsible for a great deal of consulting revenue, their role in Enron’s SPE transactions, and Arthur personnel destroying Enron audit documents.
Recommendation & Reasoning
The five recommendations made involving how to strengthen the independent audit function following the Enron scandal are described in detail as follow. The first recommendation is establishing auditor independence and how auditors should be limited in the scope of non-audit services they provide to clients. I agree with this recommendation because an independent audit agency is easier to keep independent because there would be not benefit of additional profit from the auditing service. The second recommendation deals with establishing more precise statutory requirements that prohibit client executives from interfering with the work of the independent auditors. I would have to agree with this recommendation as well because it would improve the work of the independent auditors because there wouldn’t be the pressure of having the executives looking over the auditors every move. Going off the previous recommendation the third recommendation made is requiring independent auditors to work more closely with the client’s audit committee.
This one I could not agree with more because it would allow both groups to work together and ultimately be more efficient. Working together the company would then know what the auditors want to identify within the company and then receive that information. As for the auditors, it allows them to be up close and personal when analyzing the financial statements of their client and make them aware of any risk or problems that can be resolved. The fourth recommendation given is that audit clients periodically rotate and/or change their independent audit firms. I also agree with this recommendation because if an audit firm worked with the same company for a long period they would become dependent on their profits and their profits would strictly be associated with their client. The last recommendation made prohibits the provision of all non-audit service to audit clients (Knapp, 2018, p. 21).
I partially agree with this recommendation because non-audit services can be a huge profit for firms but, there should be a type of regulation in which the non-services are provided because if you have one company doing all the non-audit services it could lead to writing up the books without a second eye to check. I believe all these recommendations have been implemented except the first recommendation of establishing an independent audit agency.