Enron Case Study

In March of 2002, Arthur Andersen, one of “The Big Five” accounting firms was tried in court for the destroying of various documents that hindered the SEC’s investigation of Enron. Located in Houston, Enron was a US based energy company.  From the 1990’s and into the early 2000’s, Enron used deceitful ways to raise their stock prices and inflate revenues.  This paper aims to give a full understanding of the fraudulent crimes as well as unlawful business ethics of Enron.        

        In charge of handling the auditing of Enron and oversaw the company’s accounting or financial information was Arthur Anderson.  They were one of the largest companies in the world, with over 86,000 employees worldwide.  Andersen’s Houston location was in charge of handling the audits as well as the consulting practices for Enron.  This is the origin of the problem that leads to the major change in accounting standards.  Andersen had a huge conflict of interest because they handled both the audits and the consulting of Enron.  By doing this for Enron, Andersen received 25 million for their audit service and 27 million dollars for annual service fees.  Andersen was also in charge of all consulting for Enron.  This meant that they helped Enron earn profits and run a successful business by giving them professional advice.  Andersen would then receive the yearly consulting fees if Enron met their projected incomes.  Due to the fact that Andersen was in charge of validating Enron’s financial statements, Enron had the means to continually present misleading financial records because Andersen wanted to keep getting the significant revenue from Enron.  Several examples of the issues Andersen allowed to occur in the financial statements dealt with; special entities, derivatives, mark-to-market accounting, and revenue recognition.  Enron’s management put pressure on Andersen’s auditors to defer the recognition of charges from special purpose entities, which allowed them to hide their debt.  The truth about Enron’s actual financial standing finally came to the service and the SEC began an investigation into the company.  Once Andersen was made of aware of the investigation, they began disposing several tons of relevant documents.  Additionally they deleted emails and erased computer files in an attempt to cover up the fraudulent actions.  Due to these actions Andersen was convicted of obstruction of justice by the US Supreme Court and forced to forfeit its license.  This ruling would ultimately be overturned but once they were convicted of obstruction of justice, they lost all credibility and the firm dissolved.  Andersen did have internal structures in place to avoid conflicts of interest from happening. However, the enticing incentives that Andersen received for these unethical decisions proved to be too great, thus leading to the need for significant changing in the financial reporting industry.