Enron Case Study

In 2001, Enron, one of the world’s largest public companies, and Arthur Andersen, one of the Big Five public accounting firms, collapsed amid a firestorm of ethical controversies. The collapse can be attributed to a variety of business risks incurred by Enron, independence issues from an auditing and consulting perspective and ill-advised management decision-making.

Business Risks Enron Faced

Enron faced a variety of business risks stemming from aggressive accounting practices that helped lead to the downfall of the company. The biggest financial risk Enron faced was the use of special purpose entities in these aggressive transactions. In these transactions, Enron was borrowing funds without recording the liabilities on the company’s balance sheet. Enron would make the inflow from borrowing funds look like a sale of assets. Another risk Enron faced was backing these “loans” with Enron stock, which posed a significant problem to the financial statements when the stock plummeted, leaving Enron with debt that they were unable to satisfy due to the diminished stock price. Enron faced another risk by handling over $1 billion in transactions on Enron Online, a business model that heavily relied on cutting-edge technology and customer trust to maintain success in the commodities market. When this public trust was broken due to the fraudulent accounting practices that were discovered, trading on the website stopped, further leading to Enron’s ultimate collapse.

Responsibilities of the Board of Directors

It is possible that actions by the board of directors at Enron could have helped prevent the company’s fall. The duties of the board include corporate governance over the policies and objectives of the organization as well as acting in the interests of the owners and users of the financial information. In Enron’s situation, the board of directors could have prevented the fall of the company if they had been better informed of the problems prior to the collapse. The board of directors should have known about the risks and independence issues long before the downfall, especially concerning the numerous SPE transactions. The board should have been aware that such a large portion of operations were devoted to the SPEs and should have checked into any independence or unusual accounting issues from the start. Another strong indicator of an issue would have been Jeffrey Skilling’s resignation after only serving as CEO for six months at his “dream job.” This should have been an immediate red flag to the board that there was an underlying issue behind his resignation.

Auditor Independence Issues

The independence issues that Enron is involved with surround separation of duties. If an auditor