Enron: An Analysis of Auditing Standards

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Enron: An Analysis of Auditing Standards


The Enron scandal was a financial scandal involving Enron Corporation and its accounting firm, Arthur Arthur Andersen. A major portion of the company's profits and revenue were resulted from deals with special purpose entities (SPE) that they controlled, like limited partnerships. Furthermore, the company's debts and losses were not reported in the financial statements. The Enron scandal was revealed in late 2001, ultimately leading to the dissolution of Arthur Arthur Andersen, which was one of the five largest accounting firms in the world at that time. Enron was on the edge of bankruptcy by November of 2001 and filed for bankruptcy on December 2, 2001. After the discovery of the scandal, Enron shares fell from over US$90.00 to less than 50¢. This was a shocking, incomparable, and catastrophic event in the financial world since Enron had always been considered as a blue chip stock.

Enron was an energy company which people would never have thought it would fail. Most of the public believed that Enron was a reliable business as everyone in the world needs heat and electricity. No one had knowledge about the numerous number of audit problems associated with this giant corporation until the Enron-Arthur Andersen debacle occurred. There were flaws in the application of accounting standards which enabled manipulation of Enron's earnings. However, if the auditing standards were applied with due care, Arthur Andersen's audit may have been more effective. Indeed, due professional application of auditing standards is essential since Enron operates in a risky environment in an audit's point of view. The company's stock price had strong reliance on constant access to capital and earnings growth. Furthermore, Enron's stock was used to guarantee various off-balance sheet financing arrangements. For these reasons, the audit risk was extremely high for the...