Enron's Audit

Essay by nithinUniversity, Bachelor's April 2004

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The auditing profession is a key reason that the United States enjoys the most well developed capital markets in the world. Auditors provide shareholders, lenders, employees, customers, suppliers and policy-markets with the assurance that the financial information provided by companies is reliable. During the past few years, the auditing profession has received unprecedented attention. Andersen's audit of Enron was front-page news, a place where auditors seldom find themselves.

Unfortunately, Enron's success story is nothing but an elaborate scam. Simply put, profits were inflated and debts were concealed as special purpose entities, which did not show up on the balance sheet. Disclosures in Enron's filing with the Securities and Exchange Commission revealed that three previously unconsolidated special purpose entities should have been consolidated in Enron's financial statements based on the Generally Accepted Accounting Principles. Disclosure of the three SPE partnerships is what brought about the collapse of Enron. By creating these entities, Enron was able to draw capital from bank, insurance companies, pension funds, and individuals. Since much of the debt was off balance sheet, Enron was able to protect its credit rating.

It seems to me that Andersen had difficulties in preventing Enron from engaging in fraudulent activities. This is because Enron was creating hundreds of SPEs, which were used for the sole purpose of downloading underperforming assets from its financial statement. Also, Enron often sold assets at grossly inflated prices to their SPEs, allowing the company to manufacture large paper gains that it reported in its periodic income statement. As I learned, auditors are not guarantors or insurers of financial statements. Even for professional auditors, it is extremely difficult to detect well-concealed fraud. However, people tend to believe there is an audit failure when the company fails although an auditor conducted correct audit report.