Downfall of Enron

In: Business and Management

Submitted By Harvardbs
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ENRON

The Downfall of Enron

Introduction

In recent months, the well publicised collapse of Enron has dominated the international financial news. The impact that Enron has had on both the accounting and business world will be long lasting and there is a need for an accounting shake-up. German newspapers have been casting doubts on the long-term prospects of the so-called “Big 5”. Some articles have been sceptical over the remaining “Big 4” accounting firms’ future and see Andersen as the start of a long-term downturn in the accounting world. (“Das Ende der Big 5”, ICN 2002)

Andersens were auditors of Enron until the company’s collapse. They were not only auditors but provided consultancy. This was one of the major factors behind Enron’s collapse, as there were conflicts in their duties. Andersen could have found their fees cut substantially if they did not comply with Enron’s auditing demands. Acconting firms want their consultancy practices to be efficient. Therefore, they want their clients to look as profitable as possible. However, auditors need to provide a true and fair view of the accounts. They must not be tempted to manipulate financial reports. In Enron’s case, thıs duty was neglected. There is a lot of literature on creative accounting and Andersens used some of oldest tricks of manipulation. Enron’s financial reports had hidden liabilities and capatalised many expenses which should have been written off in the year they occured. As a result, profits were largely inflated, which is misleading to investors. Enron used off-balance sheet financing and recognised many long-term contractsto make the business look financially healthier. Andersens had a more astounding way of increasing Enron’s finances. They helped create “bogus” companies and made them loan money to Enron. These loans were treated as income from partnerships and not as liabilities.…...

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