Enron Case Review
Of all the cases of fraud within the business sphere, the Enron case seems the most notorious. Considered the greatest grossing company in the United States, it was delightfully prosperous ad insultingly successful, which could not but raise some concerns about the credibility of the information concerning its income. “At its height, which occurred on August 23, 2000, Enron had a stock price over $90, which gave it a market value of almost $70 billion” (Giroux 1208).
However, the higher the company climbed, the longer and more painful its downfall was. According to the existing data, Enron Corp. was consistently and consciously forging the information concerning its incomes so that it could remain on top of the U.S. charts and be considered the world’s richest corporation. “The stock would trade for less than $1 later in 2001, the debt would be rated junk and the company declared bankruptcy December 2, 2001” (Giroux 1203). As a result, by the end of 2001, Enron shuffled off its mortal coil.
Enron and Management’s Responsibility for Internal Controls
Enron managers neglected their responsibility of verifying the information concerning the annual incomes and losses that the company provides to the corresponding authorities. As the existing definition of managers’ responsibilities states, it is the task of the company’s manager to make sure that the following principle: “accounting information and reporting must comply with generally accepted accounting principles as well as other necessary regulatory requirements” (Kranacher, Riley and Wells 175) should be followed.
In addition, according to Kranacher, Riley, and Wells, a manager’s responsibility for internal controls includes internal controls that “are meant to prevent fraud” (Kranacher, Riley, and Wells 190), which was neglected in the given case. It was clear that the managers had neglected their primary role and provided inaccurate information concerning the company’s annual income on purpose. The key manager’s responsibility was to provide accurate information on the company’s income, which the manager failed to carry out.
Management’s Attempt at Overriding and Colluding to Avoid the Controls
Despite all the despicability of the fraud that Enron Corporation committed, one must admit that the given operation required much effort. Avoiding the state controls and providing wrong information deliberately was extremely complicated, which once again proves that Enron committed the fraud on purpose. It must be mentioned that in the course of the check conducted by the company’s auditor, Arthur Andersen, certain information on secret and fraudulent transactions, disclosing which would have inevitably led to the company’s bankruptcy. However, under the pressure of the head of the company, the auditor did not disclose the given facts of the fraud to the committee, therefore, becoming the contributory infringer.
Therefore, the plot was quite simple; Borget colluded with Andersen to hush down Enron’s shady deals and, thus, retain the company’s high status: “Enron used sophisticated fraud based on complex financial instruments” (Giroux 1208). Though Borget, the company founder, could have easily called the whole process off and made a clean breast of it, amazingly enough, he followed the course set by the auditor. Having the auditor of the Securities and Exchange Commission as an accomplice, Borget managed to avoid being caught red-handed by the members of the Securities and Exchange Commission and, thus, managed to pull off one of the greatest forgeries of the decade.
The Role of External Auditor in Discovering the Fraud
When considering the case of Enron, one starts realizing how important it is that the external auditor should be completely trustworthy and fully independent. The role of the external auditor was pivoting in Enron’s case; unless the auditor was dependent on Borget’s authority, the latter would have not been able to persuade the auditor to offer false data and the downfall of the company would have never started.
However, even the most brilliant forgeries come to an end sooner or later, partially because of the inconsistencies in the data that are revealed later on, and partially because of the enormous ego of their authors, who either crave for more or are foolish enough to leave too many clues behind. The former was Enron’s case exactly; thrilled by the previous success, Borget continued putting his swindling plans to practice, which finally led to the discovery of the Enron fraud. Ironically, it was Borget’s lack of trust in his accomplices that led him to the rapid and shameful downfall: “Borget was interested in diverting cash for himself and accomplices.
There were two sets of books, one real and one for the Houston office” (Giroux 1211). One must also give credit to the external authorities, though; as the case states, they also contributed much to investigating the case and finding the one responsible for the swindle: “The SEC and U.S. attorney’s office investigated Enron, but the focus was on Borget and his cronies” (Giroux 1211).
How SAS No.99 Could Have Been Applied to Detect the Fraud
When it comes to defining the role of SAS No.99 in the given case, one must mention, though, that the Enron case rather spawned a more conscious use of the SAS No.99 rules rather than displayed an effective application of the SAS No.99 principles to detect the fraud. According to the existing evidence, SAS No.99 “emphasizes that a material misstatement of financial information can result from fraud or error; intent will be the determining factor” (Kranacher, Riley, and Wells 176).
In the given case, SAS No.99 could have been applied to detect the intentions of the company director and the auditor. It is, however, necessary to mention that SAS No.99 itself will only help in risks identification, not the fact of fraud itself. However, analyzing the risks that the company faces, one can realize the reasoning behind the choices that the company has presumably made and, thus, discover the fact of fraud.
How Could the Board of Directors and the Internal Audit Staff Have Acted More Responsibly to Detect the Fraud
In a retrospective, however, one must admit that the given instance of fraud could have been prevented; or, at least, the consequences of the given fraud could have been less drastic. For milder consequences, the Board of Directors should have applied the principles of business ethics, which says that the company must provide an honest account of its incomes to the auditor. The Board of Directors should have also taken into account the concept of fiduciary duty, which presupposes that the relationships between the two parties must be completely clear.
As it has been stated above, there seems yet to be no way to stop fraud from occurring, especially within the sphere of business, where large amounts of money and even people’s careers are often at stake. However, grinding and bearing it does not seem to be a way out either. As the example analyzed above shows, fraud will occur even when there seems to be nothing wrong with the company, which means that it is necessary to not only drive the possibility of fraud to nil but also be able to face it and deal with it. Only by being able to recognize the problem, one can develop an efficient plan of handling it.
Giroux, Gary. “What Went Wrong? Accounting Fraud and Lessons from the Recent Scandals.” Social Research 75.4 (2008): 1205–1238.
Kranacher, Mary-Jo, Richard Riley and Joseph T. Wells. Forensic Accounting and Fraud Examination. New York, NY: John Wiley & Sons, 2010. Print.