The lessons for auditors and regulators from Enron fraud Essay

The lessons for auditors and regulators from Enron fraud - Essay Example This paper concerns the auditing as an investigative process performed to verify the reliability and accuracy of a company’s state of affairs for the last fiscal period. A comprehensive and authentic audit report adds to shareholder values and assists the company’s stakeholders to analyse how the management has responded to their financial interests. In addition, business decisions of third party stakeholders such as banks, other lending institutions, and investors are centred on the company’s annual audit report. It seems that even a well structured audit programme may fail to provide desired outcomes unless the whole audit team pays special attention to each and every phase of the audit process. The past decade witnessed a series of corporate scandals including Lernout & Hauspie, Arthur Anderson, Enron, WorldCom, Parmalat, Peregrine Systems, Rite Aid, and Homestore.com. Subsequent investigations have proven that majority of those failures were attributable to a ccounting fraud. However, these incidents greatly increased the significance of audit work and firms nowadays allot more money for developing internal control systems. Many of the economists argue that weaker corporate governance structure also greatly contributed to those corporate failures. As a result, organisations are vehemently trying to improve their corporate governance framework. Evidently, audit firms have made strategic amendments to their processes and procedures to detect frauds and errors in the account books of the client on time. This paper will analyse the lessons that auditors and regulators must learn from Enron Fraud. Enron Scandal: Overview In 1985, The Huston Natural Gas integrated its natural gas pipeline companies with those of InterNorth under the supervision of Kenneth Lay to form Enron. The Enron became the North America’s largest natural gas dealer by 1992 and the company’s gas contracts trading operations significantly contributed to its ma rket dominance. The firm’s stock rose by 311% during the period 1990-1998 and its market capitalisation went over $60 billion by the end of the year 2000. This unimaginable growth assisted the company to be rated as the most innovative huge company in Fortune’s Most Admired Companies survey. Unlike other corporate giants, the Enron had not published its balance sheet along with statement of earnings and this practice persuaded financial analysts to explore the company’s sources of income. Despite the explanations given by the company officials, Enron’ stocks started to fall in 2001 mainly due to its indecipherable nature of business and vague accounting practices. Following the stock level declines, the company faced a series of challenges including restructuring losses, the US Securities and Exchange Commission (SEC) investigation, liquidity issues, and credit rating downgrade. The Enron scandal was revealed in October 2001 and it gradually led to bankru ptcy. Reports indicated that Enron scandal was the biggest audit failure at that time. Jeffrey Skilling, the former President, CEO, and COO of the Enron Corporation, misled the company’s stakeholders through special purpose entities, accounting loopholes, and unsupported financial reporting practices and therefore they (stakeholders) were unable to identify debts resulted from failed deals and projects. These deceitful practices assisted the company to exaggerate its profit figures and thereby unfairly retain the trust of its shareholders. Andrew Fastow, the Chief Financial Officer, and other executives misled the Enron’s board of directors and also forced Andersen to neglect the issues. As per reports, the Enron shareholders lost nearly $11 billion when the company’s stock price fell from US$90 per share in mid-2000 to less than $1 in late-2001 (World News Inc, 2012). Following this issue, the U.S Securities and Exchange Commission commenced an investigation to bring out the actual reasons behind this