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The Arthur Andersen and Enron Scandal 2011


									                                The Arthur Andersen and Enron Scandal

                           Arthur Andersen and Enron - two names that are forever
                 tarnished because of the events leading up to and including the
debacle of December 2001, when Enron filled for bankruptcy. These two giants in
the utility and accounting industries, and known throughout the world, took advantage of not only
investors, but also the government and public as a whole, just so that those individuals involved could
illegally increase their personal wealth. How could the backlash from the actions of the management of these two
organizations have a positive influence in the accounting industry as a whole? The fallout from Enron’s
bankruptcy and the SEC investigation that followed resulted in many changes to the industry to make
accounting standards tougher, penalties harsher, and the accounting industry more reliable.

Safety Measures in place Prior to the events.
        Prior to the fall of Enron and their accountants, Arthur Andersen, there were many different types
of safety measures in place to help protect the investors and the public as a whole. These safety measures
included Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards
(GAAS), Statements on Auditing Standards (SAS), and all professional ethics.
        During yearly audits performed by external, independent auditors, checks are performed to make
sure that a business is following GAAP consistently. If they are not, then the business must show why they
are not, and present rationale to demonstrate that what they are doing is both ethical and appropriate in
their specific situation. Since interpretations are quite subjective, the American Institute of Certified
Public Accountants (AICPA), added the stipulation that the treatment must also be applied consistently
over time. These rules are in place to make financial statements as accurate and reliable as possible. Enron
took these rules and manipulated them to allow certain individuals within the company to make money
from the increased investments from stockholders. They did this by bolstering their balance sheet with
inflated asset values, and dispersing their liabilities to different divisions of the company…. Meaning that
Enron didn’t include these companies in their financial statement accounts at the end of their fiscal years,
causing massive misstatements. . When Enron declared bankruptcy they had $13.1 billion in debt on
Enron’s books, $18.1 billion on their subsidiaries’ books, and an estimated $20 billion more off the balance
sheets. Enron’s strategy was to have a balance sheet with many intellectual assets, like patents and
trademarks, and that actual assets were bad and should be immaterial when compared to the intangibles.

Overview of the Biggest Accounting Scandal in US History
Changes since the Scandal

        Many accounting firms and independent CPAs reacted to these events and implemented changes in
procedure voluntarily. The biggest change that accounting firms made was a move made by the four
remaining members of the big five, KPMG, Ernst and Young, Deloitte & Touche, and
        The government reacted aggressively when they became aware of the Enron scandal, and a flurry of
legislation and proposals emanated from Congress and the SEC about how best to deal with this situation.
President Bush even announced one post-Enron plan. This plan was to make disclosures in financial
statements more informative and in the management’s letter of representation. This plan would also
include higher levels of financial responsibility for CEOs and accountants. Bush’s goal was to be tough, but
not to put an undue burden upon the honest accountants in the industry (Schlesinger).
        By far the biggest change brought about is the Sarbanes-Oxley Act (Ditman). The Sarbanes-Oxley
Act requires companies to reevaluate it’s internal audit procedures and make sure that everything is
running up to or exceeding the expectations of the auditors. It also requires higher level employees, like the
CEO and CFO to have an understanding of the workings of the companies that they head and to affirm the
fact that they don’t know of any fraud being committed by the company. Sarbanes-Oxley also brought
with it new requirements for disclosures. These requirements included reporting of transactions called
reportable transactions. These transactions are broken down into several categories, which impact every
aspect of a business

            o Enron's shareholders lost $74 billion
                        Stock went from $90/share to less than $1/share
            o Enron closed!
                        More than 20,000 of Enron's employees lost their jobs and PENSIONS
            o Arthur Andersen surrendered its CPA license on August 31, 2002
                        85,000 employees lost their jobs

Overview of the Biggest Accounting Scandal in US History

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