Enron Scandal Case study - Essay Example

Basically those businesses prosper that have implemented systems to enhance the faith of the shareholders via transparency, responsibility and fairness (Raghavan, 2010). Carrying out of ethical business conduct would mean accepting and practicing sound corporate governance. The role of auditors is also vital in bringing good corporate governance (Fan & Wong, 2001). The main objective of the study is to identify the facts that led Enron to financial scandal and brought up to the surface a culture of corruption as well as greed.

The role of the auditors and the corporate governance in such context will also be studied in adequate detail. The study will try to focus upon the main actor involved in the Enron case, the role of the organisation, the legal context and the prevention strategies that could have been followed in order to stop such fraudulent activities from taking place. Enron Case Enron is one of the best examples of unethical business practices conducted in an organisational context. It had been the seventh biggest business house in the United States.

It dealt with ‘natural gas pipeline’ and was based in Houston. It filed for bankruptcy in the year 2001. The company was charged with security related frauds. It was noted that the employees and retirement accounts lost hundreds of millions of Dollars, when the stock price of Enron dropped from its height of US$105 to few cents and subsequently the company was de-listed by NASDAQ (Healy & Papelu, 2003). The company made use of complex and dubious accounting schemes in order to minimise its tax payments, to increase its income and profits, to increase its stock price and credit rating, to conceal losses in ‘off-balance-sheet subsidiaries’ and to falsely manipulate Enron’s financial condition in public reports (Munzig, 2003).

In addition to hurting the confidence of the investors and generating questions regarding the continuity of a deregulated energy market, the crumple of Enron has hurried a complete re-examination of both the accounting industry as well as many other components of the corporate governance in America (Dembinski & et. al., 2006). It was noted that the company violated accounting standards that necessitated at least three percent of the company’s assets to be possessed by independent equity investors.

By violating this requirement, the company was capable to evade the merging of these ‘special purpose entities’. Due to these, the balance sheets of Enron devalued its liabilities and exaggerated its equity and earnings. The company focused on minimum disclosure in relation to special purpose entities (Munzig, 2003). Role of Auditors in Enron’s Case The most significant question surrounding the Enron’s case is that how the Enron’s problem could remain hidden for such a long time. Most of the accusations for failing to realise Enron’s problem has been consigned to the auditor of the company, Arthur Andersen and to the ‘sell-side’ forecasters whose main duty was to work for brokerage, research firms and investment banking (Munzig, 2003).

Role of External Auditors The external auditor of Enron, Arthur Andersen was blamed for practicing lax standards in their audits due to conflict of interest over consulting fees that was created by