Enron Scandal External
Enron Scandal
Enron was able to successfully engage in fraudulent financial activities due to the failures of corporate governance practices in addition to other relevant factors. This paper will briefly cover some of these issues and offer suggestions for prevent similar future malpractice.
External Corporate Governance The key external governance failures in the Enron Scandal involve oversights by regulators, creditors, auditors, and investors at large, with particular focus towards Enron’s ambiguous accounting practices. Due to various failed deals and projects, Enron was burdened with billions of dollars of debt. In order to maintain their investment grade rating and alleviate their debt problems, Enron utilized special purposes entities to balance their contracts by using Enron’s stock as collateral. Additionally, Enron implemented mark-to-market practices incorporating expected future cash flows into the present values of their assets (the problem was that their future value estimates were much too high to be accounted for). Regulators, creditors, auditors, and investors should have scrutinized Enron more heavily in order to identify these practices. A significant contributor to the lack of transparency is the role of Arthur Andersen as Enron’s auditor. The auditing firm was also involved in consulting services for Enron, leading to very high conflicts of interest. The auditor of Enron, should have been more independent in order to provide objective assessment, and the aforementioned parties should have been wary enough to investigate the close relationships between Enron and Arthur Andersen. Furthermore, the regulations in place at the time, which allowed SPEs to be implemented in the manner mentioned above along with allowing the gross over-estimations of future cash flows for mark-to-market valuation, failed at fully preventing Enron’s fraudulent practices. The lack of standards for auditing reports, during that time period, was also a substantial
Enron was able to successfully engage in fraudulent financial activities due to the failures of corporate governance practices in addition to other relevant factors. This paper will briefly cover some of these issues and offer suggestions for prevent similar future malpractice.
External Corporate Governance The key external governance failures in the Enron Scandal involve oversights by regulators, creditors, auditors, and investors at large, with particular focus towards Enron’s ambiguous accounting practices. Due to various failed deals and projects, Enron was burdened with billions of dollars of debt. In order to maintain their investment grade rating and alleviate their debt problems, Enron utilized special purposes entities to balance their contracts by using Enron’s stock as collateral. Additionally, Enron implemented mark-to-market practices incorporating expected future cash flows into the present values of their assets (the problem was that their future value estimates were much too high to be accounted for). Regulators, creditors, auditors, and investors should have scrutinized Enron more heavily in order to identify these practices. A significant contributor to the lack of transparency is the role of Arthur Andersen as Enron’s auditor. The auditing firm was also involved in consulting services for Enron, leading to very high conflicts of interest. The auditor of Enron, should have been more independent in order to provide objective assessment, and the aforementioned parties should have been wary enough to investigate the close relationships between Enron and Arthur Andersen. Furthermore, the regulations in place at the time, which allowed SPEs to be implemented in the manner mentioned above along with allowing the gross over-estimations of future cash flows for mark-to-market valuation, failed at fully preventing Enron’s fraudulent practices. The lack of standards for auditing reports, during that time period, was also a substantial