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It is expected that the accountancy profession would play quite an important role in scandals such as Enron, Xerox, and Worldcom, as all they all deal with the financial accounts not showing a true and fair view the company. Hence it is the role of accountants to prepare and check the financial statements. Therefore I feel that in the essay it is worth analyzing who exactly in the accountancy profession was responsible for each action in scandals, and show how 'accountants move easily from watchdogs in their capacity as auditors to being the architects of clever deals and frauds as CFO's and CEO's. ' (lies damn lies) In the Statement of Auditing Standards 100, published on March 1995, we are told that 'the responsibility for the preparation of the financial statements is that of the directors of the entity'. Therefore the auditor is only responsible to act as a watchdog and make sure that the directors' of the company have prepared the statements in accordance to Auditing and Accounting Standards. Author Andersen LLP (Enron's auditors) were therefore responsible in providing shareholders with 'reasonable assurance' that the financial statements presented a true and fair view of the company's financial position. Consequently one could argue that because they failed to do this that they were entirely responsible, as far as the public is concerned, in Enron's scandal.
The fact that thousands of pages of documents were shredded proves on itself that Andersen was guilty of fraud, as this is a violation of the law and Justice Department. In response to these accusations Andersen stated that their only role in this scandal was to 'express an opinion on the financial statements prepared by the company, ' (accountancy age) and therefore will hold themselves responsible for any errors in the auditing. In addition to this it has been 'publicly acknowledged that there was one error of judgment in the treatment of one partnership' (Accountancy Age). Though in another partnership matter, they have defended their case in saying that they were not provided with the necessary information by Enron.
According to SAS 600 it was Andersen's role to qualify the financial statement, and thus disclaim it if the effect of this limitation of scope was pervasive enough to make the statements as misleading as they were. However the situation was much more complex than this, as it was Enron who prepared the financial statements in the first place. It is believed that the financial statements were prepared in such a way that they would show a profit, and failed to report billions of dollars in debt. This was done to make its stock attractive to unsuspecting investors. As accountants Andersen had an obligation to be neutral in examining the company's financial statements, and making sure that all financial transactions were duly reported. Therefore we should question Andersen's motive to accept such manipulated accounts.
The reason been simple, they were paid $ 52 million last year, hence not only were they been paid for auditing work and consulting services but their role was also 'to make Enron profits and stock prices appear much more attractive than they really were' and therefore become an accomplice in Enron's fraudulent projects. ' (Enron was a corporate icon) An interesting aspect in Enron's account was that Andersen were paid more for consulting than for the actual auditing. This on itself is suspicious, as it can be suggested that the money that was been used to bribe them, was appearing as consulting fees in Enron's accounts. Therefore Andersen found themselves in this agreement with Enron. Enron 'evolved from being a company with rather dull set of physical assets in a regulated market into a financially sophisticated risk management company that shaped its own trading environment. ' (SEP) This was achieved by investing in a large number of risky projects and so the problem arose when its investments and new markets were not proving to be as successful as they thought they would be. Therefore Enron found itself in a precarious situation where they found themselves dependent on their continuing management credibility and creditworthiness. As a result they ended up resorting to the manipulation of financial statements.
The first major fraud was 'Enron's executives apparent use of Special-Purpose Entities (SPEs) to deceive shareholders and to enrich themselves. ' (Accounting issues at Enron) In other words Enron was applying for the loan through the SPEs meaning that these debts would not appear on their financial statements. Not only this but investors were willing to accept a lower interest rate because to them it appeared that the repayment of their loan was a sure thing, since the SPE would have no other debt. Consequently Enron found itself in a situation where they needed to increase the number of SPEs to keep moving debt off the balance sheet and so began using its own stock as a collateral. This resulted in the SPEs recording 'an increase in Enron's stock as income, which would thereby allow Enron to increase income by utilizing the equity method of accounting' (Accounting Issues at Enron). $ 30 million in profits on investments in Enron SPEs transactions was the result of this fraud. (Partners to the end? ) Profits generated from the SPEs were been used in order to structure off-balance sheet treatment of assets and liabilities, meaning that Enron was able to carry such transactions because of the fact that the accounting standards had not kept pace with new techniques in off-balance sheet financing. This meant that off-balance sheet items were been used to keep liabilities of its books.
All this was possible because Enron managed its SPEs by making sure that at least one SPE investor had put up at least 3 % of the SPE's equity. According to the US GAAP this meant that the company could contribute the rest and still qualify for off-balance sheet treatment. In the 1990 s Enron began to take many of its assets and liabilities off its reported balance sheet, because they continued using off-balance sheet vehicles to access capital and to reduce risk. As long as they followed various accounting rules in would not have to reveal many details about these financings.
Enron also resorted to cut-off fraud; this basically consisted of recording revenues early and / or recording expenses and liabilities late. 'According to GAAP, revenue is recognized when the earnings process is complete and the rights of the ownership have passed from seller to buyer' (timing is of the essence). However, the exact techniques used by Enron are unknown, but there are three main ways of illegally recognizing revenue. The method most commonly used was to hold the open books past the end of the accounting period to accumulate more sales, this meant that companies were holding the open books until they reached their target sales, which they might have promised to shareholders. Recording revenue when services are still due and shipping merchandise to private warehouses for storage before the sale is final, and counting the shipments as sales, were two other types of cu...
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