Enron and Arthur Anderson

Enron and Arthur Anderson

Introduction

Arthur Andersen and Enron - two names that will forever live in infamy 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? 

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.  The use of GAAP by accountants is standard protocol.  An accountant follows these principles as a matter of daily routine.  According to Several accounting texts, GAAP is identified as a “dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements.”

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.  This leaves the field open to interpretations of what is appropriate for different situations.  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 circumvented 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 subsidiaries that they just didn't consolidate.  Meaning that Enron didn't include these companies in their financial statement accounts at the end of their fiscal years, causing massive misstatements.  Since these partnerships were, in most cases, wholly owned subsidiaries or partnerships, they should have been shown on the consolidated financial statements with Enron.  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 (Zellner). 

However, in lieu of the lucrative fees being collected by Andersen from Enron these were also overlooked.  In spite of all of these safety measures the wrongdoings at Enron went undetected for a long period of time.  The major problem was that of collusion.  GAAP and GAAS can not prevent fraud when people ...