It is common practice for firms to open their books for inspection by audit companies. The auditors are required to ensure that the records in the books reflect the true situation of the company (Cross & Kunkel, 2012). While most auditors are truthful in their reports, there have been reports of some auditors who collude with companies to defraud investors and deceive the public. Andersen is one of these audit companies as it was found to have lied in its audit of Enron. It was found that Andersen audited Enron in a manner that allowed the former to hide loans from its balance sheet (Cross & Kunkel, 2012). The case of Enron and Andersen highlight the damage that can result from irresponsible financial practices. This essay is a reflection on the insights gained from an article by Noe Cross and Robert Kunkel who explore the impacts of the Andersen-Enron scandal.
Actions responsible for Enron’s bankruptcy
There are a number of actions that pushed Enron into bankruptcy. One, the failure by Enron to report the loans in its balance sheets shares the blame for the bankruptcy (Cross & Kunkel, 2012). Had the company been honest with its shareholders, perhaps some measures would have been instituted to protect it from bankruptcy. Two, Enron shredded records in an effort to hide the malpractices. This led to investors losing confidence in the company and downgrading it (Cross & Kunkel, 2012). The ultimate result of the investor defection is that Enron became unable to honor its obligations and was forced into bankruptcy.
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Accounting and auditing practices amounting to fraud at Enron
Several auditing and accounting practices are responsible for the fraudulent activities as Enron. Inconsistent reporting of financial activities is one of these practices. Enron set up companies that allowed it to secure credit but failed to record this in its books (Cross & Kunkel, 2012). The other activity regards the failure by Andersen to report the inconsistencies. Andersen understood that Enron’s financial reports did not accurately represent the company’s position yet Andersen proceeded to issue a clean bill of health. Following revelations that Enron had lied in its reports, the company was forced to issue new reports which indicated that it has misled investors and the public about its earnings in the previous years (Cross & Kunkel, 2012).
Ethical environment leading to the fraud
It appears that the ethical environment at the time that fraud took place at Enron did not facilitate integrity and accuracy in financial reporting. It is argued that it was difficult for audit firms to identify any irregularities in the financial reports of companies (Cross & Kunkel, 2012). This suggests that the ethical environment allowed companies to lie in their financial reports. The very fact that Andersen and Enron colluded to mislead investors and the public points to the fact that the ethical environment lacked safeguards to prevent fraud. This lack of safeguards is further evidenced by the enactment of the Sarbanes-Oxley Act which introduced tighter controls on audit companies (Cross & Kunkel, 2012). It seems that the government understood that the ethical environment at the time could not guarantee integrity.
Impacts on Enron’s bankruptcy on competitors
In the article, Cross and Kunkel focus on the impacts of Enron’s woes on its competitors. They noticed that Enron’s bankruptcy presented good tidings for the competitors. Other companies in the energy industry in which Enron operated reported boosts in their market capitalization (Cross & Kunkel, 2012). Cross and Kunkel argue that this was a direct result of Enron’s bankruptcy. The competitors anticipated Enron’s bankruptcy following reports of financial misconduct. With the bankruptcy of Enron which posed a threat to other firms in the industry, the number of competitors was reduced (Cross & Kunkel, 2012). This afforded Enron’s competitors the opportunity for growth.
Lessons about the auditing process
There are a number of lessons that I have gained from the article about the auditing process. One, I have learnt that this process is important for boosting investor confidence. When investors receive confirmation through the audit process that a firm’s books are accurate, there is a boost in their confidence. The second lesson that I have learnt is that integrity is key to accuracy in auditing. The case of Andersen and Enron highlight the devastation that can occur when auditing is not conducted with integrity.
In conclusion, the collapse of Enron is one of the greatest disasters to hit the American market. This collapse was the result of recklessness and fraud. Enron could have avoided the scandal that preceded its collapse by being honest in its reporting. Andersen also receives blame for its failure to report the inconsistencies in Enron’s records. This case should serve as warning to other companies about the impacts of fraud and inaccurate auditing.
Reference
Cross, N. J., & Kunkel, R. A. (2012). Andersen Implosion over Enron: An Analysis of the Contagion Effect on Fortune 500 Firms. Managerial Finance, 38 (7): 678-688.
