"Audit Project - Enron 1Audit Project - EnronNameCourseTutorUniversityCity/StateDate Audit Project - Enron 2Audit Project - Enron In this report, I have been asked to search in the internet for any failure, looser, or acompany that faces financial, managerial, or organizational difficulties no matter where it isand tell when the case happened and then discuss about the role of management, internalauditor, and external auditor in that case. For my analysis I have found information aboutEnron. Essence, Nature, or Problem of the Company Problem or scandal of Enron is one of the famous scandals in the history ofbusinesses. (Wikipedia, 2015) The nature of the problem has multiple dimensions. Theproblem of Scandal was managerial, financial, and organizational at the same time.Enron was established about 30 years before in year 1985. It was established inUnited States of America. Jeffrey Skilling and Kenneth Lay were the persons who foundedEnron. If we discuss about the nature of the business of Enron, mainly the business of Enronconsisted on energy, commodities, and service. Enron was one of the well known companiesof United States of America and was considered as one of the top innovative companies. Theperiod of late 90s of previous century was a golden era for Enron as it was expanding itsbusiness. During the period, Enron continued the process of building new power plants aswell as continued to operate the lines of gas. Besides this, Enron also started trading businessof gas and electricity for which Enron became famous within very short time.(Li, 2010) Collapse of Enron or the problem was revealed in the month of October of year 2001.Till 2001, Enron was one of the leading companies of the world in the field of gas, electricity,paper, pulp, and communications. In year 1995, the revenues of Enron were 9 billion USDwhich increased to 100 billion USD in year 2000. But, in year 20001, Enron was bankrupted.It was the year 2001 when it was revealed that a systematic, institutionalized, and well Audit Project - Enron 3planned accounting fraud has taken place in Enron. (Li, 2010) When there is a planned andsystematic fraud at the organizational level then we have to say that the said organization isfacing a managerial, financial, and organizational problem at the same time therefore it ismentioned in the start of this report that Enron faced a managerial, financial, organizationalissue at the same time because the reason behind the accounting fraud was that Enron wasbecoming financial weak in reality, there were weak managerial practices, and weakorganizational structure and control which allowed the characters of the scandal to do such ahuge scam.(Free, Macintosh, & Stein, 2007) There were different causes behind the problem / scandal like; lack of truthfulness,conflict of interest, reputation of audit firm Arthur Anderson and Enron, and loopholes in theaccounting rules and regulations which were manipulated by the management. Managementof Enron was really frightened of the financial health of Enron; therefore, the managementhidden the truth in financial statements about the actual financial health of the company.There was conflict of interest, as well as the lack of over sighting of management by Enron’sboard. There were two big accounting regulation loopholes which were manipulated by themanagement of Enron; the Mark to Market and Special Purpose Entity. (Li, 2010) There was key role of management, internal auditors, and external auditors which isdiscussed in the following graphs: Role of ManagementIn this case, the management, internal auditors, and the external auditors had the keyrole. We have to understand that whatever the issues or problems created in an organization,management has key responsibility or role in it. In this case, the board’s chairman KennethLay, Chief Executive Officer Jeffrey Skilling, and Chief Financial Officer Andrew Fastowhad the main role as they were one who were jointly responsible for the running of Enron. Audit Project - Enron 4Especially Chairman and the Chief Executive Officer were responsible for this scam becausethey were the one who allowed the then Chief Financial Officer to commit accounting fraud.(Li, 2010) The chairman and the Chief Executive Officer allowed the Chief Financial Officerto secretly develop private institutions and then transfer the property illegally. Themanagement committed crime of malfeasance. The management of an organization isresponsible to protect the organization from the hazards and prevent frauds. But in this case,the managerial and organizational structure of Enron was so weak and had such people on thekey positions of Chairman and Chief Executive Officer who instead of preventing fraud,ordered the employees of Enron to follow the instructions of Chief Financial Officer andcommit the accounting fraud. (Free, Macintosh, & Stein, 2007) In order to operate the organization successfully and achieve long term sustainability,it was necessary for the management of Enron to take measure to increase its business andcontrol costs to improve the performance and profitability of Enron but instead of takingmeasures to improve the performance and profitability of Enron, the management hidden thepoor performance of Enron and made false disclosures about the operations and financialposition of Enron. Good practices of management of a company improves the reputation ofthe company but in this case, in reality the management of Enron worked against this normand allowed a fraud to occur which ultimately halted the reputation of Enron seriously. (Li,2010)Role of Internal Auditor As for the role of internal auditors of Enron is concerned in this particular case, it isthe responsibility of the internal auditors to ensure that accounting regulations are dulycomplied according to their true essence. It is also the duty of internal auditors to ensure thatthere are effective policies formulated to control and prevent any issue whether it is fraud or Audit Project - Enron 5any other managerial or organizational issue. One step ahead, it is the responsibility ofinternal auditors to ensure that the policies formulated to control and prevent any managerialor organizational issue are implemented accordingly. (Farrell & Franco, 1999) It is also theresponsibility of internal auditor to ensure a healthy corporate culture. If there are anydiscrepancies, it has to incorporate these in their periodic reports. But, in the case of Enron,the internal auditor failed to identify the discrepancies, and failed to prevent the fraud. Theinternal auditors also failed to maintain a healthy corporate culture which was one of themain reasons behind the creation of fraud problem and ultimately the collapse of Enron.(CharteredInstitueofInternalAuditors, 2015) Role of External AuditorThe major role in the problem / issue of Enron was of the External Auditors ArthurAnderson. Arthur Anderson was one of the 5 top and largest audit firms of United States ofAmerica and was the external auditors of Enron for the last sixteen years. The role ofAnderson was that it overlooked huge amounts which were not recorded in the books ofaccounts of Enron. Enron recorded millions of dollars as equity which was actually operatingexpenses. Arthur Anderson overlooked and allowed the Enron to Capitalize the OperatingExpenses. It is the responsibility of the external auditor to ensure that the GAAP principlesare followed with their true essence but in this case the external auditor did not played its roleand failed to ensure the applicability of GAAP principles with their true essence. (Norris,2002) The external auditor must have to analyze the practices of the management in terms ofethical values and integrity while planning the audit, the external auditor also have to analyzethe nature of over sighting of audit committee and the board. But Arthur Anderson failed toanalyze the practices of the management in terms of ethical values and integrity while Audit Project - Enron 6planning the audit, the external auditor also failed to analyze the nature of over sighting ofaudit committee and the board. (Free, Macintosh, & Stein, 2007)Conclusion This case provides great lesson for everyone especially for the one who is going towork as a manager in future. Through this case we can learn the importance of the role ofbuilding a strong organizational culture. The role of the management of Enron wasconspicuous in developing the culture of Enron. The management had hidden the poorperformance of Enron and made false disclosures about the operations and financial positionof Enron. The internal auditor failed to identify the discrepancies, and failed to prevent thefraud. The internal auditors also failed to maintain a healthy corporate culture which was oneof the main reasons behind the creation of fraud problem and ultimately the collapse ofEnron. The role of Anderson was that it overlooked huge amounts which were not recordedin the books of accounts of Enron. Arthur Anderson overlooked and allowed the Enron toCapitalize the Operating Expenses. External auditor did not play its role and failed to ensurethe applicability of GAAP principles with their true essence. Arthur Anderson failed toanalyze the practices of the management in terms of ethical values and integrity whileplanning the audit, the external auditor also have to analyze the nature of over sighting ofaudit committee and the board in the case of Enron.Audit Project - Enron 7BibliographyCharteredInstitueofInternalAuditors. (2015). What is internal audit? Retrieved 09 04, 2016, fromiia.org: https://www.iia.org.uk/about-us/what-is-internal-audit/Farrell, B. R., & Franco, J. R. (1999). The Role of the Auditor in the Preventionand Detection ofBusiness Fraud. Western Criminology Review , 2.Free, C., Macintosh, N., & Stein, M. (2007). MANAGEMENT CONTROLS: THEORGANIZATIONAL FRAUD TRIANGLE OF LEADERSHIP, CULTURE AND CONTROL INENRON. Ivey Business Journal .Li, Y. (2010). The Case Analysis of the Scandal of Enron . International Journal of Business andManagement , 37-41.Norris, F. (11 01, 2002). Did Enron's Auditors Think They Had Something to Hide? Retrieved 09 04,2016, from New York Times: http://www.nytimes.com/2002/01/11/business/did-enron-s-auditors- think-they-had-something-to-hide.htmlTysiac, K. (18 11, 2014). Defining roles in prevention of financial reporting fraud . Retrieved 09 04,2016, from CGMA:http://www.cgma.org/magazine/news/pages/201411371.aspx?TestCookiesEnabled=redirectWikipedia. (2015). Enron scandal. Retrieved 09 04, 2016, from wikipedia:https://en.wikipedia.org/wiki/Enron_scandal "