Reference no: EM132892397

The story of Enron really has two plot lines. The first story is of Enron, a huge company that grew from modest beginnings as an energy producer and pipeline business to a global trader of intangible assets - primarily as an intermediary for trades of energy contracts. When market conditions changed Enron was caught up in a downfall that was exacerbated because the company had violated accounting rules and misrepresented itself in the financial markets.

The second plot lines deals with the public accounting firm, Arthur Andersen. Individuals at Arthur Andersen made some mistakes in the audits of Enron. We will never know whether those mistakes were simple errors of professional judgment (known as negligence) or whether they would have been judged constructive fraud or actual fraud because of knowledge or more active involvement in Enron's activities. Whether Arthur Andersen auditors had an appropriate level of independence and objectivity is also a question.

In addition to problematic behavior on the part of individual auditors, the public accounting firm of Arthur Andersen was found guilty of felony obstruction of justice related to the firm directing and sanctioning the process of destroying information while knowing it was wrong to do so. The evidence destruction occurred during a period of time when Enron was being informally investigated by the SEC and the audit partner knew about the investigation. Because of the felony conviction, after designing mechanisms for a period of transition, the SEC refused to accept financial statements of public registrants that had been audited by Andersen. In this same general time frame, WorldCom, also an Arthur Andersen client, filed for bankruptcy. You may be surprised to know that the entity known as Arthur Andersen still exists. Although it no longer performs public accounting services, it still manages issues of the dissolution of the firm and various lawsuits. One of the developments that occurred after Arthur Andersen's name dropped out of the public view is that its felony obstruction of justice charge was overturned by the United States Supreme Court.

Problem 1: Try to "connect the dots" between what was happening at Arthur Andersen and Enron, and discuss how each business entity's set of events was separate yet impacted by the other. Discuss the issue of the partner responsible for the engagement being a relative young partner with limited personal power within AA. How might this have influenced his behavior? Contrast this to the role of the quality assurance partner for the Enron engagement.