Content area
Full Text
How the problems took root
In Brief
Accounting Abuses Lead to Significant Structural Changes
The failure of Enron sent shock waves through the economy, resulting in a series of reform and proposals that will significantly change accounting standards setting auditing practice, and the legal and regulatory environment of finanacial reporting. The authors integrate a short history of the rise and fall of Enron with an account of the sham operations carried out and accounted for therein. They also offer a discussion of the analytical procedures that might have revealed the shams, the remedies currently proposed, and the implications of the possible changes for the accounting profession.
The accounting profession is facing a major overhaul because of a credibility crisis. Accountants' overall image has quickly fallen from the top to near the bottom of all professionals. The profession's self-regulatory system is in the process of replacement, and new legislation prohibits certain services to audit clients. Even the issue of who will determine accounting and auditing standards is up for debate.
Why this sudden focus on the accounting profession? The problem arose in part because many executives at Enron and Andersen focused on the "letter of the law" rather than on whether the proposed accounting appeared ethical and "fair." This issue extends beyond Enron and Andersen, as seen in many recent articles in the popular and business press, but understanding the current crisis requires starting with what happened at Enron.
A Short History of Enron
Enron's 2000 annual report stated that its business is
to create value and opportunity for your business by combining financial resources, access to physical commodities, and market knowledge to create innovative solutions to challenging industrial problems.
This unusual business arose from a 1985 merger of Houston Natural Gas and InterNorth. In 1986, Kenneth Lay became the newly created firm's top executive. He later became chairman of the board and hired Jeffrey Skilling as CEO. Under their leadership, Enron adopted an aggressive growth strategy. Andrew Fastow, Enron's CFO, helped create the complex financial structure for the new Enron.
Enron rapidly changed its business from a regulated natural gas company into one of the world's largest energy traders. Enron was, in large measure, an unregulated derivative-trading company. It generated funds...