In analyzing this case, take a lessons learned approach. Do not rehash the details of the Enron collapse and how it happened. Instead, concentrate on how the fraud could have been discovered earlier or prevented. Support your presentation with appropriate references, and present your case using the following structure.
1. Define the problem(s): ( problems cause symptoms—e.g., stress causes the symptom of high blood pressure—often, the symptoms are directly described in the case, whereas the problem(s) usually are not; if necessary, indicate how the problems are related to one another). Make this section brief and succinct—do not rehash the details or have a long history or background section.
2. Analyze the situation: Again, take a lessons learned approach. You might use the following questions as guides.
A. What important internal controls were ignored when LJM1 was created?
B. How might Enron’s harsh Performance Review Committee (PRC) have aided company executives in committing the fraud?
C. The fraud at Enron is one of many major financial statement frauds that occurred in recent years (Qwest, Global Crossing, WorldCom, etc.). What are some factors that could explain why the falsifying of financial statements is occurring so frequently?
D. Suppose you are a certified fraud examiner but enjoy investing in the stock market as an additional source of income. Upon doing research of Enron’s stock, you notice that although its stock has a history of strong growth and a seemingly promising future, Enron’s financial reports are unclear and, frankly, confusing. In fact, you can’t even explain how Enron is making money. Could this lack of clarity in its financial reporting serve as a red flag in alerting you to the possibility of fraud at Enron? Why or why not?
3. Present solutions: Here are a couple of guideline questions.
A. How could the auditors—in this case, Arthur Andersen—have performed their audits and not caught the Enron fraud? Is it possible for a financial statement auditor to form a GAAS-compliant audit and not catch major financial statement fraud? Has GAAS auditing changed enough since Enron to guarantee that all frauds are caught?
B. What other solutions have been or might be implemented to detect and/or prevent a future Enron-type scenario?
Field of study:
Wednesday, October 3, 2018