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Audit

Table of Contents
Question a ..................................................................................................................................................... 2
Question b ..................................................................................................................................................... 3
Question c ..................................................................................................................................................... 4
Question d ..................................................................................................................................................... 6
References ..................................................................................................................................................... 8

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Question a

The incentives and the bonuses as in the cash form or as stock options, in huge amount, were
provided to the employees of Enron. It was provided to those employees considers who were
good performers. Due to this fact, the competition in the Enron increased. There is hurry for
getting every deal inside Enron. Since after finishing any deals, they have their portion of
bonuses, irrespective of the nature of the deals. Due to this reason, there were many projects
completed in Enron without any follow-ups. The employees do not want to share the
responsibility of a finished deal or wish to share the bonuses for every project (Jickling, 2003).

The employees of Enron were very aggressive, mainly because of the performance review
committee. Thus, it leads to inappropriate cooperation between the employee of Enron. This
review committee in Enron gives to the rating for employees between 1 to 5, and 1 means the
highest rating, the person getting one means getting the big amount of bonus. Again if the rating
is 5 or 6, that means that particular employee is not suitable for Enron culture. That particular
employee should keep in their mind that they have to quit the company very soon.

Special Purpose Entity

To fabricating the profit and to hide the losses, a large number of SPE's employed by Andrew
Fastow. Among the SPE's Chewco, LJM1, LJM2and Raptor are main. There was a critical case
of debt-hiding. When this case of debt-hiding occurred in the company, The shares of Enron
company start failing down its value. As a result, Enron's stock prices start falling. A severe
consequence of this event is that several SPE's gets collapsed. It is necessary for any SPE to
exist legally, they should satisfy three requirements. (1) minimum 3% of the equity should be
given by outsiders. (2) Enron should not control the entity. (3) Loans and liabilities are not
the responsibility of Enron. It has been observed by some investigators of Enron that the SPE's of
Enron are not independent but they dependent on employees of the company (noch, 2004).

Key players

Very bright and talented employees are assets of Enron. Those employees are so smart executive
in comparison to another employee that, other employees think that they can hide all types of

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crime. Jeffrey Skilling is one of such bright employee, who used to manage the accounting in
Enron. His contribution to the company is launching the EnronOnline.

The Chief Financial officer of Enron was Andrew Fastow. His innovation for the company is
Special Purpose Entities like LJM1, LJM2 etc., The complicated financial structures created
by him, that fabricated the losses and debts of Enron.

The head of the failed business of the Enron was Rebecca Mark, who govern the Enron
International and Azurix.

Question b

Some of the projects of Enron were included such as $3 billion power plant in Dhabol, in India
and Azurix on the acquisition of Wessex water. Rebecca also used the Jet plane of Enron for
her world trips. Some of the executive of the company mention that company has to pay around
$60,000 whenever she attained a meeting.

Again one of the major roles played by the Chairman and CEO of the company Keneth Lay, in
the event of company's bankruptcy. He is so busy in socializing including his family that a huge
amount of company's asset used for that purpose. All of these above mention persons used
company' jet for personal uses. The CEO of the company also engages in the conspiracy and
fraud of the company, so that the downfall of the company not get noticed. Due to bankruptcy
near about 21,000 of the employee of Enron suffered. Before declaring ring the bankruptcy in
Enron, in last four years, the shareholders of the company lost about $74 billion. About $ 40-45
billion can get traced back, after the event. Again about 20,000 employees of Enron win a case
against the company, i. e., of amount about $ 85. This is against $2 billion pension amount of
the employee of the company (Cuong, 2011).

Again, some people lost their income, as such. Due to the loss of pension, the employee of the
company lost their security, also the responsibility to feed their families. After the scandal of
Enron, the Sarbanes –Oxlay Act started in the federal of USA. This acts deals with the ways to
regulate public boards of a company, the management, also firms that deal with public funds.
Also, there was a recommendation nominate some independent directors. Also to nominate the
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compensation company within the structure of a company. Also, the recommendation is to have
financially educated people in the audit committee; they should have the expertise.

Andy Fastow and his wife both pleaded guilty, and they reimburse by unusual dealing. Andy
Fastow gets a sentence of 10 years. Also unusual charges against Skilling and other executive
members of Enron. The advocates of this case so impressed by the performance of Andy, that
his final sentenced get shortened by six years at stake (Lemus, 2014).

The jury member of this case against Lay and skilling returned their verdict, on May 2006. Lay
was convicted for securities and wire Freud cases, total six charges, and have imprisonment for
45 years at a stretch. He suffered from a heart attack, and died after 41 days, in Aspen. This
happens before his actual presentment gets started. Again there are 28 cases against Skilling,
and he charged for 19 cases, including the cases of security and wire fraud. He got sentenced to
24 years and four months in jail.

As a consequence of this cause, some acts were framed, morally questionable, for all the
executives and traders. The employee of Enron gets paid partially which motivate the workers
of Enron morally. This culture of Enron influenced the competitions of other company as a
result.

Question c

The board of directors of the company is the main corner stone of decision making for the
company. They are like the pillar of a strong building. If the board of directors is weak, then the
company will not be able to survive in this fiercely competitive market. The board of directors is
made of a group of professionals who are meticulous in their field. They have to look at all the
dimension for the proper and smooth running of the company (Dibra, 2016). The major
responsibility of the board of directors is to maintain the legal liabilities for the company. In the
board of directors, one law professional must be there to suggest the appropriate measures. The
compliance with all the legal matters of the company should be monitored by the law
professional. Another responsibility of the board of directors is to monitor all the financial
matters of the company.

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The financial and business transaction those are occurring in the company should be monitored
by the board of directors for the proper implementation of the program me. The Business growth
should also be looked after by the board of director. The decision of the stakes and investments
should also be taken by the board of directors. The overall company growth depends on the
amount of money invested. The decision of this investment is the role of the board of directors.
There is an internal policy of the company which is also formulated and monitored by the board
directors. The Clients and their demands are also handled by the board of directors. After
meeting with the clients, the action plan is formulated, and from that action plan, the work is
distributed according to the competencies of the workers. The Stake holders who invest in the
company are also dealt by the board of directors. The board can improve the corporate
governance of by implementing some stringent policy. The latest technologies like e-commerce
and e accounting can be implemented for the better governance. The assets of the company can
also use properly so that optimization of production can occur from those companies. A policy
like a database management system and proper documentation should be implemented for better
governance. For maintaining the confidentiality, firewall protection should be done. This is the
basic steps that can be taken by the board of directors to improve the governance of the company
(Pramasivan and Subramanian, 2017).

Every company has an audit committee. The audit is one of the most essential for monitoring the
overall standards of the company or the organization. The ethical values and morals are also
considered under the audit. Mainly the companies focus on the financial audits which examine
the financial transaction of the company. Like this in Enron also there was audit team. The audit
team looked after the transactions and the evaluation of the projects that were done in Emron.
The Board of directors should have been more stringent in the monitoring of the financial
matters. The legal compliance should have been checked with the details by the law committee
present in the board of directors. If proper compliance with the financial statements was done,
then this fraud case could have been avoided. The reporting and documentation part is also
another matter which should have monitored well by the board of directors of the company or the
organization. If there were proper documentation or database management, then it would have
been easy to stop the fraudulent.

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Question d

The Audit is one of the essential parts of monitoring the holistic system of the company. The
auditors play a crucial role in the compliance with the financial administrative and other parts of
the company. The different kind of audit performed by the auditors is financial audit process
audit, material audit, project audit and environmental audit. The auditors examine different
aspects considering the minute details. The company or the organization has to produce an audit
report to the stakeholder of the company who has invested in the company. The stakeholder
should be given a clear picture so that brand value of the company can be maintained. In case of
the Enron Company, the auditor who performed the financial audit were given the task to make
compliance with the law so that the company can cover for its fraud case. The incentives were
provided to the employees after finishing the project. The quality of the work was not measured
by the auditors.

The employees finished the project as early as possible for the bonus. The main motive of the
employees was to take the bonus, and the quality of the work was not checked. The monitory
transaction was fraud. The Auditors MR Arthur was pressurized to give a false statement. The
auditor's role is to strictly abide by the audit rules and perform the audit task cleanly. The
auditing professionals should perform a task like a financial audit of the organization or the
company. The financial details of the company transaction should be minutely checked by the
auditing agency or the auditor who is assigned to the job (Jiříček and Dostálová, 2010). The
material and asset audit is also another important point which should be examined by the auditor
very minutely. The assets are very important stakes of the company. The auditor should not be
engaged in other works like maintenance compliance with the law. The law is one of the
essential which should be looked into by a law professional and not by the Auditor. The Auditor
should be professional he should consider the values and ethics. He should not do any duties
which are not in his job description. In this case, the auditor made compliance with the law to the
save the Enron company which was absolutely a crime.

The stakeholder of the company suffered due to the frau transactions made by Enron. If the
Auditor was given responsibility to do the Holistic Audit only then, it should have been right.
Since the Auditor was given the power to do compliance with a law he made a false financial

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report. This false financial report had a huge impact on the stakeholders of the company. After
analysis inference can be drawn that auditor should be professional only perform the duties that
are mentioned in his job description (Archive, 2018).

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References
Archive (2018). INTRODUCTION TO AUDITING. [online] Archive.mu.ac.in. Available at:
http://archive.mu.ac.in/myweb_test/study%20TYBCom%20Accountancy%20Auditing-II.pdf
[Accessed 9 May 2018].

Cuong, N. (2011). FACTORS CAUSING ENRON’S COLLAPSE: AN INVESTIGATION INTO


CORPORATE GOVERNANCE AND COMPANY CULTURE. [online] Virtusinterpress.org.
Available at: http://www.virtusinterpress.org/IMG/pdf/10-22495cocv8i3c6p2.pdf [Accessed 9
May 2018].

Dibra, R. (2016). Corporate Governance Failure: The Case Of Enron And Parma. [online]
Eujournal.org. Available at: https://eujournal.org/index.php/esj/article/viewFile/7580/7307
[Accessed 9 May 2018].

Jickling, M. (2003). The Enron Collapse: An Overview of Financial Issues. [online]


Royce.house.gov. Available at: https://royce.house.gov/uploadedfiles/rs21135.pdf [Accessed 9
May 2018].

Jiříček, P. and Dostálová, Z. (2010). FINANCIAL MANAGEMENT. [online] Vspj.cz. Available


at: http://www.vspj.cz/ISBN/Skripta%20-%20V%C5%A0PJ/Financial%20management%20-
%20Petr%20Ji%C5%99%C3%AD%C4%8Dek,%20Zde%C5%88ka%20Dost%C3%A1lov%C3
%A1.pdf [Accessed 9 May 2018].

Lemus, E. (2014). The Financial Collapse of the Enron Corporation and Its Impact in the United
States Capital Market. [online] Globaljournals.org. Available at:
https://globaljournals.org/GJMBR_Volume14/3-The-Financial-Collapse-of-the-Enron.pdf
[Accessed 9 May 2018].

noch, S. (2004). Andersen's Role in Enron's Failure. [online] www.researchgate.net. Available


at: https://www.researchgate.net/publication/313607848_Andersen's_Role_in_Enron's_Failure
[Accessed 9 May 2018].

Pramasivan, C. and Subramanian, T. (2017). Financial Management. [online] Qu.edu.iq.


Available at: http://qu.edu.iq/ade/wp-
content/uploads/2016/02/financial_management_www.accfile.com_.pdf [Accessed 9 May 2018].

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