The document provides an overview of the Enron scandal, detailing its origin, the fraud mechanics including deceptive accounting practices, and the subsequent impact on employees and auditors. The scandal culminated in Enron's bankruptcy in December 2001, leading to significant losses for investors and employees, while also resulting in the downfall of Arthur Andersen as a major auditing firm. It emphasizes the importance of ethical corporate practices, effective internal controls, and the auditor's role in preventing such fraud in the future.

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THE ENRON SCANDAL : A SIMPLE OVERVIEW
Alifa Dian Ramadhani
17312391
Review a movie “Enron : The Smartest Guys in The Room" to conclude what exactly
happened in these case | The Enron Scandal.
a. Why the scandal happened
b. What are the impacts of the scandal
c. How to prevent the scandal in the future
d. What can learnt from the case.
[ Determine the correlation of these case with some auditing indicators : Internal Control, IC
Weaknesses, recommendations for substantive procedures,etc ]
Enron Corporation was an American energy, commodities, and services company in
Houston, Texas. It was formed through a merger in 1985 between two energy companies,
Houston Natural Gas and InterNorth. It was founded by a man named Ken Lay that has goal
to build a powerful organisation.
Enron used to be the seventh (7th) largest corporation in United States. However, at the
1997 they started losing money, even accumulating debts. Instead of admitting about what
actually happen, for some reasons the Enron executives considered to take a risky decision
by hiding the losses through ‘accounting tricks’. So that, It will prevent the Enron stock price
went down. Moreover, all of the employees were pushed to put their life savings into Enron
Stock. Since then, the business culture have changed a lot. Early these unethical activities
are accepted by almost or even all the executives including the founder, as they realized
that they were making money. In a period of time, Enron “act” as they were making money
and growing successfully at a rate that no-one have ever seen. Around the year 2000,
Enron becomes a big, fantastic and attractive company for investors; known as one of the
leader in business world.
At the 2001 as the media started wondering whether the Enron is overvalued stock
price, Enron got a big pressure on stock prices which used to be as high possible. They
decided to cash out and started to selling lots of shares. But the prices kept falling until
AUDIT AND ASSURANCE (AA)

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reached at below a dollar in late 2001. Precisely in December 2001 Enron ultimately
announced for bankruptcy. This situation directly impact to the massive employee
retirement, approximately thousands people lost their jobs. In addition, Arthur Andersen as
an auditor, which was one of the "Big Five” at the time, was found guilty of obstruction of
justice during 2002 for destroying documents related to the Enron audit, and finally forced
to stop auditing public companies.
Enron used a variety of deceptive, bewildering, and fraudulent accounting practices and
tactics to cover its fraud in reporting Enron's financial information. But, In my opinion,
maybe i still can believe that Enron ‘might’ actually has initial intent to liquidate some of
their stock, but unfortunately they have too high ambitions on stock price and didn’t
adequately considering the long-term consequences of the business strategy
implemented. We can say that many opportunities, pleasure from the fame and success,
were taken by Enron Executives and founder/owner are really lost ‘only by making the
wrong decision’.
THE EXECUTIVES & FOUNDER (Ken Lay, Jeffry Skilling, Andre Fastow)
THE EMPLOYEES
THE AUDITORS (Arthur Anderson)
THE LAW FIRM (Vinson and Elkins LLP)
The major reasons why Enron failed implementing the strategy:
— Deceptive Organizational Culture
Organizational culture where employees and independent boards / partners may
perform a poor ethical business, tend to feel smarter or better than others and could do
anything they want. This may cause lack of accountability and responsibility.
— Employee Compensation and Appraisal was unfair
Enron implement an “up or out” appraisal system that whoever the bottom 10%
performers were fired automatically, and those who performed well were getting
rewards.
Inappropriate/ Incompetence members & partners which may lead omissions or uncovered frauds.

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— Deceptive Financial Statement and Accounting
Enron presented financial statement in profitability even when it had million of dollars in
debt and losses. They designed the financial statement in a complex format, not easily
understandable, and hide the actual cash flow.
— etc
Enron Corporation, a major American energy trading company that went bankruptcy in
December 2, 2001 owing to the breaking out of its huge financial and accounting fraud
scandal.
All this time, honestly there was one thing that really made me wondering every time I
heard the Enron case, about “how these scandal could occur for many years at that time?”
Some of written sources that I have read before and some points that I can understand
from this film helped me learn about the situation, or the case more clearly.
So, Let’s figure it out and make (a kind of) illustration?!
The ‘accounting tricks’ that used by Enron commonly called as market-to-market
accounting system. Basically, this allow you to recognise revenue immediately rather than
when the revenue is actually occur. So, it may enable you to record profit when you have no
profit..
For example, in this case, look back at the year 2000 when Enron signed a contract with
Blockbuster Company. Enron was recognise over $100 millions in revenue. In the fact,
Blockbuster felt that Enron doesn't seem like they were really earned $100 millions yet they
reported $100 millions in revenue. By the second quarter of 2001, Enron Broadband
Services was reporting losses. So, obviously these contract didn’t work out and Blockbuster
ended the contract.
Some ethical issue and corruption indicated members has Incentives to manipulate —
Accounting system implemented and auditing process is non-compliance with standards —
Those 3 factors indicated a weak internal control system implemented in the organization,—
and may increases detection risk
Errors & frauds which is incurred in this case included Incomplete/inappropriate
disclosure and/or inappropriate management estimate

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There are a number of factors driving this case to occur, as described above. A weak
internal control implemented, poor performance by the members (external & internal)
related to the business, and misuse of standards and regulations. But, the main factor why
this fraud can last for years is because almost all members of the company have a deal and
committed with the external independent bodies, including auditors and legal counsel to
cover up frauds.
The auditor | Arthur Anderson
The auditor should check on Financial Statement to ensure that the company’s position
is fairly represented. The importance of the Auditor is to act as an independent board who
checks, analyses and advises the client, to prevent any fraud and errors, so that the case like
this will never happen. Every public company legally has an audited financial statement. So,
investor can confidently use the report to make a right decision. In this case, Arthur
Anderson as the auditor should have seen ‘red flags’ all over the place if they had done
their job properly. But they weren’t doing it at all, as Enron had paid them and committed
to cover up the fraud.
In this case there’s a number of audit risk identified, such as Andersen, which had the
job not only of Enron's external but also internal audits for the years. Andersen was also
responsible for some of Enron's internal bookkeeping. Moreover, Many of Enron's internal
accountants, controllers, and Chief Financial Officers (CFOs) were former employees of
Arthur Andersen. This may increase inherent and control risk.
Directors should have duty to monitor management's actions, make an authorisation for
some documentations & report. But, after seeing what happened to Enron at the time, this
could not be implemented properly. This may lead an internal control risk, but once again,
the auditor didn’t reveal this fact.
At this point, friends, colleagues or partners elected for the same board together,
creating the potential for conflicts of interest and violating what is supposed to be an
independent. In the wake of Arthur Andersen's involvement with the Enron scandal, the
accounting profession faced a major credibility crisis. The external accounting profession
(especially, the auditing function) and the internal auditing professions have come under
severe public and governmental scrutiny due to a perceived lack of independence and the
failure to protect the public's interest.

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For all risks that should be detected by the auditor, it is important that they carry out a
full substantive procedure. Audit team should maintain professional scepticism and be alert
to the risk of further fraud.
And for each procedure that has been defined, it is important to do a test of control, to
ensure that the implementation of the new internal control will be more effective.
WHAT WE CAN LEARN? | THE PREVENTION
As the founder, executives and employees, it is important to act as a professional member
of the company, maintaining responsibility and accountability.
As the auditor, it is important to act as an independent board as they are designed to
maintain standards in the audit profession.
For example, in the Enron case, the audit profession came under close scrutiny from
investors, business, and regulators and the wider public and as a result comprehensive
changes were made.
As the investor, it is important to ascertain the entity where we will invest. In the Enron case,
they had a very complicated business model that many investors didn’t full understand.
Regulations & Standards [ Accounting & Auditing Rules ]
Recognise the use of the regulations and standards by the company. The regulatory
framework including accounting and auditing standards, laws, ethical and corporate
governance code and other guidance issued by regulatory bodies; provide transparency,
reliability, and objective benchmarks against which the audit/accounting profession’s
performance can be assessed.
Risk Management implemented effectively and prevent any negligent risk management
process.
This review is based on the movie mentioned above, and supported by online research on
the internet.
Thank you,