accounting fraud

and auditor legal liability

ca S e S included in thi S Section

4.1 Enron Corporation and Andersen, LLP....89

Analyzing the Fall of Two Giants

4.2 Comptronix Corporation ....................................99

Identifying Inherent Risk and Control Risk Factors

4.3 Cendant Corporation ..........................................111

Assessing the Control Environment and
Evaluating Risk of Financial Statement
Fraud

4.4 Waste Management, Inc..................................119

Manipulating Accounting Estimates

4.5 Xerox Corporation................................................127

Evaluating Risk of Financial Statement Fraud

4.6 Phar-Mor, Inc............................................................137

Accounting Fraud, Litigation, and Auditor Liability

instructor resource Manual do not coPy or redistribute

instructor resource Manual do not coPy or

redistribute

4.1

c as e

enron corporation and andersen, llP

analyzing the fall of two giants

Mark S. Beasley Frank A. Buckless Steven M. Glover Douglas F. Prawitt

in S tructional objective S
[1]

[2]

[3]

To help students understand what happened at

Enron Corporation and how Andersens involvement with Enron led to the accounting firms
downfall.
To enhance students appreciation of the importance of understanding an audit clients
core business strategies.
To develop students understanding of the
role of confidence, reputation, and trust both
in the corporate and auditing professions.

To provide a venue for exploring

professional issues relating to auditor
independence and the provision of non-audit
services for clients.
[5] To introduce students to the current debate on
rules- versus principles-based accounting standards and related implications for the
auditing profession.
[6] To actively involve students in considering the
challenges facing the accounting profession and
in evaluating alternative courses of action for
overcoming these obstacles.
[4]

KEY FACTS

Enron entered the year 2001 as the seventh largest public company in the U.S., only to exit
the year as the largest company to ever declare bankruptcy in U.S. history (until
WorldComs bankruptcy in 2002 later claimed the record).
Enron engaged in very aggressive accounting approaches, including the establishment of
special purpose entities (SPEs), the intent of which appears to have been simply to move
debt off the companys balance sheet and enhance profits.
Enron began as a natural gas pipeline company, when Houston Natural Gas and InterNorth
of Omaha, Nebraska merged in 1985. The company eventually morphed into a speculative
energy and commodity trading company, often acting as a market-maker in electricity
and other markets.
A Northwestern University professor established Arthur Andersen, LLP in 1913. The
company rapidly achieved a reputation for taking tough stands against clients wishing to adopt
aggressive reporting strategies. This reputation was key to the early success of the firm.
Andersens failure was a result of the firms loss of reputation as a result of a long string of
audit failures (including Waste Management, Global Crossing, Sunbeam, Qwest
Communications, Enron, and eventually WorldCom) and of the firms conviction on
federal charges of obstruction of justice.
Financial accounting standards played a role in that some of Enrons questionable
accounting strategies were in technical compliance with generally accepted accounting
principles (GAAP), despite clearly violating the intent of those standards. This ties directly
to the current debate on rules-based versus principles-based accounting standards.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and
Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective
handling of an administrative situation.

copyright 2009 by Pearson education, inc., upper saddle river, nJ 07458

89

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