The external auditors of the company were also at fault as their audit activities were marred by conflict of interest. The external auditors of Enron were Arthur Andersen who received $25 million and $27 million in audit fees and consulting fees respectively from Enron. The management of Enron pressurized the independent auditors in several issues at various points of time. The auditors were also pressurized by an implication that the audit firm could be replaced by the company management.
The audit firm had to show responsibility and independence in general interest as users of financial statements rely on the auditor’s opinion regarding the accuracy and fairness of financial statements. The accounting standards were also quite limited which could not cover the scope of Enron’s long term contracts and as a result of corporate fraud the Sarbanes Oxley Act was enacted to implement proper regulation and oversight of audit firms.
The fraud committed by company management not only caused the bankruptcy of Enron but also caused a loss of billions of dollars of investors, banks and financial institutions and Arthur Andersen which was one of the big five accounting firms was dissolved. The Enron case paved the way for more rigid accounting standards and regulations to curtail similar fraudulent events in the future and protect general interest of shareholders (Knapp, 2008 pp. 3-22).
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