Enron

A U.S. *multinational corporation that filed for Chapter 11 bankruptcy reorganization in December 2001. At the time, it was the largest bankruptcy in U.S. corporate history. The uncovering of false accounting and fraud forced Enron to make a write-down of stockholder *equity of more than $1 billion in its *financial statements in 2001. One of the contentious accounting mechanisms used by Enron was a web of *Special Purpose Entities. Some of these semi-independent, off-balance sheet investment partnerships were used to mask debts and losses. These investment mechanisms skirted some of the looser acceptability frontiers of *Generally Accepted Accounting Principles and many were essentially elaborate accounting hoaxes. Enron’s problems exploded in late 2001 and last-minute attempts to arrange for the corporation to be acquired by a rival failed. Following its collapse, Enron has been described as representing "greed and hubris, deceitful accounting, and Wall Street favors" (Fox, 2003, v). The importance of Enron in the history of auditing was the effect of its fall from grace. First, it was a major contributory factor in the demise of the *Big Five external auditing firm *Arthur Andersen (AA). A perception of collusion between the senior management of Enron and AA led to a hemorrhage of AA’s audit clients, the secession of some of AA’s international practices, and the firm’s criminal indictment. Most notoriously, AA’s shredding of literally tons of Enron-related auditing documents left its reputation in tatters. Even worse was to follow, as the Enron accounting scandal was followed by an even larger one at *WorldCom, another AA auditing client. Arthur Andersen itself collapsed in 2002. The second way in which Enron is important to auditing is the effect of its accounting scandal on public opinion. The Enron affair changed the entire climate of auditing, and it led to shifts in the parameters of business legislation and *corporate governance. Words like *Enronitis entered the English language. The most tangible post-Enron changes to corporate governance crystallized in the *Sarbanes-Oxley Act of 2002. Further reading: Baker (2003); Bryce (2002); Fox (2003); Hala (2003); Schwartz and Watkins (2003); Toffler and Reingold (2003) Web site: www.enron.com