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Business - Case 2 Accounting for Enron.docx

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Philosophy 2074F/G
Michael Herbert

CASE 2: ACCOUNTING FOR ENRON  The worst of recent corporate corruption scandals. Billions of dollars were lost by investors and thousands of people lost their jobs and their retirement savings when the one-time seventh-largest US corporation went bankrupt, the largest bankruptcy in history at the time, as a result of the fraud created by its highest ranking execs  Enron’s collapse began in 2001 hen some independent stock analysts and journalists publicly raised questions about the value of Enron’s stock  In October 2001, when Arthur Andersen auditors finally reversed their previous decisions and restated Enron’s financial situations, the collapse of Enron began in earnest  Enron’s collapse was mirrored by the collapse of its auditing firm, Arthur Andersen. Once one of the Big 5 accounting firms – driven out of business by its role in the Enron scandal  Andersen admitted that it had shredded thousands of documents related to its Enron audits  Justice department indicted Arthur Andersen on charges of obstruction of justice – found guilty in a criminal trial of obstructing justice by shredding evidence relation to the Enron scandal  Special purpose Entities that were at the heart of the Enron scandal  Evidence shows that Andersen’s auditors had serious concerns about the validity of Enron’s financial self portrait  The discussion focused on Fastow’s conflicts of interest in his capacity as CFO and the LJM manager, the amount of earnings that Fastow receives for his services and participation in LJM  Enron’s activities described as intelligent gambling  Enron was also described as aggressive in the way it structured its financial statements  It’s fair to say that Andersen overestimated their ability to manage the risks of Enron. Several decisions made by Andersen’s professional staff during October proved to be disastrous for the company  Duncan then instructed Andersen employees to shred Enron documents. Duncan has acknowledged that he and others at Andersen were aware of a possible SEC investigation at the time  Watkins became widely known as the Enron Whistleblower as
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