Business Ethics and Corporate Governance, Second Edition

AUDIT FAILURES LEADING TO CORPORATE SCAMS

In December 2001, in what is termed as the biggest bankruptcy in US history, Houston-based transnational trader of natural gas and power, Enron Corporation, filed for bankruptcy under Chapter 11, and downward restatement of earnings of $500 million. Enron was believed to have created a Special Purpose Vehicle (SPV) which involved setting up partnership firms to mask its losses.

The mega corporation’s auditor, Arthur Andersen, the fifth largest audit and consultancy firm worldwide and a member of the Big Five league, also faced investigation by the Securities and Exchange Commission (SEC) for fudging official documents and for not being able to detect accounting jugglery undertaken by Enron. However, Arthur ...