Audit and Party Transactions

1551 words 7 pages
April 21, 2003
The Enron Collapse

Was Enron’s collapse due to a failure in the standard setting process? Why or why not?

The Enron collapse was by no means due to a failure in the standard setting process instead, the collapse resulted from Enron’s fast growing rate and its highly “creative” management team who at one point just lost control of the business. The company stopped doing what it was known for doing best, energy generations, and began exploring and operating in a new and unknown business segment and a new industry. The standard setting process was indeed effective; however management kept finding ways to go around the system. Finally, the collapse can also be attributed to management integrity and Andersen’s failure to detect
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How and why did Enron’s corporate governance system fail? What could have been done to prevent failure?

According to the SIC report, the company’s corporate governance system fail for many reasons including week or nonexistent internal controls, ineffective oversight by various committees of the BOD, and poor communication. The problem in this case was the control environment, which consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity.

The following steps could have been taken to prevent the failure: • Conflict of interest should have been avoided from the beginning. • Fastow should have notified the BOD of Kooper’s involvement in Chewco and requested a waiver since the action violated the company’s Code of Conduct. • Fastow should have been more transparent informing the board regarding the LJM1 and LJM2. • The board should have gotten more involved and raised more questions rather than approving something that was not clear. • Lay and Skilling should have implemented proper controls that would have forced Fastow to request approvals from them for any subsequent change to the Rhythms transaction. • The controls put in place in regards to LMJ2


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