CaseM1.3M M JustMforMFeet,MInc.M M
1
CASE 1.1M
ENRON CORPORATION
M
Synopsis
ArthurMEdwardMAndersenMbuiltMhisMfirm,MArthurMAndersenM&MCompany,MintoMoneMofMtheMlarges
tMandMmostMrespectedMaccountingMfirmsMinMtheMworldMthroughMhisMreputationMforMhonestyMandMintegrity.
M “ThinkMstraight,MtalkMstraight”MwasMhisMmottoMandMheMinsistedMthatMhisMclientsMadoptMthatMsameMattitud
eMwhenMpreparingMandMissuingMtheirMperiodicMfinancialMstatements.M ArthurMAndersen’sMauditingMphiloso
phyMwasMnotMrule-
based,MthatMis,MheMdidMnotMstressMtheMimportanceMofMclientsMcomplyingMwithMspecificMaccountingMrulesMb
ecauseMinMtheMearlyMdaysMofMtheMU.S.MaccountingMprofessionMthereMwereMfewMformalMrulesMandMguideline
sMforMaccountantsMandMauditorsMtoMfollow.M Instead,MAndersenMinvokedMaMsubstance-over-
formMapproachMtoMauditingMandMaccountingMissues.M HeMpassionatelyMbelievedMthatMtheMprimaryMroleMofM
theMauditorMwasMtoMensureMthatMclientsMreportedMfullyMandMhonestlyMtoMtheMpublic,MregardlessMofMtheMcon
sequencesMforMthoseMclients.
Ironically,MArthurMAndersenM&MCo.’sMdramaticMfallMfromMprominenceMresultedMfromMitsMassociat
ionMwithMaMclientMknownMforMaggressiveMandMinnovativeMusesMofM“accountingMgimmicks”MtoMwindowMdr
essMitsMfinancialMstatements.M EnronMCorporation,MAndersen’sMsecondMlargestMclient,MwasMinvolvedMinMla
rge,McomplexMtransactionsMwithMhundredsMofMspecialMpurposeMentitiesM(SPEs)MthatMitMusedMtoMobscureMits
MtrueMfinancialMconditionMandMoperatingMresults.M AmongMotherMuses,MtheseMSPEsMallowedMEnronMtoMdow
nloadMunderperformingMassetsMfromMitsMbalanceMsheetMandMtoMconcealMlargeMoperatingMlosses.M DuringM2
001,MaM seriesMofMcircumstances,MincludingMaMsharpMdeclineMinMtheMpriceMofMEnron’sMstock,MforcedMtheMc
ompanyMtoMassumeM controlM andM ownershipM ofM manyM ofM itsM troubledM SPEs.M AsM aM result,M EnronM wasM
forcedM toM reportM a
, CaseM1.3M M JustMforMFeet,MInc.M M
2
largeM lossM inM OctoberM 2001,M restateM itsM earningsM forM theM previousM fiveM years,M and,M ultimately,M fil
eM forMbankruptcyMinMDecemberM2001.
DuringMtheMearlyMmonthsMofM2002,MAndersenMbecameMtheMfocalMpointMofMattentionMamongMlawMe
nforcementMauthoritiesMsearchingMforMtheMpartiesMresponsibleMforMEnron’sMsuddenMcollapse.MTheMaccusati
onsMdirectedMatMAndersenMcenteredMonMthreeMkeyMissues.M TheMfirstMissueMhadMtoMdoMwithMtheMscopeMofMp
rofessionalMservicesMthatMAndersenMprovidedMtoMEnron.M CriticsMchargedMthatMtheMenormousMconsultingMf
eesMEnronMpaidMAndersenMimpairedMtheMauditMfirm’sMindependence.M TheMsecondMissueMstemmedMfromM
Andersen’sMallegedMroleMinMEnron’sMaggressiveMaccountingMandMfinancialMreportingMtreatmentsMforMitsMS
PE-
relatedMtransactions.MFinally,MtheMmostMembarrassingMissueMwasMtheMmassiveMeffortMofMAndersen’sMHous
tonMofficeMtoMshredMEnronMauditMdocuments,MwhichMeventuallyMledMtoMtheMdemiseMofMtheMfirm.
EnronMCorporation--KeyMFacts
1. ThroughoutMArthurME.MAndersen’sMlife,M“ThinkMStraight,MtalkMstraight”MservedMasMaMguidingMprincip
leM forMhimselfMandMArthurMAndersenM&MCo.,MtheMaccountingMfirmMthatMheMfounded.
2. ArthurMAndersen’sMreputationMforMhonestyMandMintegrityMresultedMinMArthurMAndersenM&MCo.Mgaini
ngMstatureMinMtheMbusinessMcommunityMandMgrowingMintoMoneMofMtheMnation’sMleadingMaccountingMf
irmsMbyMtheMtimeMofMhisMdeathMinM1947.
3. LeonardMSpacekMsucceededMArthurMAndersenMasMmanagingMpartnerMofMArthurMAndersenM&MCo.MinM
1947MandMcontinuedMAndersen’sMlegacyMofMlobbyingMforMmoreMrigorousMaccounting,Mauditing,MandM
ethicalMstandardsMforMtheMpublicMaccountingMprofession.
4. WhenMSpacekMretiredMinM1973,MArthurMAndersenM&MCo.MwasMoneMofMtheMlargestMand,Marguably,Mthe
MmostMprominentMaccountingMfirmMworldwide
5. TheMpredecessorMofMEnronMCorporationMwasManMOmaha-
basedMnaturalMgasMcompanyMcreatedMinM1930;MsteadyMgrowthMinMprofitsMandMsalesMandMnumerousMac
quisitionsMallowedMEnronMtoMbecomeMtheMlargestMnaturalMgasMcompanyMinMtheMUnitedMStatesMbyMthe
Mmid-1980s.
6. DuringMtheM1990s,MKennethMLay,MEnron’sMCEO,MandMhisMtopMsubordinate,MJeffreyMSkilling,M transfo
rmedMtheMcompanyMfromMaMconventionalMnaturalMgasMsupplierMintoManMenergyMtradingMcompany.
, CaseM1.3M M JustMforMFeet,MInc.M M
3
7. LayMandMSkillingMplacedMaMheavyMemphasisMonM“strongMearningsMperformance”MandMonMincreasingM
Enron’sMstatureMinMtheMbusinessMworld.
8. EnronMexecutivesMusedMhundredsMofMSPEsM(specialMpurposeMentities)MtoMarrangeMlargeMandMcomplex relatedMparty
9. DuringM2001,MEnron’sMfinancialMconditionMdeterioratedMrapidlyMafterMmanyMofMtheMcompany’sMSPEM
transactionsMunraveled;MinMDecemberM2001,MEnronMfiledMforMbankruptcy.
10. FollowingMEnron’sMcollapse,MtheMbusinessMpressMandMotherMcriticsMbeganMsearchingMforMpartiesMtoMh
oldMresponsibleMforMwhat,MatMtheMtime,MwasMtheMnation’sMlargestMcorporateMbankruptcy.
11. CriticismMofMAndersen’sMroleMinMtheMEnronMdebacleMfocusedMonMthreeMkeyMissues:M theMlargeMamoun
tMofMconsultingMrevenueMtheMfirmMearnedMfromMEnron,MtheMfirm’sMroleMinMmanyMofMEnron’sMSPEMtra
nsactions,MandMtheMeffortsMofMAndersenMpersonnelMtoMdestroyMEnronMauditMdocuments.
12. Andersen’sMfelonyMconvictionMinMJuneM2002MeffectivelyMendedMtheMfirm’sMlongMandMproudMhistoryMi
nMtheMpublicMaccountingMprofession.
InstructionalMObjectives
1. ToMprovideMstudentsMwithMaMbriefMoverviewMofMtheMhistoryMandMdevelopmentMofMtheMpublicMaccount
ingMprofessionMinMtheMUnitedMStates.
2. ToMexamineMtheM“scopeMofMservices”Missue,MthatMis,MtheMthreatsMtoMauditorMindependenceMposedMbyM
auditMfirmsMprovidingMconsultingMservicesMtoMtheirMauditMclients.
3. ToMexamineMtheMextentMtoMwhichMindependentMauditorsMshouldMbeMinvolvedMinMtheirMclients’Mdecisi
onsMregardingMimportantMaccountingMandMfinancialMreportingMissues.
4. ToMreviewMrecentMrecommendationsMmadeMtoMstrengthenMtheMindependentMauditMfunction.
, CaseM1.3M M JustMforMFeet,MInc.M M
4
5. ToMreviewMauditors’MresponsibilitiesMregardingMtheMpreparationMandMretentionMofMauditMworkpapers.
SuggestionsMforMUse
IMtypicallyMbeginManMauditingMcourseMbyMdiscussingMaMmajorMandMwidelyMpublicizedMauditMcase.MCle
arly,MtheMEnronMcaseMsatisfiesMthoseMcriteria.M TheMpurposeMofMpresentingMsuchMaMcaseMearlyMinMtheMseme
sterMisMnotMonlyMtoMacquaintMstudentsMwithMtheMnatureMofMauditingMbutMalsoMtoMmakeMthemMawareMofMwh
yMtheMindependentMauditMfunctionMisMsoMimportant.M ManyMaccountingMstudentsMareMnotMwellMacquaintedM
withMtheMnatureMofMtheMindependentMauditor'sMworkMenvironment,MnorMareMtheyMgenerallyMfamiliarMwithMt
heMcriticalMroleMtheMindependentMauditMfunctionMplaysMinMourMnationalMeconomy.M Hopefully,McasesMsuch
MasMthisMoneMprovideMstudentsMwithMaM"realityMjolt"MthatMwillMstimulateMtheirMinterestMinMauditingMand,Mpo
ssibly,MmakeMthemMmoreMinclinedMtoMpursueMaMcareerMinMtheMauditingMfield.
TheMEnronMcaseMalsoMservesMasMaMgoodMstartingMpointMforManMauditingMcourseMsinceMitMprovidesMstu
dentsMwithManMoverviewMofMhowMtheMauditingMprofessionMdevelopedMandMevolvedMinMtheMUnitedMStatesMo
verMtheMpastMcentury.M TheMvehicleMusedMtoMpresentMthisMoverviewMisMtheMhistoryMofMArthurMAndersenM&
MCo.M YouMwillMfindMthatMtheMcaseMattemptsMtoMcontrastMtheM“ThinkMstraight,MtalkMstraight”MphilosophyMo
fMArthurME.MAndersen,MtheMfounderMofMtheMAndersenMfirm,MwithMtheMmoreMbusiness-
orientedMapproachMtoMauditingMthatMhisMpredecessorsMadoptedMinMtheMlatterMdecadesMofMtheMtwentiethMcen
tury.
ConsiderMaskingMoneMorMmoreMofMyourMstudentsMtoMinterviewMformerMAndersenMpersonnelMwhoMareM
graduatesMofMyourMschool.M IMhaveMfoundMthatMmanyMformerMAndersenMpartnersMandMemployeesMareMmor
eMthanMwillingMtoMdiscussMtheirMformerMemployerMandMtheMseriesMofMeventsMthatMledMtoMtheMfirm’sMsudde
nMcollapse.MTheseMindividualsMtypicallyMsuggestMthatMfederalMprosecutors’MeffortsMtoM“bringMdown”MtheMe
ntireMAndersenMfirmMasMaMresultMofMtheMdocument-
shreddingMincidentMwasMnotMonlyMunnecessaryMbutMalsoMinequitable,ManMargumentMthatMmanyMmembersMo
fMtheMaccountingMprofession—includingMacademics—findMdifficultMtoM refute.
SuggestedMSolutionsMtoMCaseMQuestions
1. AMlargeMnumberMofMpartiesMboreMsomeMdegreeMofMresponsibilityMforMtheMproblemsMthatMtheMEnronMfi
ascoMultimatelyMposedMforMtheMpublicMaccountingMprofessionMandMtheMindependentMauditMfunction.M TheMf
ollowingMbulletMitemsMidentifyMseveralMofMtheseMpartiesM[seeMbold-
facing]MandMtheMroleMtheyMplayedMinMtheMEnronMdrama.
TheMleadershipMofMtheMAndersenMfirmMthatMallegedlyMfocusedMtooMmuchMattentionMonMpractice
development
t
ImpertinentMcorporateMexecutivesMwhoMinsistedMonMaggressive,MifMnotMillegal,MaccountingMand financialMrep
1
CASE 1.1M
ENRON CORPORATION
M
Synopsis
ArthurMEdwardMAndersenMbuiltMhisMfirm,MArthurMAndersenM&MCompany,MintoMoneMofMtheMlarges
tMandMmostMrespectedMaccountingMfirmsMinMtheMworldMthroughMhisMreputationMforMhonestyMandMintegrity.
M “ThinkMstraight,MtalkMstraight”MwasMhisMmottoMandMheMinsistedMthatMhisMclientsMadoptMthatMsameMattitud
eMwhenMpreparingMandMissuingMtheirMperiodicMfinancialMstatements.M ArthurMAndersen’sMauditingMphiloso
phyMwasMnotMrule-
based,MthatMis,MheMdidMnotMstressMtheMimportanceMofMclientsMcomplyingMwithMspecificMaccountingMrulesMb
ecauseMinMtheMearlyMdaysMofMtheMU.S.MaccountingMprofessionMthereMwereMfewMformalMrulesMandMguideline
sMforMaccountantsMandMauditorsMtoMfollow.M Instead,MAndersenMinvokedMaMsubstance-over-
formMapproachMtoMauditingMandMaccountingMissues.M HeMpassionatelyMbelievedMthatMtheMprimaryMroleMofM
theMauditorMwasMtoMensureMthatMclientsMreportedMfullyMandMhonestlyMtoMtheMpublic,MregardlessMofMtheMcon
sequencesMforMthoseMclients.
Ironically,MArthurMAndersenM&MCo.’sMdramaticMfallMfromMprominenceMresultedMfromMitsMassociat
ionMwithMaMclientMknownMforMaggressiveMandMinnovativeMusesMofM“accountingMgimmicks”MtoMwindowMdr
essMitsMfinancialMstatements.M EnronMCorporation,MAndersen’sMsecondMlargestMclient,MwasMinvolvedMinMla
rge,McomplexMtransactionsMwithMhundredsMofMspecialMpurposeMentitiesM(SPEs)MthatMitMusedMtoMobscureMits
MtrueMfinancialMconditionMandMoperatingMresults.M AmongMotherMuses,MtheseMSPEsMallowedMEnronMtoMdow
nloadMunderperformingMassetsMfromMitsMbalanceMsheetMandMtoMconcealMlargeMoperatingMlosses.M DuringM2
001,MaM seriesMofMcircumstances,MincludingMaMsharpMdeclineMinMtheMpriceMofMEnron’sMstock,MforcedMtheMc
ompanyMtoMassumeM controlM andM ownershipM ofM manyM ofM itsM troubledM SPEs.M AsM aM result,M EnronM wasM
forcedM toM reportM a
, CaseM1.3M M JustMforMFeet,MInc.M M
2
largeM lossM inM OctoberM 2001,M restateM itsM earningsM forM theM previousM fiveM years,M and,M ultimately,M fil
eM forMbankruptcyMinMDecemberM2001.
DuringMtheMearlyMmonthsMofM2002,MAndersenMbecameMtheMfocalMpointMofMattentionMamongMlawMe
nforcementMauthoritiesMsearchingMforMtheMpartiesMresponsibleMforMEnron’sMsuddenMcollapse.MTheMaccusati
onsMdirectedMatMAndersenMcenteredMonMthreeMkeyMissues.M TheMfirstMissueMhadMtoMdoMwithMtheMscopeMofMp
rofessionalMservicesMthatMAndersenMprovidedMtoMEnron.M CriticsMchargedMthatMtheMenormousMconsultingMf
eesMEnronMpaidMAndersenMimpairedMtheMauditMfirm’sMindependence.M TheMsecondMissueMstemmedMfromM
Andersen’sMallegedMroleMinMEnron’sMaggressiveMaccountingMandMfinancialMreportingMtreatmentsMforMitsMS
PE-
relatedMtransactions.MFinally,MtheMmostMembarrassingMissueMwasMtheMmassiveMeffortMofMAndersen’sMHous
tonMofficeMtoMshredMEnronMauditMdocuments,MwhichMeventuallyMledMtoMtheMdemiseMofMtheMfirm.
EnronMCorporation--KeyMFacts
1. ThroughoutMArthurME.MAndersen’sMlife,M“ThinkMStraight,MtalkMstraight”MservedMasMaMguidingMprincip
leM forMhimselfMandMArthurMAndersenM&MCo.,MtheMaccountingMfirmMthatMheMfounded.
2. ArthurMAndersen’sMreputationMforMhonestyMandMintegrityMresultedMinMArthurMAndersenM&MCo.Mgaini
ngMstatureMinMtheMbusinessMcommunityMandMgrowingMintoMoneMofMtheMnation’sMleadingMaccountingMf
irmsMbyMtheMtimeMofMhisMdeathMinM1947.
3. LeonardMSpacekMsucceededMArthurMAndersenMasMmanagingMpartnerMofMArthurMAndersenM&MCo.MinM
1947MandMcontinuedMAndersen’sMlegacyMofMlobbyingMforMmoreMrigorousMaccounting,Mauditing,MandM
ethicalMstandardsMforMtheMpublicMaccountingMprofession.
4. WhenMSpacekMretiredMinM1973,MArthurMAndersenM&MCo.MwasMoneMofMtheMlargestMand,Marguably,Mthe
MmostMprominentMaccountingMfirmMworldwide
5. TheMpredecessorMofMEnronMCorporationMwasManMOmaha-
basedMnaturalMgasMcompanyMcreatedMinM1930;MsteadyMgrowthMinMprofitsMandMsalesMandMnumerousMac
quisitionsMallowedMEnronMtoMbecomeMtheMlargestMnaturalMgasMcompanyMinMtheMUnitedMStatesMbyMthe
Mmid-1980s.
6. DuringMtheM1990s,MKennethMLay,MEnron’sMCEO,MandMhisMtopMsubordinate,MJeffreyMSkilling,M transfo
rmedMtheMcompanyMfromMaMconventionalMnaturalMgasMsupplierMintoManMenergyMtradingMcompany.
, CaseM1.3M M JustMforMFeet,MInc.M M
3
7. LayMandMSkillingMplacedMaMheavyMemphasisMonM“strongMearningsMperformance”MandMonMincreasingM
Enron’sMstatureMinMtheMbusinessMworld.
8. EnronMexecutivesMusedMhundredsMofMSPEsM(specialMpurposeMentities)MtoMarrangeMlargeMandMcomplex relatedMparty
9. DuringM2001,MEnron’sMfinancialMconditionMdeterioratedMrapidlyMafterMmanyMofMtheMcompany’sMSPEM
transactionsMunraveled;MinMDecemberM2001,MEnronMfiledMforMbankruptcy.
10. FollowingMEnron’sMcollapse,MtheMbusinessMpressMandMotherMcriticsMbeganMsearchingMforMpartiesMtoMh
oldMresponsibleMforMwhat,MatMtheMtime,MwasMtheMnation’sMlargestMcorporateMbankruptcy.
11. CriticismMofMAndersen’sMroleMinMtheMEnronMdebacleMfocusedMonMthreeMkeyMissues:M theMlargeMamoun
tMofMconsultingMrevenueMtheMfirmMearnedMfromMEnron,MtheMfirm’sMroleMinMmanyMofMEnron’sMSPEMtra
nsactions,MandMtheMeffortsMofMAndersenMpersonnelMtoMdestroyMEnronMauditMdocuments.
12. Andersen’sMfelonyMconvictionMinMJuneM2002MeffectivelyMendedMtheMfirm’sMlongMandMproudMhistoryMi
nMtheMpublicMaccountingMprofession.
InstructionalMObjectives
1. ToMprovideMstudentsMwithMaMbriefMoverviewMofMtheMhistoryMandMdevelopmentMofMtheMpublicMaccount
ingMprofessionMinMtheMUnitedMStates.
2. ToMexamineMtheM“scopeMofMservices”Missue,MthatMis,MtheMthreatsMtoMauditorMindependenceMposedMbyM
auditMfirmsMprovidingMconsultingMservicesMtoMtheirMauditMclients.
3. ToMexamineMtheMextentMtoMwhichMindependentMauditorsMshouldMbeMinvolvedMinMtheirMclients’Mdecisi
onsMregardingMimportantMaccountingMandMfinancialMreportingMissues.
4. ToMreviewMrecentMrecommendationsMmadeMtoMstrengthenMtheMindependentMauditMfunction.
, CaseM1.3M M JustMforMFeet,MInc.M M
4
5. ToMreviewMauditors’MresponsibilitiesMregardingMtheMpreparationMandMretentionMofMauditMworkpapers.
SuggestionsMforMUse
IMtypicallyMbeginManMauditingMcourseMbyMdiscussingMaMmajorMandMwidelyMpublicizedMauditMcase.MCle
arly,MtheMEnronMcaseMsatisfiesMthoseMcriteria.M TheMpurposeMofMpresentingMsuchMaMcaseMearlyMinMtheMseme
sterMisMnotMonlyMtoMacquaintMstudentsMwithMtheMnatureMofMauditingMbutMalsoMtoMmakeMthemMawareMofMwh
yMtheMindependentMauditMfunctionMisMsoMimportant.M ManyMaccountingMstudentsMareMnotMwellMacquaintedM
withMtheMnatureMofMtheMindependentMauditor'sMworkMenvironment,MnorMareMtheyMgenerallyMfamiliarMwithMt
heMcriticalMroleMtheMindependentMauditMfunctionMplaysMinMourMnationalMeconomy.M Hopefully,McasesMsuch
MasMthisMoneMprovideMstudentsMwithMaM"realityMjolt"MthatMwillMstimulateMtheirMinterestMinMauditingMand,Mpo
ssibly,MmakeMthemMmoreMinclinedMtoMpursueMaMcareerMinMtheMauditingMfield.
TheMEnronMcaseMalsoMservesMasMaMgoodMstartingMpointMforManMauditingMcourseMsinceMitMprovidesMstu
dentsMwithManMoverviewMofMhowMtheMauditingMprofessionMdevelopedMandMevolvedMinMtheMUnitedMStatesMo
verMtheMpastMcentury.M TheMvehicleMusedMtoMpresentMthisMoverviewMisMtheMhistoryMofMArthurMAndersenM&
MCo.M YouMwillMfindMthatMtheMcaseMattemptsMtoMcontrastMtheM“ThinkMstraight,MtalkMstraight”MphilosophyMo
fMArthurME.MAndersen,MtheMfounderMofMtheMAndersenMfirm,MwithMtheMmoreMbusiness-
orientedMapproachMtoMauditingMthatMhisMpredecessorsMadoptedMinMtheMlatterMdecadesMofMtheMtwentiethMcen
tury.
ConsiderMaskingMoneMorMmoreMofMyourMstudentsMtoMinterviewMformerMAndersenMpersonnelMwhoMareM
graduatesMofMyourMschool.M IMhaveMfoundMthatMmanyMformerMAndersenMpartnersMandMemployeesMareMmor
eMthanMwillingMtoMdiscussMtheirMformerMemployerMandMtheMseriesMofMeventsMthatMledMtoMtheMfirm’sMsudde
nMcollapse.MTheseMindividualsMtypicallyMsuggestMthatMfederalMprosecutors’MeffortsMtoM“bringMdown”MtheMe
ntireMAndersenMfirmMasMaMresultMofMtheMdocument-
shreddingMincidentMwasMnotMonlyMunnecessaryMbutMalsoMinequitable,ManMargumentMthatMmanyMmembersMo
fMtheMaccountingMprofession—includingMacademics—findMdifficultMtoM refute.
SuggestedMSolutionsMtoMCaseMQuestions
1. AMlargeMnumberMofMpartiesMboreMsomeMdegreeMofMresponsibilityMforMtheMproblemsMthatMtheMEnronMfi
ascoMultimatelyMposedMforMtheMpublicMaccountingMprofessionMandMtheMindependentMauditMfunction.M TheMf
ollowingMbulletMitemsMidentifyMseveralMofMtheseMpartiesM[seeMbold-
facing]MandMtheMroleMtheyMplayedMinMtheMEnronMdrama.
TheMleadershipMofMtheMAndersenMfirmMthatMallegedlyMfocusedMtooMmuchMattentionMonMpractice
development
t
ImpertinentMcorporateMexecutivesMwhoMinsistedMonMaggressive,MifMnotMillegal,MaccountingMand financialMrep
