On the 2nd December 2001, Enron, at the time the seventh largest company in the US, filed for Chapter 11 becoming the “biggest bankruptcy in any industry anywhere” with losses around the $60bn mark. The companies share price fell from a high of $90 in August 2000 but now are trading on the markets at about 45 cents. Enron started life as a regional gas pipeline company in 1985, but by 2001 it had become the world’s largest energy trading company. Company success came about because of Enron’s ability to exploit the trading opportunities brought about by deregulation in the late 1980’s allowing users to buy gas or electricity from a number of producers. Before long it was the darling of Wall Street as analysts heaped praise on the firm for its “unique” approach in bringing high-tech complex finance to energy trading.
However, it was in August 2001 that the deeper institutional problems within Enron began to emerge. The abrupt resignation of CEO Jeffrey Skilling, citing “entirely personal reasons” for his decision was to sow the seed of doubt in the shareholders’ minds, and the stock price began to slide. The situation deteriorated dramatically in October when Enron had to set aside $35m to cover losses in two
There are a number of suggestions that can help independence in general and would have helped in the Enron case. Firstly auditors should rotate; the profession must accept that long-term tenure of audit contracts is not healthy. Familiarity between client and auditor must be discouraged, long-standing links with big clients are especially good examples of where the audit may be less questioning. There also should be stronger regulation from the government and more independent review, at the extreme appointment of auditors by the state is a suggestion. The role of audit committees could be increased to help bring in some independence, though this did not work for Anderson as only one of the member spoke out.
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