2018SP081ACCT Case 41pdf e ousecompluginfile php62069modres

: 2018SP-081-ACCT Case 4.1.pdf e ouse.com/pluginfile php/62069/mod-resource/content/1/Case%204.1.pdf ing purposes, such as hiding debt. \"Bala G. Dharan and Willam R. Bufkins, \"Red Rlags in Enron\'s Reporting of Revenues and Key Rnancial Mesures, March 2003, prepublication draft (ww.nuf.rice.edu/-bala/fles/dharan-bufkins enron_red_flags 041003.pd), pp. 7-11 Case Questions 1. Consult Paragraphs 65-69 of PCAOB Auditing Standard No. 12. Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (the fraud triangle)? Based on the infor- mation provided in the case, which of these three conditions appears to have been the most prevalent at Enron, and why?

Solution

According to the Auditing Standard 12, Fraud triangle theory, a fraud is likely to occur when 3 conditions are present in an organisation, which are as follows:

1. Pressure: financial or emotional force pushing towards fraud.

2. Opportunity: ability to do fraud without bring caught.

3. Rationalization: personal attitude towards dishonest actions.

Enron had the 1st condition of financial pressure among employees as they were granted a lot of stock options so there was incentive to manipulate the financials so that the price of shares would go up.

It was a case of agency conflicts and non alignment of interests.