On the 10th anniversary of Enron collapse, the Chartered Institute of Internal Auditors (CIIA) said the focus on risk management and internal control has increased considerably and should remain a priority for board members.
Enron Corporation was a US energy company based in Houston, Texas. At the end of 2001 it went into bankruptcy after it was revealed its reported financial condition was sustained substantially by accounting fraud.
The US Senate Committee’s subsequent investigation into the company’s collapse highlighted the conflict of interest generated by the outsourcing of internal audit to its external auditors Arthur Andersen as a major factor in Enron’s downfall. As a consequence of the scandal, Arthur Andersen collapsed in 2003.
The institute’s chief executive Ian Peters stressed that one significant change post-Enron has been the widespread acceptance that external and internal audit need to be properly independent of one another.
“While companies may devise systems to prevent conflicts of interest arising, the continued intense focus on corporate governance means that investors are likely to require extensive reassurance on these sorts of arrangements,” Peters said.
The UK’s Corporate Governance Code now requires audit committees to provide an explanation of how external auditor objectivity and independence is safeguarded if the company’s external auditor also provides it with non-audit services, including internal audit.