The Swedish Management Audit - Could It Have Influenced the Enron Collapse?

Abstract

The large accounting scandals that have taken place mainly in the United States have created an international debate on the roles of accounting and auditing and how they should be designed to protect the stockholders. In Sweden, the auditor shall, besides the examination of financial reports, also conduct an audit of the President’s and the Board of Directors’ management of the company. This Management Audit is mandatory for all stock corporations and underlies the decision whether to recommend the annual meeting of stockholders to grant the President and the Board discharge or not. This practice is not applied in the US where there is no time limit for their responsibility. Our starting point is the Swedish Management Audit. To analyze its usefulness, we chose to compare Sweden with the United States whose auditing practices looks a bit different. We chose to use the Enron scandal to illustrate the possible advantages of utilizing a Swedish-type Management Audit. The main research question is whether the Swedish Management Audit could have influenced the lapse or the outcome of the Enron scandal. To determine whether the Swedish Management Audit could have influenced the Enron scandal, we applied each of the eight steps a Swedish auditor carries out when performing a Management Audit to the Enron case. Our study shows that there were several problems in the control and management of Enron, which the auditor could have observed by conducting a Swedish Management Audit. Some of the interviewees pointed out that the auditors should also have noticed these problems under the American system if they had only done their job properly. However, the use of the Swedish Management Audit might have mitigated the outcome of the scandal by making the stockholders aware of the company’s financial situation earlier.