Enron Case

8 August 2016

1. The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. Briefly justify each of your choices.

a. Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. A common theme of the allegations leveled at the three executives was that they had created a corporate culture that fostered, if not encouraged, “rule breaking”.

Enron Case Essay Example

b. Andersen. They allowed Enron to use these fraudulent statements for 15 years. Corporate executives and their accountants are ultimately responsible for the integrity of their company’s financial statements.

2. List three types of consulting services that audit firms have provided to their audit clients in recent years. For each item, indicate the specific threats, if any, that the provision of the given service can pose for an audit firm’s independence.

a. Providing IT services. There could be a self-evaluation threat because they would evaluate what they have created.

b. Valuation services. Auditors could be threatened when providing appraisals. There could be intimidation threats.

c. Management functions. There could be independence issues like familiarity threats. 3. For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 are accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen violated any professional auditing standards? If so, list those standards and briefly explain your rationale.

Yes, they did violate the professional auditing standards.

a. Objectivity. Since they participated in the structuring and accounting treatment of the Raptor transactions, and charged over $1 million for its services, they have failed to provide the objective accounting judgment that should have prevented these transactions from going forward.

b. Due Care. Since Andersen had independence issues and violated one of the fundamental principles of ethics, Andersen is also in violation of the due professional care standard.

c. Professional Behavior. Since Andersen did not abide with all the rules and regulations of the law, Andersen is also in violation of the professional behavior standard. 4. Briefly describe the key requirements included in professional auditing standards regarding the preparation and retention of audit workpapers. Which party “owns” audit workpapers: the client or the audit firm?

The auditor must prepare audit workpapers for each engagement with appropriate and sufficient details to provide a clear understanding of the work that was performed, evidence obtained and conclusions reached. The retention of audit workpapers should not be shorter than seven years. The audit workpapers are the property of the audit firm.

5. Identify and list five recommendations that have been made recently to strengthen the independent audit function. For each of these recommendations, indicate why you support or do not support the given measure.

a. Rotation of personnel every five years. It is done to avoid familiarity threats, which would address to independence issues.

b. Having independent audit service. It is done to eliminate audit-client relationships, which would also address independence issues.

c. Imposing a stricter accounting and financial reporting guidelines. It is done to improve the quality of independent audits so that the professionalism of accountants would also improve.

6. Do you believe that there has been a significant shift or evolution over the past several decades in the concept of “professionalism” as it relates to the public accounting domain? If so, explain how you believe that concept has changed or evolved over that time frame and identify the key factors responsible for any apparent changes.

In 1940 to 1970s Arthur Andersen & Co. (accounting firm) had offices scattered across the eastern one-half of the United States and employed more than 1,000 accountants. When Arthur Andersen died, Leonard Spacek replaced him and because of Spacek’s strong leadership and business skills, he transformed Arthur Andersen & Co. into a major international accounting firm. In 2006, an unending flood of jokes and ridicule directed at Andersen tainted and embarrassed practically every accountant in the nation, including both accountants in public practice and those working in the private sector.

7. As pointed out in this case, the SEC does not require public companies to have their quarterly financial statements audited. What responsibilities, if any, do audit firms have with regard to the quarterly financial statements of their clients? In your opinion, should quarterly financial statements be audited? Defend your answer.

Audit firms should review their clients’ quarterly financial statements. In my opinion, quarterly financial statements should be audited because it would be easier for the auditors to identify problems or potential problems that exist or may exist within the quarterly period if they have real-time information.

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