ENRON CASE STUDY

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 the most responsible for that crisis. Briefly justify
each of your choices.
The board of directors of Enron. They focused too much on becoming the worlds
biggest company. However they didnt balance the conflict between their goal and
stockholders interest. From the letter of Wherron Watkin, it mentioned that
Skillings abrupt departure will raise suspicions of accounting improprieties and
valuation. They just ignored. Thus when misstatements and irregularities emerged
and were made clear to the public, the executives of Enron lost the confidence of
the stakeholders in the company.
Internal Audit Committee in Enron. One of the most important duty of internal
audit committee is to analysis and give the guide or advice of the companys
internal control. However, from the scandal, we can see that it used a lot of SPEs
to maintain a paperwork healthy. Enron scandal happened proves that the
internal auditors were not performing the way an audit group should.
Arthur Anderson. The independence of the outsider auditors should be questioned.
They didnt present itself with professionalism and responsibility. They already
noticed the suspicious financial report. In order to keep this client, they chose to
ignore the misstatement because they not only provided audit service but also
almost half of its revenue came from consulting service. Thus the confidence that
the public had in the company was diminished.
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 forms
independence.
Design the accounting procedures. They helped them alerting the accounting
systems within the company. There will be an increasing threat for the
independence. In this case, the creators of the accounting procedures
fabricated the financial statements by using a complex procedure that users
could not understand. Also the SPEs strategy indicated that some
manipulation from the part of the audit firm that also with prior knowledge of
accounting ethics, which at most times makes it more risky, given the legal
involvement.
Review the financial statement. Financial statements are an important to the
company revenue and all the financial processes. The auditors have easier
access to misstating financial reports and statements. Manipulations of these
data may be disclosed if the auditors process an appropriate precise audit to
decrease the detective risk. In this situation, a review service of financial
statement would be an increasing threat of independence.
Provide professional consulting services such as tax or other accounting
procedures. This is obviously a great risk of independence of the audit firm.
Those consulting service may have associated with the auditing service they

provided. In this case, the manipulation is also very likely and comes as one
of the biggest threats to audit consultancy services and its credibility that can
hurt the reputation of the audit firm. And they are not able to perform their
duties as an external auditor to the best of their ability. Their opinions are
subject to change based on biases.
3. For purposes of the question, assume that the excerpts from the Powers
Report shown in Exhibit 3 provide accurate descriptions of Andersens
involvement in Enrons accounting and financial reporting decisions. Given
this assumption, do you believe that Andersens involvement in those
decisions violated any professional auditing standards? If so, list those
standards and briefly explain your rationale.
Independence. Andersen earned around $52 million from Enron during 2000,
but only $25 million was payment in reference to the 2000 audit. Andersens
interests were not independent of the company, but he invested himself in
solidifying the security of the company and its success.
Planning and supervision. Anderson should be supervised when performing
the auditing service to keep independence. However the lacks of planning and
supervision made Anderson become too involved in client accounting and
financial reporting decision.
Internal control evaluation. Anderson should have a sufficient understanding
of the clients internal control especially about their SPEs.
Reporting. Because Anderson didnt maintain its independence, they should
issue a disclaimer of opinion on its financial statement.
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?
Audit workpapers is the record of the audit procedures performed, relevant audit
evidence obtained, and the conclusions the auditors reach. The key requirement
includes:
a) The auditor must state in the auditors report whether the financial statements
are presented in accordance with GAAP.
b) The auditor must bring to light an instances in which the GAAP were not
consistent during the current period.
c) When informative disclosures are not adequate, the auditor must state so in the
report.
d) The auditor must state an opinion in regards to the financial statements. If the
auditor cannot state an opinion, this much be noted in the report. If the auditor is
taking any responsibility in relation to the financial statements, it must also be
stated in the auditors report.
Basically, audit workpapers are the property of the auditor concerned in all
circumstances. That is to say, the audit work papers belong to auditing firm. The
auditor does hold responsibility for the evidence and reports, and is to make sure
that the information is not misused in any way.
5. Identify five recommendations made to strengthen the independent audit

function following the Enron scandal. For each of these recommendations,

indicate why you support or do not support the given measure. Also indicate
which of these recommendations were eventually implemented.
Establish an independent audit agency.
I agree with that. The independence of the audit firm is the most important
fact to the auditing procedures. It determines the detective risk of the
procedures. An independent audit agency would be much easier to keep
independent because they would not gain an additional profit from auditing
service or even some other related service.
Prohibit the provision of all non-audit service to audit clients.
I partly agree with this. Non-audit service is a huge part of profit for auditing
firm. Providing such service is decided by market not only audit firms. I agree
with that government should have regulations to rule these services such as
which service is prohibited, which is limited, which should be supervised. We
cannot simply prohibit all these firms.
Require that audit clients periodically rotate or change their independent audit
firms.
I agree with that. An audit firm would be dependent if they work as auditors
for a specific company for a long time because their profit and fellowship
would be associated with their client. This recommendation would force the
company keep their auditors independent. Because there will be expensive for
these firms to sign a ghost protocol every couple years.
Require independent auditors to work more closely with clients audit
committee.
I agree with that. That would help both auditors and companies to improve
the efficiency. For companies, they would know what auditors exactly want to
know and provide such information. For auditors, they would further analysis
their clients statements to avoid or decrease detective risk.
Establish more explicit statutory requirements that prohibit client executives
from interfering with the work of their independent auditors.
I agree with that. The companies pursue an unqualified opinion. There would
a loss if they dont get an unqualified opinion. This would release the auditors
pressures from companies. Thus this is a way to improve the independence of
the auditors.
I think most of them are eventually implemented except the first one. The
PCAOB , although, is authorized by Sarbanes-Oxley Act of 2002, its actually
not an independent auditing agency but a supervisor of the public companies
and audit firms.