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Crisis of Enron and Auditors Responsiblilites

Several parties were responsible for Enron crisis, including independent auditor, key executive officers, internal auditors, SEC and FASB. The hypocrisy, dishonorable actions and unethical behavior of Kenney Lay, Jeffrey Skilling, Andrew Fastow led to bankruptcy. This and many other problems, such as loss in transactions involving the swaps stocks, SPE related issues and est. , finally contributed to crisis. As Enron executives, all of their concerns should have been focused on Enron’s profits, but seems that many of them only cared about their wealth.

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When financial problem surfaced, they did not attempt to fix it, but made efforts to maintain their own benefits and ignored the whole company’s and investor’s loss. This unethical behavior not only deceived the investors but also finally resulted in Enron’s crisis. Auditors also played an important role in Enron’s downfall. The most important statutory duty of the independent auditor is to ensure the financial reports are intended to give a true and fair view.

If the financial statement contains fraud and irregularities, independent auditor should discover and report it to the proper authority. Auditors were negligent of their duties. Anderson breaches the duty to warn, as they knew there was fraud and major error in the financial statements. Moreover, questionable accounting and financial decisions had been reviewed, analyzed, and apparently approved by Andersen. Even worse, Anderson was issuing unqualified reports over the period of time while the books were “cooked”.

They jeopardized their independence by providing many not just audit services but also consulting services. In addition, to prevent law enforcement authorities from obtaining potential incriminating evidences Andersen shred the audit workpapers. All of these triggered the public disappointment in professionalism that leads accounting industry to take its blame in Enron’s crisis. SEC and FASB didn’t provide proper and enough guidance; minimal legal and accounting guidelines for SPEs helped Enron to divert huge amounts of liabilities to off its balance sheet.

Qt. 2 The scope of consulting services that accounting firms could provide to their audit clients should be limited because it is a conflict of interest and it can put at risk auditors’ independence. a. Bookkeeping or other services related to the accounting records or financial statements of the audit clients are one of those consulting services that directly impair independence where auditors’ objectivity is going out the window. b. Internal audit outsourcing services.

These rules prohibit the accountant from providing any internal audit service that has been outsourced by the audit client that relates to the audit client’s internal accounting controls, financial systems or financial statements unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client’s financial statements. Potential threat here is that the auditor would not want to list something as a weakness in the area that was created and employed by them. c.

Financial information systems design and implementation. This rule prohibits the accounting firm from providing any service related to the audit client’s information system, unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client’s financial statements. Again, the potential threat here is that designing and testing the same system will impair auditor’s independence. Qt. 3 There is no question that Andersen was involved in Enron’s accounting and financial reporting decisions.

Involvement in these decisions violates at least the following professional auditing standards: 1. SAS 32- Reporting on adequacy of disclosure in financial statements. Inadequate disclosures that Enron provided for its transactions meant that “the nonprofessional {investor} has no idea of the extent of the firm’s real liabilities”. Enron made only nominal financial statement disclosures for its SPE transactions and those disclosures were typically presented in confusing if not cryptic, language. 2. SAS 55- Internal Controls. Judging from the case, it can be clearly seen that internal control was not working properly. . SAS 45 Related parties – Special Purpose entities were a mechanism to raise needed financing for various purposes without being required to report the debt in their balance sheets. Enron used gaping loophole in accounting practice to create hundreds of SPEs and it did not limit its SPEs to financing activities. Enron used SPEs for the purpose of downloading underperforming assets from its financial statements to the financial statements of related by unconsolidated entities. SPE would finance the purchase of those assets by loans collateralized by Enron’s common stock.

In some cased, undisclosed side agreement made by Enron with an SPE’s nominal owner insulated those individuals from any losses on their investments and, in fact, guaranteed them a windfall profit. Even more troubling, Enron often sold assets at grossly inflated prices to their SPEs allowing the company to manufacture large “paper” gain on those transactions. Qt. 4 Audit documentation as per SAS 103, is a record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. It supports the fact that the audit was done in accordance with auditing standards.

According to ISA 230, key requirements for audit workpapers are: (a) The auditor shall prepare audit documentation on a timely basis, (b) The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed, the results of the audit procedures performed, and the audit evidence obtained; and significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions, (c) It should be signed by the person who prepares it so that queries can be directed to the appropriate person, (d)It should be signed and dated by any person who reviews it, in order to meet the quality control requirements of the review.

SEC (Retention of Records Relevant to Audits and Reviews) and PCAOB auditing standard No. 3, Audit Documentation requires auditors to retain documents involved in an audit for seven years after an accountant concludes an audit or review of an issuer’s financial statements. The auditors provide auditing services in their capacity as a principal, not an agent: they are directly responsible for any negligence in performing their duties. Hence, the audit working papers are the property of the auditors. Qt. 5 * Audit Firm Rotation – new PCAOB Release No. 2011-006. This release that PCAOB it discussing now relates to a fully rotation of audit firm.

Rotation requirement focused both on strengthening the auditor’s ability to resist management pressure and on the benefits of a fresh viewpoint and as a result of it increase independence “… Auditor rotation is a ‘powerful antidote’ to auditor conflicts of interest, which reduces dramatically the financial incentives for the audit firms to placate management. The second point, the need for a “fresh viewpoint” is closely related to the first. An audit firm with less incentive to placate management might exercise that increased independence out of concern about what its replacement might find”. I think it is great proposal because it will bring auditors’ independents to a higher level * Section 203 of the Sarbanes-Oxley Act specifies that the lead and concurring partner must be subject to rotation requirements after five years.

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