Case Enron Corporation

Case Enron Corporation

Question 1

All parties involved in the financial reporting and decision making process bearded certain levels of responsibilities for the disastrous events happened to not only Enron Corporation and Andersen Firm, but also to the entire accounting profession. However, the author believed that the executives in Enron Corporation in charge of preparing the financial documents were most liable for the crisis. It was their duty to ensure that the financial statements reported to the auditors were fair, accurate, and free of unreasonable misstatement. They failed their responsibilities by using hundreds of SPEs to obscure the true financial performance of Enron Corporation. Such practices were not up to the standards of honest financial reporting. Secondly, managements in Arthur Andersen made the decision to sign off the books and issue audit opinions in favor of Enron Corporation despite their questionable accounting and financial reporting decisions. Although the audit firm had no control over whether Enron Corporation adheres to the accounting rules, Arthur Andersen could drop the account to preserve the firm’s integrity. Third, the individual auditors simply complied with the managements decisions due to Andersen firm’s policy of “speaking in one voice”. Auditors should express their concerns when sensing an accounting malpractice, and if an auditor in the firm decided to be a whistleblower, the problems could be addressed early. At last, lack of supervision from the authorities also fostered the inappropriate behaviors of both Enron Corporation and Arthur Andersen.

Question 3

In the author’s opinion, Andersen violated a number of professional auditing standards in their services provided to Enron Corporation based on the evidences shown in Exhibit 3. First of all, Andersen was involved in a large number of activities outside of auditing, e.g., providing SPE structuring advice (Page 5), participating in the structuring of the Raptor transactions, etc. Such activities compromised the audit firm’s independency from the client and thus violated General Standards #2. Second, Andersen failed to ensure that the financial statements prepared by accountants at Enron Corporation meet the professional rules, and therefore violated the Standards of Field Work #1 which requires the auditor to properly supervise any assistants. Third, Andersen acknowledged that an error existed in a prior SPE transaction, and although it later concluded that it did not need restatement, it suggested that Andersen did not obtain sufficient understanding of Enron Corporation’s operations, especially its internal control. This violated Standards of Field Work #2. Moreover, Andersen had concerns about the disclosures issued by Enron (Page 202) but did not include them in its report. Such omission was against Standards of Reporting #2. At last, due to the high levels of engagement of Andersen in Enron’s restructuring of SPEs, the firm could no longer independently express an opinion regarding the financial statements reported by Enron. The firm failed to disclose such position in its report and thus violated the Standards of Reporting #4.

Question 5

From Commission Adopts Rules Strengthening Auditor Independence

http://www.sec.gov/news/press/2003-9.htm

1. Some campaigned to limit the scope of consulting services that accounting firms could provide to their audit clients (Arthur Levitt and Leonard Spacek). The author found this suggestion favorable because it can help avoid conflict of interest and preserve audit firm’s independency.
2. Require the audit team to rotate after no more than five or seven consecutive years. Such practice could increase the chance of discovering potential flaws in the company’s financial reporting policies.

From The Sarbanes-Oxley Act of 2002

http://www.soxlaw.com/index.htm

1. Require the issuer of financial reports to disclose the adequacy of their internal control structure. This could be beneficial in providing critical information about the auditee to the audit firm. (Section 404)
2. Up to 20 years imprisonment for destroying records and documents obstruct legal investigations. This act will ensure that the investigators can obtain all the evidences and avoid events like shredding of documents by Andersen’s Houston office. (Section 802)
3. The issuers are required to publish information on changes in their financial condition to the general public. The author believes that such practice will increase public access to information on the company’s financial condition and encourage whistleblowing. (Section 409)

Question 6

It can be seem from the example of Arthur Andersen that audit firms in the past few decades have gradually shifted their focus from ensuring that clients reported accurately and entirely to the public towards selling consulting services to clients in favor of monetary gains. In the case of Andersen and Enron, the accounting firm charged over $1 million for its service in the structuring and accounting treatment of the Raptor transactions. Because of these additional advising and consulting services provided by the accounting firms to various companies, audit teams started to lose their independency. The key factor driving such shifts was the huge revenue generated by the additional services provided by accounting firms. According to a study on nearly 600 large companies, for every $1 audit fee paid to auditor, $2.69 was paid for nonaudit consulting services to their independent auditor (Case Page 16). In addition, because the clients have the freedom to choose any accounting agencies as their auditors, competitions between firms are unavoidable. In order to keep the clients satisfied and maintain their business relationship, some accounting firms chose to “cut-corners” and disregarded, if not cooperated, clients’ malpractice in financial reporting.