1.

Executive Summary Android & Co started in 1913 when Arthur and Clarence, both from the audit firm of Price bought out a small audit firm in Illinois to form Arthur, Clarence & Co, which became Androids & Co in 1918. Android headed the firm of Androids & Co until his death in 1945. Besides, Android who is founder of Androids & Co was a zealous supporter of high standards in the accounting industry. For many years, the Androids motto was Think Straight, Talk Straight. David Lawrence,43 years old had joined the auditing firm of Androids in 20 years ago. David Lawrence is Androids partner and auditor, who are responsible in charge of auditing in Enronaas account since 1987. The major problem David faces are the issue there are evidence suggesting Android assisted to puff up reported returns of off Balance Sheet activities when David conducting the audit in Enronaa. Enroonaa demand David to falsifies and hides Enronaas debt and losses. David also confessed that Android has used accounting practices that allow Enronaa to hide their debts, but its all are within the context of the fair value accounting. Securities and Exchange Commission (SEC) would be able to detect fraud and deception in Enronaa account and this will drag Androids company too in SEC investigation. Too make it more worst, Androids had prior entanglement with SEC related to Solid Waste case. As in the case of Solid Waste, both Solid Waste and Androids paid fines of total of USD 229 million to settle class-action suit for misleading and false accounting practices. This amount is thus far the most expensive suits ever recorded in history of accounting. However, Android managed to escape without any official recognition. In effect of this, Androids were put under injunction that forbade Androids from future wrongdoings with the SEC. So, severe actions will be taken if Androids got caught again in another scandal. Nancy who is lawyer at Androids Chicago Headquarters advised David Lawrence about Androids policies regarding retention of document s from client engagement. So there are two possible solution in this case, whether David agree the advice from Nancy to shred the document of Enronaa to destroy all working paper and document of Enronaa company so that Androids can hide evidence of Enronaa fraud or the other solution were David decide not to shred the document of Enronaa and admit Androids and Enroonas fault to SEC.

2. Statement of the Problem 2.1 Issues in Enronaa

The issue arise when David Lawrence received an emergency conference call from the Chicago Head Office that he said in no uncertain terms that Androids future is in Davids hands. There were evidence that could suggesting Android assisted to puff up reported returns of off Balance Sheet activities. Besides, David know that in Enronaa many off-the-book partnership had not been properly accounted for and were not independent entities. Androids have to hide millions of Enronaa debt and losses and had to reflected in Enronaas books. David express that he had used accounting practices which creative accounting that allow Enronaa to hide their debts, but it is all are within the context of the fair value accounting. David are very concern on these problems that SEC could be able spot fraud and deception in Enronaas account. Furthermore, Androids still have others unresolved litigation with SEC because of the past case of Androids client, Solid Waste. Furthermore, Androids were put under injunction that forbade Androids from future wrongdoings with the SEC. Despite that, Android do not want to lose Enroona because it is their single biggest client.

2.2 Issues in Solid Waste SEC found Android guilty of issuing materially false and misleading audit report on Solid Waste financial statement. Several fault had been detected that Androids allowed Solid Waste management to use improper accounting to inflate its operating income and other measures of success. Solid Waste was restating its financial statement and it was the largest restatement of results in history of SEC. Androids audit engagement team recognized that Solid Waste employed aggressive accounting practices to enhance its earnings and some were practically violating GAAP. Several accounting practices that violate GAAP are Solid Waste reduce depreciation expense on its property plant and its equipment, adoption of non-GAAP method of capitalizing interest on landfill development cost, its failure properly to accrue for its tax and self-insurance expenses,

improper use of purchase accounting to increase its environmental remediation reserve, improper charges of operating expenses to the environmental remediation reserve (ERR) and its refusal to write-off permitting and/or project costs on impaired or abandoned landfills.

3. Cause of the Problem 3.1 Audit Issues Android as a professional external auditor failed to comply with audits ethics and professional conduct which are integrity, independence, and self interest. 3.11 Integrity The principle of integrity requires a professional auditor to be sincere, honest and straightforward in his professional and business relationship. Android should not associate with any report or statement that David believe is false, materially misleading or is furnished negligently. Android did follow the fundamental of integrity principal because Android falsified audit report of Enronaa and Solid Waste. 3.12 Independence We can see that David as a professional auditor is not independence because he has a relationship with Enronaas Chief Accounting Officer (CAO), Casey. They are close friend because before this Casey was working in Androids. Besides, they often go vacation together with Enronaa and Android collegues on annual golf outing. David as a independent auditor, should not have any personal relationship with his client because this can affect his decision as a auditor to his client, Enronaa. 3.13 Self-Interest Threat Self interest threat may occur as a result of conflicts relating to financial or other interest of a professional accountant. In this case, Enronaa was the most important client to Androids because it is their single biggest client. Enronaa pay $100 million fee to Androids annually. This fee may consist of audit fee and other services that Andoids served to Enronaa such as

consulting services. Androids do no want to lose this tremendous amount of income that they get from Enronaa so Androids have to care Enronaa. 3.2 Accounting Issues 3.21 Creative Accounting Creative accounting define as the accounting process consisting of dealing with many matters of judgment and of resolving conflicts between competing approaches to the presentation of the results of financial events and transactions. In Enronaa case, David express that he had used accounting practices which creative accounting that allow Enronaa to hide their debts, but it is all are within the context of the fair value accounting. In Solid Waste case, Androids audit engagement team recognized that Solid Waste employed Aggressive accounting practices to enhance its earnings and some were practically violating GAAP.

4. Alternatives solutions We suggest that there should be a policy that the audit team must be rotate every 5 years. This is because to avoid conflict of interest and personal relationship between external auditor and its clients. Besides, the audit report will be more accurate and independent and this will result in the trust and confident level of shareholder that the financial statement of the company are well prepared and do not have misstatements and fraud. Besides, SEC must tighten ethics policies, independence and code of professional conduct in every audit firm. Every audit firm must comply and follow fundamental principles of ethics which are integrity, objectivity, competence and due care, confidentiality and other professional behavior. External auditing work and consultation must be separate to avoid conflict of interest and fraud. External auditor is refereed as an independent auditor and not being employed by the

company being audited. External auditor only audit financial statements and they also may conduct compliance, operational, and forensic audit for client. The management of advisory and consultation services should be provided by other audit company. Based on Nancy advices, David had to decide whether to shred or not shred the document of Enronaa.. For the first situation, if David choose to shred the document mean that David want to hide Enronaa fraud and misstatements. In anytime, Enronaa fraud could be blown out and be known by SEC. So it is important for Androids to destroy all the evidence of misleading and fraud. David has to know that SEC can investigate to detect fraud in Enronaa firm by using others way because the working paper of Enronaa is not the only evidence SEC can use. The other situation is David choose not to shred the documents, in the same time, David admit the guilty between Androids and Enronaa to SEC. Of course, Androids will received punishment and penalty by SEC but since Androids are reporting the fraud and admit their guilty, SEC can reconsider their penalty.

5. Recommendations We suggest that Androids should not shred the working paper of Enronaa and in the same time report the fraud of Enronaa to SEC because even if Androids will be sued, at least David had done the right thing by exposing the truth and paid his responsibility to the fraud been done. Besides, David should continue Androids motto Think Straight, Talk Straight and the companys founder, Arthur Android philosophy which he emphasis on honesty . Therefore, as an auditor, David at least has to comply with his own professional ethics and paid his responsibility toward the stakeholders. Besides, when David admit the fraud, he can be said as honesty, integrity and comply with auditing procedures and standard.

6. Reference http://www.pwc.com/
http://en.wikipedia.org/wiki/Auditor_independence http://www.charteredaccountants.com.au/Industry-Topics/Audit-and-assurance/ExternalAuditors/Auditor-Rotation.aspx