1.

PRESENTATION OF THE FACTS SURROUNDING THE CASE

The case study is about Androids is under attack as it was already in the news,
and what made Androids a tastier target was the fact that Enronaa was not the
first time. Its start from they had used accounting practices that allowed Enronaa
to hide its debts, but really these are all within the context of fair value
accounting. Androids was critics that the auditors were incompetent, at worse,
they deliberately overlooked irregularities at Enronaa in order not to lose the
lucrative stream of consulting and other work it provided. Androids also had prior
entanglements with the Securities and Exchange Commission (SEC). Androids
agreed to pay the SEC a civil penalty of USD 7 million to settle charges related to
the firms work as auditors of Solid Waste. This issue is the US SEC found
Androids guilty of issuing materially false and misleading audit reports on Solid
Waste financial statements for the period 1993 through 1996.
Then, Androids also issued an audit report on Solid Wastes financial statements
in which it stated that the companys financial statements were presented fairly,
in all material respects, in conformity with generally accepted accounting
principles (GAAP) and that Androids had conducted its audit of those financial
statement in accordance with generally accepted auditing standard (GAAS). So,
SEC found that Androids representations were materially false and misleading.
While, Solid Wastes financial statements were not presented fairly, in all
material respects, in conformity with GAAP. Androids had allowed the
management of Solid Waste to use improper accounting to inflate its operating
income and other measures of success. It was the largest restatement of results
in the history of the SEC. Besides that, SEC found Androids failed to ensure that
all known misstatements were quantified and all likely misstatements were
estimated. SEC also found that Androids knew or was reckless in not knowing
that the auditors of the financial statements on which Androids issued
unqualified audit reports during those years that were not conducted in
accordance with GAAS. Androids thereby, engaged in improper professional
conduct.
The Solid Waste case followed Androids decision to pay USD 110 million to settle
a lawsuit on audits at Sunbeamic, another US client found to have less than
reliable accounts. David and Ken knew that the firm would be in deep trouble for
its role in Enronaas collapse. Androids were already under probation with the
SEC and another scandal in the likes of Enronaa would mean the end of their
business. The sessions would pressure Androids auditors to view accounting
issues Enronaas way. Androids knew that what Enronaa wanted and usually
sought to give it to them. The Enronaa account had become so lucrative for
Androids that the firm was unwilling to step away.

2.

IDENTIFICATION OF THE KEY ISSUES

1. Lack of professional independence of auditors

Android and his audit team does not apply independent audit
concept because they follow Enronaas management request.
2. Lack of professional integrity
Android has issue wrong audit report in order to assist its
client
( Enronaa)
3. Creative accounting
Enronaas accountant has manipulate their financial
statement to hide some misappropriate statement.
4. Engaged in improper professional conduct
Android pay 110m to settle lawsuit on Sunbeamic Company.
5. Close relationship between auditors and client (enronaa)
Android had been long time doing auditing services for
Enronaa. They may create good relationship therefore any
misstatement Android just ignores.

3. LISTING OF ALTERNATIVE COURSES OF ACTION THAT COULD BE

TAKEN

1. Android should apply accurate accounting and auditing principle towards

auditor independence conceptual.
2. Segregation of duties.
3. Enronaas accountant have to control company account by controlling
cost, expenses, and not by manipulate company account to get proper
account statement.
4. Despite of pay 110m, Android should obey the law punishment and make
improvement to next audit services they conduct. Admit the guilty
5. Android have to apply professional conduct as auditor to ensure there is a
limit between the relationship with client and their services while doing
auditing.

4. EVALUATION OF ALTERNATIVE COURSES OF ACTION

1. Android should apply accurate accounting and auditing principle

towards auditor independence conceptual.
Advantages: Clients will trust the level of quality that Android provides.
Disadvantages: Lack of independence may lead to huge amount of
penalty by SEC.
2. Segregation of duties.
Advantages: Segregation of duties will ensure the whole transaction and
procedures are done correctly and preventing staff from misleading of integrity.
Disadvantages: This system might allow another cost of hire staff because it
needs to allocate a few departments to separate the duties.
3. Enronaas accountant have to control company account by controlling
cost, expenses, and not by manipulate company account to get
proper account statement.
Advantages: by controlling all those expenses, cost etc. will result profit for the
company rather than by manipulate account statement to indicate profit.
Disadvantages: Controlling Company cost and expenses need accurate
transaction together with accurate invoice and sales transaction as an evidence
that might hard to get if top management is doing manipulation.

4. Despite of pay 110m, Android should obey the law punishment and
make improvement to next audit services they conduct. - Admit the
guilty

Advantages: by obey the law and regulations, Android may have to pay penalty
for huge amount. However they may not losing their client because client are
realised android are not take for granted about their responsibility.
Disadvantages: SEC will charge big amount of penalty to Android.

5. Android have to apply professional conduct as auditor to ensure

there is a limit between the relationship with client and their services
while doing auditing.
Advantages: by apply good professional conduct of auditor, android will
produce a high quality of work and he will be more independence in auditing.

Disadvantages: android may lose his close client because he applies strict
rules and regulation.

RECOMMENDATION OF THE BEST COURSE OF ACTION

There is two situation that arise in this case, which is David agree the advice
from Nancy to shred the document of Enronaa or the other situation were David
decide not to shred the document of Enronaa. Other than that, David should also
issue an adverse opinion report to Enronaa, and admit the previous
misstatements and false issuance of reports to SEC since the financial reports
consist of a lot of fraud and mistake for the past 16 years. First situation, while
David choose to shred the document mean he doesnt admit the guilt as an
auditor for Enronaa, therefore SEC will immediately start investigations towards
Androids. Thus, it is impossible for Androids to destroy all the evidence of
wrongdoing, since document is not the only evidence, when comes into
inspection to the auditors, the truth will be review and finally SEC will discovered
all the fraud that had been done by Androids and Enronaa. At the end, the
penalty and loss will be horrible than to admit the guilty. Because the company
might not have the chance to retain their reputation and other customer, at last,
Androids might go into bankruptcy.
The other situation will be David choose not to shred the documents, in the same
time, mean David admit the guilty between them and Enronaa. However, the
consequences that arise from it will be not only the penalty but also SEC will
start to investigate towards other clients of Androids, since people believe that
while one client have the problem, other clients as well might have the same
problems too. However, since they admit the fraud that had been done, they will
immediately take action to retain their reputation and improve their performance
to maintain their market. For example, they might find out and terminate the
responsibility engagement team. And they might also need to restructure their
organization in all perspective as well. Also, by admitting Androids' mistakes,
they are actually splitting the trouble with clients as well. So even though
Androids have to pay the penalties; theirs clients also need to do the same. On
the other hand, if the SEC found out them, the penalties will be much more
severe. We also would recommend legislation to create an independent, selfregulatory organization (SRO) to oversee accounting firms. In where, auditing
firm would remain in the private sector, but the government would be involved in
the same time to restore the confidence of the stakeholders. The SRO would
have rule-making, supervisory and disciplinary powers. Besides that, we also
recommend all of the auditor and professional bodies to focus more the
independent issues. Since, an auditor not only has to be independence in
appearance but also remain independence in mind. Therefore, audit firm,
professional bodies and auditor themselves need to be clear of the true meaning
4

of independence. Other than that, audit firm should look more closely at the
relationship between auditors, managers and the company audit committee. In
addition, Auditors should be rotated every few years to prevent long-term, close
ties between the management and audit firm to ensure the independence of an
auditor towards their audit opinion. Lastly, we would like to recommend that all
companies need to build a robust ethics infrastructure and follow it in the daily
business. For example, Androids might need to rebuild their policy such as
comply with by-law principles to ensure their auditor professionalism. And they
also need to ensure the policy is strong enough, it is to make sure all auditors will
comply with it. Other than that, audit firm must ensure that one auditor is only
available for one responsibility in a company. Thus, the professionalism will be
good enough for the audit firm.

6.

LESSON LEARNED FROM THE STORY.

1. Hire appropriate staf

2. Integrity level will reflects a person personality and quality.
3. Follow rules and regulations to avoid punishment.
4. Auditing career need good practice of accounting and auditing
principles.