03/14/2014

Zizhang Huang
Enron Case
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
WherronWatkin, 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

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 workpapersis 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.