3.

Given the assumption that the Powers Report excerpts included in Exhibit 3 are accurate,
Andersen violated several of the ten generally accepted auditing standards.
 Independence (Second General Standard)
In auditing Enron, Andersen violated numerous accounting standards. One of which is the
violation of independence, wherein the auditor must maintain independence in mental
attitude in all matters relating to the audit. General standard number two reads, “In all
matters relating to the assignment, an independence in mental attitude is to be maintained
by the auditor or auditors.” Andersen had given structuring advice to Andersen regarding
the SPEs and became too involved in Enron’s decisions for important accounting and
financial reporting treatments, the auditors may have forfeited some degree of objectivity
when they reviewed those decisions during the course of subsequent audits.
 Due Professional Care (Third General Standard)
“The auditor must exercise due professional care in the performance of the audit and the
preparation of the report.” Due professional care requires the auditor to exercise
professional skepticism which is an attitude of a questioning mind and a critical assessment
of audit evidence. In the auditing standards of the PCAOB, the standard stated that the
auditor uses the knowledge, skill, and ability called for by the profession of public
accounting to diligently perform, in good faith and with integrity, the gathering and
objective evaluation of evidence. Furthermore, the gathering and objectively evaluating
audit evidence requires the auditor to consider the competency and sufficiency of the
evidence. Since evidence is gathered and evaluated throughout the audit, professional
skepticism should be exercised throughout the audit process. The auditor neither assumes
that management is dishonest nor assumes unquestioned honesty. In exercising
professional skepticism, the auditor should not be satisfied with less than persuasive
evidence because of a belief that management is honest.
 Planning and Supervision (First Fieldwork Standard)
The first standard of field work requires that ‘the work is to be adequately planned and
assistants, if any, are to be properly supervised.’ “Audit planning involves developing an
overall strategy for the expected conduct and scope of the audit. The nature, extent, and
timing of planning vary with the size and complexity of the entity, experience with the
entity, and knowledge of the entity's business.” On the other hand, “Supervision involves
directing the efforts of assistants who are involved in accomplishing the objectives of the
audit and determining whether those objectives were accomplished.” A reliable quality
control function, including proper audit planning decisions and effective supervision
during an audit, should result in the identification of problematic situations in which
auditors have become too involved in client accounting and financial reporting decisions.
 Internal Control Evaluation (Second Fieldwork Standard)
“The auditor must obtain a sufficient understanding of the entity and its environment,
including its internal control, to assess the risk of material misstatement of the financial
statements whether due to error or fraud, and to design the nature, timing, and extent of
further audit procedures.” As explained by the standard, “The objective of the auditor is to
identify and assess the risks of material misstatement, whether due to fraud or error, at the
 financial statement and assertion levels, through understanding the entity and its
environment, including the entity’s internal control, thereby providing a basis for designing
and implementing responses to the assessed risks of material misstatement.” Given the
critical and seemingly apparent defects in Enron’s internal controls, Andersen auditors
failed to gain a “sufficient understanding” of the client’s internal control system.
 Sufficient Competent Evidential Matter (Third Fieldwork Standard)
“The auditor must obtain sufficient appropriate audit evidence by performing audit
procedures to afford a reasonable basis for an opinion regarding the financial statements
under audit.” Under the current third fieldwork standard the auditor must obtain “sufficient
appropriate” audit evidence. Audit evidence is defined as “all the information used by the
auditor in arriving at the conclusions on which the audit opinion is based and includes the
information contained in the accounting records underlying the financial statements and
other information.” In using an information as an audit evidence, the auditor should also
consider its’ reliability. It is explained in the standard that, “The auditor ordinarily obtains
more assurance from consistent audit evidence obtained from different sources or of a
different nature than from items of audit evidence considered individually. In addition,
obtaining audit evidence from different sources or of a different nature may indicate that
an individual item of audit evidence is not reliable.”
Andersen’s deep involvement in Enron’s aggressive accounting and financial reporting
treatments may have precluded the firm from collecting sufficient competent evidence to
support the audit opinions issued on the company’s financial statements wherein the
Andersen auditors may have been less than objective in reviewing or corroborating the
client’s aggressive accounting and financial reporting treatments.
 Reporting (Fourth Reporting Standard)
“The auditor's report must either express an opinion regarding the financial statements,
taken as a whole, or state that an opinion cannot be expressed. When the auditor cannot
express an overall opinion, the auditor should state the reasons in the auditor's report. In all
cases where an auditor's name is associated with financial statements, the auditor should
clearly indicate the character of the auditor's work, if any, and the degree of responsibility
the auditor is taking, in the auditor's report.” Accordingly, this standard establishes
requirements regarding the content of the auditor's written report when the auditor
expresses an unqualified opinion on the financial statements in the auditor's unqualified
report. When the auditor audits in accordance with the standards of the PCAOB, some
circumstances require that the auditor express a qualified opinion, adverse opinion, or
disclaimer of opinion and state the reasons for the departure from the unqualified opinion.
Andersen did not maintain independence and objectivity in auditing Enron, the audit firm
should have issued a disclaimer of opinion on the company’s periodic financial statements.