Case 1.1 – Enron Corporation

Case 1. 1 Enron Corporation - watchword 1 The parties we believe to be most at fault for the crisis in this incase are a) the scrutiniseed account Firm engaged in the Enron take stock (Arthur Andersen) b) Enron Management (Kenneth Lay, Jeffrey Skilling, Andrew Fastow and c) the SEC. The Public be Firm Arthur AndersenThe tender has the obligation to evaluate the risk of literal device, including * Incentives and motives for fraud Enron was a fast upraiseing company with many start-ups projects, such(prenominal) as the Energy Wholesale Services (a B2B electronic marketplace for the energy industries) or the Enron Broadband Services (an operating unit serving as mediator between users and suppliers of broadband services,) that constantly essential huge amount of specie to succeed. * The opportunity to kick in fraud Enron internal controls were weak and the trouble was promoting a culture that encouraged fraud rather than honesty. Rationalizations that might allow someon e to commit fraud the caution at Enron believed that they were only trying to grow the company and increase their stock price by misrepresenting their monetary statements. once their impertinently ventures would succeed, they would be able to cover the losses previously incurred. both the ingredients were present for Anderson to uncover the fraud. Moreover, the auditors have a responsibility to disclose material fraud and irregular lymph gland acts to the audit committee and the Board of Directors.If the pecuniary statements are not restated, the auditor should issue a qualified, an adverse perspective or consider withdrawing from the engagement. The team auditing Enron should have followed the guidance when the management acted with scienter. As mentioned in the case, Arthur Andersen was creation paid exorbitant amounts of money to audit Enron and certify to the validity of its financial statements. The firm failed on e precise front to seize any of the fraudulent ac counting transpiring and many critics questioned whether Anderson was involved with formulation the books.Given the scale of the compensation and how entrenched the firm was in Enrons financial operations, it is hard to believe that the Andersen auditors, CPAs, failed to notice such obviously illegal accounting treatments of trans fulfills. As so well said by the auditor of Accounting Today, if a firm accepts and collects the audit fee, then it should be alert to accept the turn on, otherwise it is not part of the solution, but part of the hassle. The fault not only goes to the auditors, but to the companys management as well.Enrons management Kenneth Lay turned a projection screen eye to anything that could obstruct Enrons growth. He said that his ultimate stopping point was to make Enron the worlds greatest company. This is a great intent for any CEO to have however, in his attempts to reach this name and address, he certain a case of tunnel vision that led to unexpected consequences. When Sherron Watkins wrote him a letter questioning the treatment of certain accounting transactions and puzzle disclosures, he ignored her and stated that hed rather not see it.Kenneth Lay even failed to acknowledge or address the issues laterwardward most of the Enron scandal had fully unraveled by refusing to testify in the beginning recounting in 2002. Jeffrey Skilling basically followed in the footsteps of Kenneth Lay and brought with him a similar rise shot to running a commerce. Skilling shared the similar tunnel vision approach as Lay as manifest by their laser-focus on allowance per share. They both were go awaying to ignore any amiss(p)doing in the company as long as pelf per share move to increase.Skilling also developed a certain level of arrogance after cosmos singled out as the number one CEO in the country. He would make brassy and tacky comments regarding Enrons competitors and critics. This arrogance probable aided in his ability to s hield out the negative aspects of Enrons operations and to only see the positives. He was the best CEO in America, so Enron couldnt possibly do anything terribly wrong under his watch. When being questioned by Congressional investigators regarding the scandal, he simply passed the blame by stating that he is not an accountant. Andrew Fastow was the CFO and created the financial infrastructure for Enron. He, analogous Skilling, was hailed as one of the top executives in the country as evidenced by his Excellence in Capital Structure Management purity presented to him by CFO Magazine. As the CFO of Enron, Fastow should have known break up than to do what he did with the creation and operation of the SPEs. His brass was at such a high level that he even named several of them after his children.He, like Kenneth Lay, refused to take any accountability by refusing to testify forwards Congress in 2002. SEC and FASB The SEC and FASB also share the responsibility for the fraud scandal th at took place. The organisms should have passed stronger accounting standards to regulate auditing. Both organizations were in favor of the 3% regulating for SPEs. This rule stated that a SPE needed only a 3% investment from an outside investor to be considered independent. This rule allowed Enron to discharge all its unprofitable businesses in SPEs to avoid consolidating losses.That is, the SEC and FASB endorsed a law that allowed companies to dump considerable losses in off-balance entities. A case of fraud was bound to happen. The Auditors, the SEC, and the FASB made it easy for Enrons management to commit one of the biggest frauds in the history of accounting. - Discussion 3 Andersens fight in Enrons accounting and financial incubateing decisions violated the following professional auditing standards AU 220, independency, SAS 1) this standard requires the auditor to be independent.Auditors issue an audit opinion that pull up stakes serve as a reliable first of instruct ion on the company to external parties (investors). Thus, it is necessary for the auditor to be unbiased when reporting his findings to the existence. The lack of independence of the team auditing Enron can be derived from the fact that Andersen was providing consulting services as well as auditing services to Enron, with consulting add accounting for more than 50% of the total yearly revenue genuine from Enron.This billet led Andersen to be at the same time external auditor and internal auditor to Enron. AU 316, context of Fraud in a Financial Statement Audit (SAS 99) this standard concerns fraudulent acts that creator a material misstatement of the financial statements. Andersen helped Enron misrepresent significant information in the financial statements. The team auditing Enron intentional misapplied accounting principles relating to the classification, the manner of presentation, and the disclosure of the financial statements. To clarify, Enron would use the mark-to-m arket ccounting method on long-term accounting contract, which immediately recognizes earnings when contracts are secured rather than when services are rendered. That accounting method results in financial statements being materially misstated and at the same time, it considerably increase the compensation of Executives at Enron that was based on earnings. AU 317. 05, Illegal Acts by Clients (SAS 54) this standard indicates that the auditors responsibility for misstatements resulting from illegal acts having a school and material effect on the determination of financial statement amounts is the same as that for errors or fraud.Enron would issue stocks to different SPEs in convert for notes receivable however, US GAAP does not allow for the recording of receivables in exchange of stocks issued. These misstatements led to a reduction of $1. 2 billion in Owners beauteousness after the reversal of previously recorded transactions as assets. In addition, Enron had investments in comp anies (not SPEs) that it consolidated, but when the investments began to show losses, they were transferred to SPEs so that it would not have to meditate these losses on the financial statements.AU 334, Related Party Transactions, SAS 45 this standard requires auditors to follow GAAS established procedures when auditing financial statements in order to observe related party relationships and transactions and to estimate whether or not the essential financial statement accounting and disclosure had been followed. This standard was also violated as Executives of Enron were managing some SPEs (p. 13. ) Andrew Fastow, Enrons CFO, earned a profit amounting to $30 million on one of his investment in an SPE that he was managing.Furthermore, Fastows friends realized a profit $1 million on investment of $5,800 in 60 days in the same SPE. AU 319, Consideration of Internal Controls in a Financial Statement audits The auditors report on internal control over financial reporting that goes to the public must report material weaknesses in internal control. Andersen audit team in charge of Enron auditing failed to provide an unbiased opinion on the effectiveness of the system of internal control over financial reporting. - Discussion 6After Enron and other fraud scandals, we see a press from the self-oversight of public accounting firms to an independent oversight of accounting firms auditing public companies by government bodies such as the PCAOB. Congress passed the Sarbanes-Oxley Act (SOX) in 2002 which goal was to strengthen the financial reporting rules for public companies. It also forced public companies to prepare reports on the quality of their internal controls as well as limit the types of consulting services that an accounting firm is allowed to provide to its clients in alignment with audit services provided.Fraud scandals also led to the establishment of the command requiring management of public companies to provide a letter asserting that the financia l statements are fairly stated. Most recently, the SEC voted to adopt whistleblower rules mandated by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The rules experience the Acts requirement that the Commission pay an award to whistleblowers who voluntarily provide original information to the SEC that leads to a successful enforcement action with sanctions of over $1 million. Professionalism in public accounting has changed over the bypast decades for a variety of reasons from the advances in technology to the globalization of the economy. One of the slipway professionalism has changed is that independence has become a major component for public accountants. Independence confirmations before the audit and during the audit are major parts of being professional in todays definition. Ethics are some other major part of professionalism. Being ethical in your decisions is stressed more now than ever before. Being courteous of others cultures, beliefs, and religions are a new addition to being professional.With everything becoming global and information quickly being spread by technology, being conscientious of what is said and done is very important for accountants for one bad thing can have monstrous implications. Being professional is more than just how you act in the business place for since you represent the company, your actions are watched on and off the job. With the increasing song of investors in the market it becomes more pressing to have reforms to regulate the circulation of information and assure investors that they are using the highest quality of financial statements. Discussion 7 The SEC has required public companies to have their every quarter financial statements audited before filing of theirs quarterly report on Form 10-Q. Therefore, audit firms will need to follow all the audit standards set out, from establishing an understanding with the client to performing analytical procedures, inq uiries and other review procedures to prepare an audit report on the review of interim financial information. It is our opinion that quarterly financial statements should be audited because they will be more reliable and credible to the investors.Auditing quarterly financial statements will also shade lights on questionable managements earnings. At the same time, a continuous (quarterly) audit will allow for less restatement at the end of the year that is less rage for investors. The auditor will be required to follow the clients financial situation more closely and address any material issues sooner. Quarterly audited financial statements will give investors confidence in relying on the companys financial information.