Auditing issues in Enron case

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1 Auditing issues in Enron case

Independent

Needed for the Houston office of Andersen, an audit partner that understands the role of being a "public watchdog" with "ultimate allegiance to the creditors and shareholders" . Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including the failure to consolidate, failure of Enron to make $51million in proposed adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries . Another example is Lord Wakeham joined Enron as a non-executive director in 1994 and also sat on Enron's audit and compliance committee. In addition, Andersen also provides internal audit service to Enron, which in fact impact Andersen independence.

Regarding to Enron collapse, the regulatory environment in which the auditing profession operates must be restructured. According to Ramsay report, the audit independent supervisor board should be established to monitor audit firms' processes, and monitor compliance with non-audit service fee disclosure and the audit committee should monitor the auditor's independence and effectiveness.

True and fair view

With regard to issues arising from SPE, Raptors were not hedges in the economic sense of transferring risk to a third party, but rather a means of absorbing losses with a reserve of Enron shares contributed by the hedging entity. However, Anderson approved Enron not to consolidate Raptor because Raptor is defined as SPE that means Andersen had seriously breached the true and fair criterion.

Enron avoid to put pressures on balance sheet by means that issuing shares would go to an affiliate and then go to the public, the cash of which would come back to Enron by paying off the note or related receivable. For example, Enron sold inventory or assets of some sort in 1999 to an affiliated entity and received a promise to pay for those assets from that affiliate.

In general, Arthur Andersen misunderstood the nature of auditor independence and true and fair view is only perceived to form audit report in accord with the accounting standards.

2 Special purpose entity

According to concept of Special purpose entity, outside owners must make a 'substantial' investment (normally 3% of total capital), and their investment must actually be at risk. Second, the outside owners must have some control over the investment the entity. In accordance with FASB, SPE is not necessary to be consolidated. Therefore, Enron employed its advantage to transfer its risk to SPE (for example Chewco and Raptor) by reducing its liabilities or debts, which is favored by financial analyst and credit agencies.

In application the concept of SPE in Australian, SPE must be consolidated with its parent company. According to AASB 1024.23, those internal transactions including debts, investments and financial leasing, etc should be eliminated in full because those entities are comprised in Enron group.

Regarding to SPE character, the application of SPE includes tax advantage and reduce the cost of borrowing. However, Enron shift its risk to another party and mask of Enron's debt position.

3 Guarantees in Enron Case

The role guarantees play in group structure

At the forefront of new business ventures and technology, Enron diversified into trading non-energy- related commodities- including new weather derivatives. Its investments resulted in a complex group arrangement with hundreds of subsidiary and other related entities, including Special Purpose Entities. The guarantees is a way to help the SPEs to "hedge" the market value of some of Enron's investments, enabling it to transfer the losses off of its books.

The role guarantees play in collapse of Enron

Enron guaranteed hundreds of millions of dollars' worth of the SPEs' debt. It used its own stock, stock in publicly traded subsidiaries and rights to future shares of Enron stock to support the SPEs' value. It sometime...
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