MANAGERIAL ACCOUNTING ASSIGNMENT NO1
QUESTION 1 (B)
Evaluate the auditor's role in the certification of the financial statements and conclude whether its work is effective in
preventing major scandals on the lines of Enron and Worldcom. 1.0
HOW DID THE AUDITORS FAIL TO CATCH PROBLEMS AT ENRON?
HOW TO PREVENT RECURRENCE OF ENRON?
NEW RESPONSIBILITIES OF AUDITORS ACCORDING TO SARBANES-OXLEY ACT 2002 6.0
The responsibility of an auditor is to express an opinion on the financial statements based on his audit which means verification or check in accordance with International Standards on Auditing. These standards require that the author complies with ethical requirements and performs the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
2.0 ENRON-CORPORATE FIASCOS
Enron was established in 1985 following the merge of Houston Natural Gas and InterNorth. In year 2000, Enron reported a remarkable growth of revenue of $ 100.8 billion, putting it at number seven in the Fortune 500 list of the country’s biggest companies. However, in October 2001, things were reversed with its report of $638 million third-quarter loss and $1.2 billion reduction in stock value . Following the revise of financial statements for past five years which accounted for $586 million in losses , in December, Enron filed for Chapter 11 bankruptcy, and became the US’s largest ever corporate collapse. Behind this world-shaking collapse is the fact of executives’ self-dealing, greed and the accountancy company’s default. Enron’s collapse recalls the debate of Anglo-Saxon corporate governance model, which supports deregulation, ‘shareholder value’ and opposition of public intervention. One of the important lessons from the Enron collapse is that no one in the ‘audit chain’ could alarm, disclose, and correct its weak financial status and bad business behaviour. The audit chain, including the audit committee of the board, the board, the outside auditor, the market specialists in stock, the stock exchanges, major creditors, and the credit rating agencies, etc., appears to have not had an enough incentive to find out and disclose the truth of the behaviour of Enron. Among them, Arthur Andersen, the outside auditors, who should be independent from the audited company, failed to report the accurate information because of a conflict of interest between the auditing and consulting activity for Enron. Enron was Arthur Andersen's second largest U.S. customer, paying $25 million in audit fees.
3.0 HOW DID THE AUDITORS FAIL TO CATCH PROBLEMS AT ENRON?
Andersen has acknowledged that its audits failed to require Enron to include two special purpose entities (SPE’s), to increase the use of debt finance to finance specific activities, in the company’s consolidated financial statements as generally accounting principles required. In addition, the Enron audit committee also failed in overseeing the work of the auditors and inquiring the operation and management of the company independently. Failure...
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