case

Topics: Audit, Enron, Auditing Pages: 7 (2304 words) Published: March 25, 2014
CASE#1
ENRON CORPORATION
1.Different parties were responsible for the occurrence of Enron crisis. Listed below are some of the parties who were responsible for the Enron fraud. a.The Enron Management: There is no doubt that the Enron management staged the fraud. The management was responsible for the misrepresentation of financial statement/ documents and wrong accounting practice. In Early 2002, their abusive accounting and financial reporting practices surfaced. Moreover, the management influenced the auditors to make business judgment in favor of the corporation and thus influenced auditor’s independence. The top three executives created a culture that fostered rule breaking. b.The Engaged Andersen’s auditors: The auditors lacked appropriate professional judgment in connection with its Enron audit. They failed to maintain their independence by issuing an unqualified opinion despite the disturbing financial statement of Enron. They failed to result a transparent is not reliable financial statement. Moreover, the auditors were assisting and providing additional consulting services to its client to build the financial statement. They should have promptly raised concern to the senior management of Andersen. c.Senior Management: Although the senior management had no power to force Enron to adhere to a higher standard, they did not immediately decide to withdraw from their client (Enron). Upon realization of concerns being raised, they failed to further investigate these concerns. The senior management should have raised this concern to the audit committee and the board of directors of Enron. d.The Regulatory agencies and accounting groups: The SEC and the FASB provided little in the way of formal guidance for companies to follow in accounting and reporting for SPEs. The gaping loophole in accounting practice allowed companies to create SPEs which had controversial exception. This exception worked in favor of Enron. The lack of PCAOB to oversee the rule making process for the independent audit function was another cause that might have fostered the Auditor’s performance. The regulatory agencies were unable to limit the Enron’s management ability to influence the independent auditor (Andersen). e.Security trader/Investment Bankers: These institutions had the responsibility to act with professional care when trading the Enron securities to its customer. The banks and brokers should have further tried to investigate the securities issued by Enron since they were suddenly very lucrative and attractive. They should have had a certain degree of due diligence towards their client/customer. 2.Today, an audit firms are prohibited from providing certain types of consulting services to their client (Sarbanes Oxley Act 2002). Below are three of such prohibited services: a. Financial system design and implementation: An audit firm is prohibited from designing a financial reporting system for its client and helping them implementing it. Today these types of design come in computer software and database system. The designing and implementation of system is costly and if an audit firm were to allow these services, they would be indirectly influenced by the high service charges and would affect their opinion on the client’s financial statement. Moreover, an auditor would act towards the favor of their client by providing an unbiased opinion. b.Legal and expert services unrelated to audit: The SOX act prohibits audit firms from providing legal and expert services unrelated to audit to its client. These services usually come with a high fee and would influence an audit firm to look for loopholes and conservative interpretation of rules in regulation thus act in favor of its client. Performing legal services would provide audit firm with opportunity to generate legal fee from its client which would directly affect their professional judgment and opinion during the audit process. c.Broker or dealer, investment adviser, or...
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