Crisis of Enron and Auditors Responsiblilites

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Viktoria Martirosyan
Case 1.1
Several parties were responsible for Enron crisis, including independent auditor, key executive officers, internal auditors, SEC and FASB. The hypocrisy, dishonorable actions and unethical behavior of Kenney Lay, Jeffrey Skilling, Andrew Fastow led to bankruptcy. This and many other problems, such as loss in transactions involving the swaps stocks, SPE related issues and est., finally contributed to crisis. As Enron executives, all of their concerns should have been focused on Enron’s profits, but seems that many of them only cared about their wealth. When financial problem surfaced, they did not attempt to fix it, but made efforts to maintain their own benefits and ignored the whole company’s and investor’s loss. This unethical behavior not only deceived the investors but also finally resulted in Enron’s crisis. Auditors also played an important role in Enron’s downfall. The most important statutory duty of the independent auditor is to ensure the financial reports are intended to give a true and fair view. If the financial statement contains fraud and irregularities, independent auditor should discover and report it to the proper authority. Auditors were negligent of their duties. Anderson breaches the duty to warn, as they knew there was fraud and major error in the financial statements. Moreover, questionable accounting and financial decisions had been reviewed, analyzed, and apparently approved by Andersen. Even worse, Anderson was issuing unqualified reports over the period of time while the books were “cooked”. They jeopardized their independence by providing many not just audit services but also consulting services. In addition, to prevent law enforcement authorities from obtaining potential incriminating evidences Andersen shred the audit workpapers. All of these triggered the public disappointment in professionalism that leads accounting industry to take its blame in Enron’s crisis. SEC and FASB didn’t provide proper and enough guidance; minimal legal and accounting guidelines for SPEs helped Enron to divert huge amounts of liabilities to off its balance sheet. Qt.2

The scope of consulting services that accounting firms could provide to their audit clients should be limited because it is a conflict of interest and it can put at risk auditors’ independence. a. Bookkeeping or other services related to the accounting records or financial statements of the audit clients are one of those consulting services that directly impair independence where auditors’ objectivity is going out the window. b. Internal audit outsourcing services. These rules prohibit the accountant from providing any internal audit service that has been outsourced by the audit client that relates to the audit client's internal accounting controls, financial systems or financial statements unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements. Potential threat here is that the auditor would not want to list something as a weakness in the area that was created and employed by them. c. Financial information systems design and implementation. This rule prohibits the accounting firm from providing any service related to the audit client's information system, unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements. Again, the potential threat here is that designing and testing the same system will impair auditor’s independence.

There is no question that Andersen was involved in Enron’s accounting and financial reporting decisions. Involvement in these decisions violates at least the following professional auditing standards: 1. SAS 32- Reporting on adequacy of disclosure in financial statements. Inadequate disclosures that Enron provided for its...
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