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accounting fraud and auditor legal liability
c a S eS inc lu de d in t hiS Se ction

4
89 99

4.1 Enron Corporation and Andersen, LLP
Analyzing the Fall of Two Giants

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4.2 Comptronix Corporation 4.3 Cendant Corporation

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Identifying Inherent Risk and Control Risk Factors
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111 119 127 137

Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . .

4.4 Waste Management, Inc. 4.5 Xerox Corporation 4.6 Phar-Mor, Inc.

Manipulating Accounting Estimates
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Evaluating Risk of Financial Statement Fraud
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Accounting Fraud, Litigation, and Auditor Liability

instructor resource Manual — do not coPy or redistribute

instructor resource Manual — do not coPy or redistribute

enron corporation and andersen, llP
analyzing the fall of two giants
inS tr uc t ional o b je c t ive S
[1]

c a s e

4.1

Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt

[2]

[3]

To help students understand what happened at Enron Corporation and how Andersen’s involvement with Enron led to the accounting firm’s downfall. To enhance students’ appreciation of the importance of understanding an audit client’s core business strategies. To develop students’ understanding of the role of confidence, reputation, and trust both in the corporate and auditing professions.

[4]

[5]

[6]

To provide a venue for exploring professional issues relating to auditor independence and the provision of non-audit services for clients. To introduce students to the current debate on rules- versus principles-based accounting standards and related implications for the auditing profession. To actively involve students in considering the challenges facing the accounting profession and in evaluating alternative courses of action for overcoming these obstacles.

KEY FACTS
ƒƒ Enron entered the year 2001 as the seventh largest public company in the U.S., only to exit the year as the largest company to ever declare bankruptcy in U.S. history (until WorldCom’s bankruptcy in 2002 later claimed the record). ƒƒ Enron engaged in very aggressive accounting approaches, including the establishment of special purpose entities (SPEs), the intent of which appears to have been simply to move debt off the company’s balance sheet and enhance profits. ƒƒ Enron began as a natural gas pipeline company, when Houston Natural Gas and InterNorth of Omaha, Nebraska merged in 1985. The company eventually morphed into a speculative energy and commodity trading company, often acting as a “market-maker” in electricity and other markets. ƒƒ A Northwestern University professor established Arthur Andersen, LLP in 1913. The company rapidly achieved a reputation for taking tough stands against clients wishing to adopt aggressive reporting strategies. This reputation was key to the early success of the firm. ƒƒ Andersen’s failure was a result of the firm’s loss of reputation as a result of a long string of audit failures (including Waste Management, Global Crossing, Sunbeam, Qwest Communications, Enron, and eventually WorldCom) and of the firm’s conviction on federal charges of obstruction of justice. ƒƒ Financial accounting standards played a role in that some of Enron’s questionable accounting strategies were in technical compliance with generally accepted accounting principles (GAAP), despite clearly violating the intent of those standards. This ties directly to the current debate on rules-based versus principles-based accounting standards.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis...
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