Enron Corporation Questions - Free Paper in Finance and Accounting

1. The Enron debacle created what one public official reported was a "crisis of confidence" on the part of the public in the accounting profession. List the parties who you believe were most responsible for that crisis. Briefly justify each of your choices.

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The leading culprit responsible for the loss of public confidence in Enron was the management team which was led by the board of directors and also consisted of the CFO. These were the people entrusted with maintaining public trust and the welfare of shareholders, but instead they turned their focus on making the Enron become the best company in the world.

The CFO of Enron was also at fault for failing to establish strong internal controls or having a strong internal audit function within the company. Transactions were getting implemented haphazardly without due diligence, consultation, or alerts for the various red flags that were conspicuous to anyone with a keen accounting eye like Watkins had observed (Maltese, 2006).

The Andersen independent auditing firm was also liable for the mess at Enron. The auditing firm was aware of the on-goings at Enron through their special purpose entities and did nothing to avert the impending financial meltdown that was inevitable. They failed to advise their client accordingly and where such was done and the client failed to adhere to the auditor's advice, the independent firm failed to excuse themselves from the looming malpractices.

2. List three types of consulting services that audit firms are now prohibited from providing to clients that are public companies. For each item, indicate the specific threats, if any, that the provision of the given service could pose for an audit firm's independence.

Providing internal audit services is one of the prohibited functions that an independent auditor should not provide to public companies because it is likely to compromise their independence. This is because, at the end of the day, the independent auditors will be auditing the financial statements that they have been auditing all along thus creating a conflict of interest.

Independent auditors are also not allowed to provide professional consultancy services to their publicly listed corporate clients. This is because they are likely to influence the business decisions of the entity, thus having a vested interest in the financial performance of the company. They ought to offer auditing services strictly and not venture into the business operation decisions of the company they are auditing.

Professional auditing companies are also not allowed to design the accounting systems of their clients. This is because they are likely to implement the system in a manner that will compromise the auditing process when the time for an audit comes (Dembinski, 2006). Designing the accounting system will make the auditors to be dependent on the company's outcome after the auditing process is complete.

3. For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen's involvement in Enron's accounting and financial reporting decisions. Given the assumption, do you believe that Andersen's involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.

Andersen violated the professional auditing standard of maintaining independence from their clients. They had vested interests in Enron because they received $52 million payment with only a half of this amount being related to auditing services. Their financial interests were tied to the success of Enron as a company.

They also violated professional auditing standards by failing to implement an audit plan that ought to have been supervised. The Houston employees should have been supervised as they carried out the audit on Enron. A clear audit plan could have preempted the need to shred some of the crucial documents like it happened.

The audit firm also failed to uphold professional audit standards by not advising their client to implement tight internal controls and establish an internal audit department. The lack of proper internal controls made it possible for Enron's employees to abuse the special purpose entities (Jones, 2010).

Andersen also breached the professional auditing standards by consistently giving unqualified reports touching on Enron's financial activities. They should have done the right thing and issues a qualified report the moment they sensed that something was amiss with the financial statements of Enron (Bierman, 2008).

4. Briefly describe the key requirements included in professional auditing standards regarding the preparation and retention of audit workpapers. Which party "owns" audit workpapers, the client or the audit firm?

The established professional auditing standards that govern working papers in an audit process require that the auditor reports whether the financial statements of the client have been prepared in accordance to the generally accepted accounting principles (GAAPs). Anywhere that the financial statements are inconsistent with the GAAPs should be highlighted by the auditors in their report. The same should also be highlighted and reported where the accounting information disclosed in the financial statements is not sufficient (Benston, 2003). The auditor must give a professional opinion, qualified or unqualified, with regards to the financial statements under audit. If there is any instance where the auditors admit responsibility or liability with regard to the financial statements under audit, they should clearly disclose this fact. All these information is contained in the audit working papers which belong to the auditing firm and should be safeguarded to prevent their contents from being misused. This is because failing to restrict access or to secure the working papers may tempt other restricted personnel to misuse the information contained in the audit working papers.

5. Identify five recommendations made to strengthen the independent audit function following the Enron scandal. For each of these recommendations, indicate why you support or do not support the given measure. Also indicate which of these recommendations were eventually implemented.

One of the recommendations passed to strengthen the independent audit function was the revision of rules pertaining offering non-audit services to clients. This was geared towards ascertaining the independence of the auditor (Niskanen, 2007), a recommendation that I strongly support because the independence of an auditor is important in forming a profession opinion on the audit report.

There was the establishment of the rule that an accounting firm should not have their members as part of an audit engagement team. Again, I support this recommendation because it divorces the accounting functions from the audit functions within the same firm.

There was also a requirement that the client makes public any information related to both audit and non-audit services provided by the employer and the audit fees paid thereof. I support this recommendation because excessive audit fees are an indication of auditor dependence on a certain client.

The independent audit team is also required to report certain matters to the internal audit team of their client. This ought to be supported because external auditors may obtain information that the internal auditors may have overlooked or not been aware of.

There was another recommendation that the internal audit committee of a company should approve in advance all the services, non-audit and audit related, that the external auditors will provided. This should be supported because the company's audit team should be aware of exactly what the external auditors are coming to do in the company.

6. Do you believe that there has been significant shift or evolution over the past several decades in the concept of "professionalism" as it relates to the public accounting discipline? If so, explain how you believe that concept has changed or evolved over that time frame and identify the key factors responsible for any apparent changes.

There is no denying that there has been a significant improvement in the aspect of 'professionalism' in accounting standards. This is mainly evident through the implementation of various standards and strict regulations put in place to avert any accounting or auditing malpractices in the profession. The new bodies to uphold these standards and the regulatory framework in the past decade have allowed accountants and auditors to maintain transparency, accountability, and integrity in the profession. The notable aspects of the improved accounting/auditing profession include regulations, laws, and the implementation of the GAAPs.

7. As pointed out in the case, the SEC does not require public companies to have their quarterly financial statements audited. What responsibilities, if any, do audit firms have with regard to the quarterly financial statements of their clients? In your opinion, should quarterly financial statements be audited? Defend your answer.

Auditors have a responsibility to go through the annual financial statements prepared by their client to ascertain their true and fair reflection. It is the duty of the management, led by the CFO and the internal audit committee, to ensure that the financial statements are prepared in adherence to the GAAPs. As such, the audit firms have little or zero influence over the quarterly financial statements of the company because they only come in to verify the true and fair view of the annual financial statements of the company. However, if an error in the quarterly statements is noticed later during the annual audit process, then the auditors have a duty to point out this in their report and prevail on the management to rectify this accordingly in their end-year financial statements. In my opinion, quarterly financial statements should not be audited because the audit process is a lengthy procedure that takes time to prepare, undertake, and report on the findings. There would be no enough time to audit any large company on a quarterly basis.

8. Biblical Perspective

The bible condemns liars and cheats in equal measure as all people, created in the image of God, ought to be fair to others in the society. The management of Enron led by their board of directors went against the biblical requirements by sidelining both the shareholders and the public in their greed to make Enron the greatest company in the world (Toffler & Reingold, 2003).

The CFO and the internal audit committee were also insensitive to the plight of their fellow workers and shareholders by engaging in fishy deals through their SPEs. Equally at fault if the Andersen independent audit firm because, instead of doing the right thing by raising red flags on scrupulous transactions, they decided to work closely with Enron management officials in concealing the actual financial position of Enron.

The biblical or prudent thing for the management, the CFO, and the Andersen auditors to do would have been compliance with the law and upholding their fiduciary duty towards their relevant stakeholders.

References

Benston, G. J. (2003). Following the money: The Enron failure and the state of corporate disclosure. Washington, D.C: AEI-Brookings Joint Center for Regulatory Studies.

Bierman, H. (2008). Accounting/finance lessons of Enron: A case study. Hackensack, New Jersey: World Scientific Publishing Company.

Dembinski, P. H. (2006). Enron and world finance: A case study in ethics. Basingstoke, England: Palgrave Macmillan.

Jones, M. (2010). Creative accounting, fraud and international accounting scandals. Chichester: John Wiley & Sons.

Maltese, J. R. (2006). Accounting violations: A study of how accountants at Enr...