ENRON CASE

1. Three types of consulting services that audit firms have provided to their clients are:
Tax services. In this case where the audit firm provides a significant portion of the clients tax planning and
compliance work, or tax work that results in calculations likely to be used in the preparation of accounting entries that
are material to the financial statements could threaten the independence of the auditing firm.
Services involving the design, provision or implementation of information technology systems. This service
pose a threat in the independence of auditing firm because accounting system plays a significant part in the
preparation of the financial statements subject to audit.
Inspection of accounting procedures. When it comes to inspection of accounting procedures, there are certain
threats, given the decision that matter. Hence, inspection of accounting procedures makes it more treatable in case of
errors that can impact the company and audit client in the most unforeseen ways. Accounting procedures affects the
preparation of financial statements subject to audit thus it pose threats to independence due to conflict of interest
(public interest vs. self-interest of the auditing firm) that may arise.
2. The key requirements included in professional auditing standards regarding the preparation and retention of audit
work papers are the following:

It should state a clear audit objective, usually in terms of an audit assertion (for example, to ensure the

completeness of trade creditors).

It should fully state the year/period end (eg 31 October 2006), so that the working paper is not confused with

documentation belonging to a different year/period.

It should state the full extent of the test (ie how many items were tested and how this number was
determined). This will enable the preparer and any subsequent reviewers, to determine the sufficiency of the

audit evidence provided by the working paper.

Where there is necessary reference to another working paper, the full reference of that other working paper

must be given. A statement that details of testing can be found on another working paper is insufficient.
The working paper should clearly and objectively state the results of the test, without bias, and based on the

facts documented.
The conclusions reached should be consistent with the results of the test and should be able to withstand

independent scrutiny.
The working paper should be clearly referenced so that it can be filed appropriately and found easily when

required at a later date.

It should be signed by the person who prepares it so that queries can be directed to the appropriate person.
It should be signed and dated by any person who reviews it, in order to meet the quality control
requirements of the review.

The requirement prepare by auditor should be in a manner that it helps the auditors to carry out auditing services in
the most appropriate way. That is to say, auditor should do away with inappropriate representation while preparing

audit report. Hence the working paper requirement at most should avoid accumulating unnecessary working papers
for the sake of client and for the requirement of professional auditing standards.
Audit workpapers are the property of the auditor. The auditors rights of ownership, however, are subject to ethical
limitations relating to the confidential relationships with the clients. The auditor should also adopt reasonable
procedures for safety custody of how working papers and should retain them for a period sufficient to meet the needs
of his practice and to satisfy any pertinent legal requirements of records retention.
3. Recommendations that have been made recently to strengthen the independent audit functions are:

Independent auditor- I agree with the selection of independent auditor. The firm that will audit an entity

must be independent from the entity itself to prevent issuance of bias opinion.
Limits the types of consulting services that independent auditors can provide to their clients- I agree
with this recommendation because it will make the firms independence firmer and opinion more reliable.
Independence should not just in fact but also in appearance provided that it is the cornerstone of auditing
profession, thus relationship that could impair independence such as performing other consulting services,

should be limited only to engagements that are not prejudicial to independence.

Creation of new federal agency Public Company Accounting Oversight Board- I agree with the
establishment of a single governing agency that auditing firms will adhere into. The centralization of

governing agency will avoid confusion of whom and what pronouncement should be followed.
Require that audit clients periodically rotate or change their independent audit firms- I agree with the
periodic rotation of independent firm. This rotation will avoid audit firms dependence with the company for
profit they will generate that might influence the opinion they will render in the conduct of the study. This
recommendation will prevent collusion between the auditing firm and the company hence public can rely

with the auditors attestation of the companys compliance with GAAP.

Improving the effectiveness of Audit committee- Audit committees are responsible for selecting and
appraising independent and external CPA firms to provide audit functions hence strict and effective audit
committee strengthen the need for independent auditor.

4. Parties most responsible for ENRON case are:

ENRON Management is the most responsible party in the crisis. It is the management who produced
unreliable financial statements and used inappropriate accounting policy. They are the starting point of the

crisis. If the management opts to adhere to high ethical standard reporting, no crisis will arise.
ENRONS Audit Committee. Audit committees primary responsibility is to provide oversight of the internal
and external audit function and over the process of preparing the annual financial statements and public
reports on internal control, they, however, clearly failed to do. The failure of this committee triggers fraud to

exist.
The auditing firm Andersens. The inappropriate accounting policy employed will not lead to such global

crisis if the auditor performed their responsibility in accordance with GAAS. The improper auditing
procedures coupled with dependence with the client (for the massive fees they received) made Andersen
responsible given the fact that collusion between them materialized and public relied with their credibility in
assessing the fairness of the financial statements issued by the entity.

5. The case Enron clearly pointed out that SEC does not require public companies to have their quarterly financial
statements audit. It is within the companys discretion if they will have their quarterly reports audited which at times is
subject to manipulation and the likes thus the responsibility of the auditor for quarter financial statement lies with the
request of the company.
Theoretically quarterly financial statements in all circumstances should be audited. Given the shortest possible time in
which the working papers are prepared, it is also subject to errors. Hence, when audit are carried out, restatement
can be drawn and adjusted, and also it does not compromise with corporate ethics or so. However, cost should also
be considered. The cost should not outweigh the benefits derived therein. Pro and cons should first be identified
whether be it quarterly, half yearly of the annual financial statements for the sake of stake holders delight. Therefore,
I dont support quarterly issued financial statements to be audited conditional upon the nature and circumstances
presented.

6. Provided that Exhibit 3 provide accurate descriptions of Andersens involvement in Enron accounting and financial
reporting decisions, the auditing firm clearly violated the following auditing standards:

Independence. Andersen earned approximately $52 million in fees from Enron during 2000, but only $25
million of which was directly linked to the 2000 audit. The enormous consulting fees Andersen earned from
the client jeopardize the firms independence. The involvement of the Andersens own accountants in the

structuring of the SPEs mitigates independence.

Due professional care. Andersen failed to conduct the audit with due professional care that would be

expected of a reasonably prudent auditor.

Planning and supervision. Adequate planning is essential to have satisfactory audit. Without planning, the
audit is likely to be done in a sporadic manner. Supervision is also important in the conduct of an audit.
Anderson clearly failed to adequately plan the audit engagement and failed to supervise the engagement
team when performing the auditing service to keep independence. The lacks therefore of planning and

supervision made Anderson become too involved in client accounting and financial reporting decision.
Internal control evaluation. Anderson should have a sufficient understanding of the clients internal control

especially about their SPEs.

Financial Statements are not in accordance with GAAP. SPE transactions are not treated according to
GAAP standards but Andersen issued immaterial misstatement regarding such transactions.

Disclosure. Andersen failed to provide the accurate opinion and disclose to the Audit and Compliance

Committee serious reservations Andersen partners voiced internally about thee related party-transactions
Opinion. They failed to provide the accurate opinion for Enrons financial statements.

7. Yes, there has been a significant shift or evolution over the past several decades in the concept of professionalism
as it relates to the public accounting discipline but the concepts of professional accounting and the large spread
frauds and scams which are attached to accounting profession had never been forgotten. Moreover, there is no
denying the fact that when it matter to the concepts of professionalism as it relates to public accounting discipline
there is some factor that have rather gone for a dramatic change all around, especially the involvement of
independent governmental agency to review the audit process.
The crisis in the past decades such as Enron and the likes are the factors that elicit professionalism to be overriding
factor and mandatory obligation of the auditing firms. This crisis had significantly detriment the trust by the investing
public to independent auditors.

This, therefore, calls for a renewed commitment to professionalism to restore

investors confidence and is, in fact, the primary step necessary to reach that goal. The enactment of Sarbanes-Oxley
Act of 2002 clearly shows the desire of the government to strengthen financial reporting for public companies,
principally by improving the rigor and quality of independent audits. The most sweeping change in the profession
resulting from the Enron fiasco was the creation of a new federal agency, the Public Accounting Oversight Board, to
oversee the rule-making process for the independent audit function. This action had greatly changes the context of
professionalism in the profession. Also the strong commitment for ethical standards reaffirms the commitment to
professionalism. One important reason for such is to solve the ethical dilemma of reconciling the professional service
ideal with the legitimate economic interests of the members of the profession. Yes, making a profit and getting more
business are legitimate pursuits, but they must be pursued within the constraints of professional standards.
Professional standards should not be ignored to achieve a business advantage and they should not be used as a
business tool to exact higher fees. Moreover, quality ethical and technical standards are also essential to provide a
foundation for the confidence of those who rely on the profession's service. Furthermore, the goal of the profession's
code is to serve as a system of social control. A profession's code describes the duties of members of the entire
group to those outside the group. It is notifying the public that the profession will protect the public interest, that in
return for the trust that the public places in the profession, the members of the profession accept the obligation to
behave in a way that will benefit the public. In addition, making fraud detection as an important objective of the audit,
requiring the auditor to evaluate the economic substance of transactions in evaluating accounting principles, making
the audit committee the primary client relationship, and imposing professional standards on the process of consulting
on accounting principles are the recommendations that proved the revolution in the profession throughout the years.
Stringent stand for the need of independence in fact and appearance by limiting the other consulting services that

one firm can provide to its own audit client are the apparent arrangements that relates robust professionalism to
public accounting discipline.