Professional Documents
Culture Documents
Zizhang Huang
Enron Case
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 are the
most responsible for that crisis. Briefly justify each of your
choices.
The board of directors of Enron.They focused too much on becoming
the worlds biggest company. However they didnt balance the conflict
between their goal and stockholders interest. From the letter of
WherronWatkin, it mentioned that Skillings abrupt departure will raise
suspicions of accounting improprieties and valuation. They just
ignored. Thus when misstatements and irregularities emerged and were
made clear to the public, the executives of Enron lost the confidence of
the stakeholders in the company.
Internal Audit Committee in Enron.One of the most important duty of
internal audit committee is to analysis and give the guide or advice of
the companys internal control. However, from the scandal, we can see
that it used a lot of SPEs to maintain a paperwork healthy. Enron
scandal happened proves that the internal auditors were not performing
the way an audit group should.
Arthur Anderson. The independence of the outsider auditors should be
questioned. They didnt present itself with professionalism and
responsibility. They already noticed the suspicious financial report. In
order to keep this client, they chose to ignore the misstatement
because they not only provided audit service but also almost half of its
revenue came from consulting service. Thus the confidence that the
public had in the company was diminished.
2. List three types of consulting services that audit firms have
provided to their audit clients in recent years. For each item,
indicate the specific threats, if any, that the provision of the
given service can pose for an audit forms independence.
Design the accounting procedures. They helped them alerting the
accounting systems within the company. There will be an increasing
threat for the independence. In this case, the creators of the
accounting procedures fabricated the financial statements by using
a complex procedure that users could not understand. Also the
SPEs strategy indicated that some manipulation from the part of
the audit firm that also with prior knowledge of accounting ethics,
which at most times makes it more risky, given the legal
involvement.
Review the financial statement. Financial statements are an
important to the company revenue and all the financial processes.
The auditors have easier access to misstating financial reports and
statements. Manipulations of these data may be disclosed if the
auditors process an appropriate precise audit to decrease the
detective risk. In this situation, a review service of financial
statement would be an increasing threat of independence.
Provide professional consulting services such as tax or other
accounting
procedures.
This
is
obviously
great
risk
of
SPEs.
Reporting. Because Anderson didnt maintain its independence,
they should issue a disclaimer of opinion on its financial statement.
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?
Audit workpapersis the record of the audit procedures performed,
relevant audit evidence obtained, and the conclusions the auditors
reach. The key requirement includes:
a) The auditor must state in the auditors report whether the financial
statements are presented in accordance with GAAP.
b) The auditor must bring to light an instances in which the GAAP were
not consistent during the current period.
c) When informative disclosures are not adequate, the auditor must
state so in the report.
d) The auditor must state an opinion in regards to the financial
statements. If the auditor cannot state an opinion, this much be noted
in the report. If the auditor is taking any responsibility in relation to the
financial statements, it must also be stated in the auditors report.
Basically, audit workpapers are the property of the auditor concerned
in all circumstances. That is to say, the audit work papers belong to
auditing firm. The auditor does hold responsibility for the evidence and
reports, and is to make sure that the information is not misused in any
way.
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.
Establish an independent audit agency.
I agree with that. The independence of the audit firm is the most
important fact to the auditing procedures. It determines the
detective risk of the procedures. An independent audit agency
would be much easier to keep independent because they would not
gain an additional profit from auditing service or even some other
related service.
Prohibit the provision of all non-audit service to audit clients.
I partly agree with this. Non-audit service is a huge part of profit for
auditing firm. Providing such service is decided by market not only
audit firms. I agree with that government should have regulations
to rule these services such as which service is prohibited, which is
limited, which should be supervised. We cannot simply prohibit all
these firms.
Require that audit clients periodically rotate or change their
independent audit firms.
I agree with that. An audit firm would be dependent if they work as
auditors for a specific company for a long time because their profit
and fellowship would be associated with their client. This
recommendation would force the company keep their auditors