1 – What were the concern hazards Enron faced. and how did those hazards increase the likeliness of stuff misstatements in Enron’s fiscal statements?
The concern hazards that Enron faced included foreign currency hazards and monetary value instability. which is common for the energy industry. In add-on. Enron faced force per unit area to execute good so that the stock monetary value would lift.
These hazards increased the likeliness of stuff misstatements in the fiscal statements for several grounds. Since Enron operated in other states. there would be a foreign currency hazards and those could take to gains/losses non being decently calculated or accrued on hedge activities. By runing in foreign states. there are political hazards such as policy alterations. deficiency of apprehension of civilization and concern patterns. The biggest hazard is holding the force per unit area to describe good fiscal consequences. The trades with the particular purpose entities ( “SPE’s” ) depended on a high stock monetary value. The company used its stock as collateral if the stock monetary value fell below a certain monetary value. At that point. Enron would hold to utilize the stock to pay out the investors. The company besides had force per unit area from its concern spouses to execute good and run into it’s future duties. If the company performed ill. the investors may waver to make concern with Enron.
3 – In your ain words. sum up how Enron used SPEs to conceal big sums of company debt.
Enron created SPE’s ( normally other LLP’s ) in order to make hard currency influx but did non enter the investings and related liabilities ( the loans used to make the SPE ) . Enron used outside investors to procure the new SPE’s. The new investors would bear the hazard of the investing and Enron used its company stock as collateral to lure the investors and stating that Enron would fundamentally bear the hazard if the investing should turn rancid. Enron used big investing bankers to take loans but these looked more like fudging activities alternatively of debt. Once the stock monetary value began to drop. and Enron was losing money. they were unable to utilize their stock to cover the losingss. To set it merely. a company sells a merchandise for a leading monetary value to another entity. However. that entity doesn’t have the hard currency flow to purchase the merchandise. So. the marketer issues a loan to the purchaser in order to sell the merchandise. Now if the purchaser defaults on the loan. the marketer loses the hard currency it lent out and the merchandise it sold. This is how Enron set up the SPE’s. and they used the big investing Bankss to keep the loans that should hold been reported on Enron’s balance sheet.
4 – What are the auditor independency issues environing the proviso of external auditing services. internal auditing services. and direction consulting services for the same client? Develop statements for why hearers should be allowed to execute these services for the same client. Develop separate statements for why hearers should non be allowed to execute non- audit services for their audit clients. What do you believe?
The independency issues that arise when an hearer provides external scrutinizing. internal auditing and direction consulting services include whether or non the hearers can be independent and exercise good professional judgement when it comes to the audit. The hearers should non be affected by any influences that would hinder their professional judgement. If the hearer is executing all of the maps. so how can they stay indifferent during the external audit?
Arguments for why hearers should be allowed to execute these services for the same client include:
Hearers can increase audit realisation by going more efficient during the external audit since they would be fundamentally scrutinizing their ain work.
When hearers find material failings or important lacks. they can utilize their confer withing function to better these issues.
Hearers would already hold a good working relationship with the client and
be able to salvage clip on the processs performed as opposed to holding to “start fresh” with a new engagement client.
Arguments for why hearers should non be allowed to execute these services for the same client include:
Hearers may non be able to move independently. and may non utilize the best professional judgement when executing the external audit.
The company should engage it’s ain internal auditor’s to guarantee that the staff understand the company’s accounting processs. This besides helps the external hearer as it give the external hearer another point of view when measuring fraud hazards. The internal hearers are apart of those charged with administration and that helps take the force per unit area off of the external hearer if a fraud should be discovered.
5 – Explain how “rules-based” accounting criterions differ from “principles-based” criterions. How might basically altering accounting criterions from bright-line regulations to principle- based criterions assist forestall another Enron-like debacle in the hereafter? Some argue that the tendency toward acceptance of international accounting criterions represents a move toward more “principles-based” criterions. Are there dangers in taking “bright-line” regulations? What troubles might be associated with such a alteration?
Rule based accounting criterions are difference from rule based criterions in that regulation based criterions are merely that – regulations. For case. the Internal Revenue codification is regulation based. There are things you can make and things you can’t. When regulations are broken. there is a specific “punishments” that are to be enforced.
Principle based accounting criterions are more like guidelines and can be unfastened to reading. Hearers are given a spot of leeway and are told to utilize their “professional judgment” . This besides means that the hearers should exert good judgement and have high moral and ethical criterions.
Principle based regulations can forestall another Enron-like debacle because it hold the accountant and hearers to a higher criterions than “just following the code” . Sometimes the codification has loopholes. which is what allowed Enron to make the SPE’s in the first topographic point. and the company can trust on that. However. if hearers are required to keep themselves to a higher moral and ethical codification. so they may non be swayed by a company’s questionable patterns. even if they are following the missive of the jurisprudence.
If “bright line” regulations are non relied on at all. and merely rule based regulations are followed. so the reading of these rules can do issues such as aggressive accounting interventions such as in the Enron instance. If there are no difficult regulations. so companies can state that the aggressive accounting interventions are non prohibited.