Enron Corporation

July 9, 2018 Accounting

1. 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 firm’s independence. In the recent years, auditing firms provides the following consulting services to their clients:

a. Internal auditing

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b. Design of accounting systems
c. Various types of Information Technology (IT) services

2. Briefly describe the key requirements included in the professional auditing standards regarding the preparation and retention of audit workpapers. Which party “owns” audit workpapers: the client or the audit firm? Workpapers is the connecting link between the client’s accounting records and auditor’s report. Rule 501 – Acts Discreditable of the AICPA Code of Professional Conduct explains the ethical requirements related to auditor’s working papers and client records. The preparation of workpapers depends on several factors, such as nature of auditing procedure being performed, the risk of misstatement involved of the area being tested, the significance of the evidence to overall audit, the extent of judgment involved in performing the work, and the nature of the findings or results. The professional standards require a period of not less than 5 years while the Sarbanes-Oxley Act of 2002 requires that the auditors maintain documentation for 7 years. Thus for public clients, auditors must retain working papers for 7 years, but they may destroy them after 5 years if the client is nonpublic company. Audit workpapers are owned or property of the audit firm, not the client. At no time does the client have the right to demand access to the auditors’ working papers. After the audit, the working papers are retained by the auditors.

3. Identify and list five recommendations that have been made recently to strengthen the independent audit function. For each of these recommendations, indicate why you support or do not support the given measure.

To strengthen the independent audit function, the following recommendations have been made: a. Requiring the auditing firm’s professional employees to continue their education throughout their careers b. The FASB imposed stricter accounting and financial reporting guidelines on SPE c. The implementation of Sarbanes-Oxley Act of 2002

d. The creation of the Public Company Accounting Oversight Board e. Adoption of a simple rule of thumb when analyzing, recording, and reporting on business transactions 4. 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 whom you believe are most responsible for that crisis. Briefly justify each your choices.

In my opinion, the parties that were responsible for the “crisis of confidence” on the part of the public in the accounting profession were:

5. As pointed out in this 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 the clients? In your opinion, should quarterly financial statements be audited? Defend your answer.

6. 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 this 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.

Yes, Andersen violated some professional auditing standards in the involvement of those decisions. Based from the Powers Report

7. Do you believe that 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? 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.

Yes, I believe there has been significant shift or evolution in the concept of “professionalism” as in relation to the public accounting discipline. During the time of when Arthur Andersen were still serving the public through his founded auditing firm, dilemmas and critics that have been encountered by them did not affect the reputation for honesty and integrity in field of their profession. He still relied on his motto “Think straight, talk straight” in which he contended to his partners and other personnel in dealing with clients, potential clients, bankers, regulatory authorities, and other parties they interacted.

However, in late 2001, Andersen faced the most significant crisis in its history since the death of its founder. The Enron debacle were triggered by public revelations on questionable accounting and reporting decisions made by company’s accountants.

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