Analyzing the autumn of two Giants
This instance consequences in the publication of Sarbanes-Oxley Act of 2002 and relevant to the Securities and Exchange Commission. Besides. it is related to SAS 103:
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Auditing. Quality Control. and Independence Standards and Rules.[ 1 ] What were the concern hazard Enron faced. and how did those hazards increase the likeliness if material misstatements in Enron’s fiscal statements?
The concern hazards Enron faced are as followers:
•Using complex concern theoretical account
•extensive utilizing particular purpose entities
•using nontraditional ventures to spread out concern quickly
•limitations in GAAP
The complex concern theoretical account used in Enron lead overstate its gross while non unwrap the exact value of debt. Numbers of particular purpose entities are used to maintain debt off the books. The nontraditional ventures incense the concern enlargement quickly and hazardous. Besides. the restriction of GAAP makes it possible that direction took advantages of complex criterions to conceal the existent economic substance. All of these above addition the likeliness of stuff misstatements in Enron’s fiscal statements.[ 2 ] ( a ) What are the duties of a company’s board of managers? ( B ) Could the board of managers at Enron—especially the audit committee—have prevented the autumn of Enron? ( degree Celsius ) Should they hold known about the hazards and evident deficiency of independency with Enron’s SPEs? What should they hold done about it? The duties of a company’s board of managers include: •Protect the shareholders’ assets and supply a return on investing •Make of import determinations that affect stockholders ( dividends ) •Decide on which executives to engage / fire
The autumn of Enron could hold been prevented by the board of managers. The board should responsible for the company’s fiscal studies. However. they are failed to unwrap the off books liabilities to the populace. which led the Enron autumn. What is more. the board and the audit commission do non oppugn any of the high hazard minutess. They should hold known about the hazards and evident deficiency of independency with Enron’s SPEs. They should acknowledge that the high hazard minutess with SPE will hold immense effects on Enron. Meanwhile. they should inquire SPE to disclosure financials decently.[ 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 is your position. and why? Hearers should non be allowed to execute non-audit services for their audit clients. because hearers need to be independency.
If an hearer provide direction consulting services for his audit client. he is merely audit what he have done. which. I think. is nonmeaningful. On the reverse. some people may hold that hearers should be allowed to execute their services for the same client. First. taking one house to make all of these services can salvage a great trade of money. Second. the hearers will much more familiar with the client’s concern and its industry. which make their work efficient.[ 6 ] Enron and Andersen suffered terrible effects because of their sensed deficiency of unity and damaged reputes. In fact. some people believe the autumn of Enron occurred because of a signifier of “run on the bank” . Some argue that Andersen experienced a similar “run on the bank” as many top clients rapidly dropped the house in the aftermath of Enron’s prostration. Is the “run on the bank” analogy valid for both houses? Why or why non? Yes. I think the “run on the bank” analogy valid for both houses. The fraud of Enron’s financials leads a prostration of investor. client. and trading spouse assurance.
Its stocks see a crisp slack. Meanwhile. Standard & A ; Poor’s re-classify Enron’s stocks as debris bonds. doing about every shareholder feel insecure. The monetary value beads to $ 0. 26 per portion in twosome of yearss. Even worse. debts holders begin to name the loans because of the lessened stock monetary value. which lead the prostration of Enron straight. Andersen experiences a similar state of affairs. The damaged repute of Andersen consequences in losing many top clients and partnerships oversea.[ 9 ] What has been done. and what more do you believe should be done to reconstruct the public trust in the auditing profession and in the nation’s fiscal coverage system? The Sarbanes-Oxley Act of 2002 is a good manner to reconstruct the public trust in the auditing profession and fiscal study. The Act required top direction to attest the truth of fiscal information separately. and increase the independency of outside hearers. As the most terrible act in history of all time. I believe SOX can assist to reconstruct the public trust.