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Audititng: Enron Case Study

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Question 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 whom you believe are most responsible for that crisis. Briefly justify each of your choices.

The basic meaning of the words, "crisis of confidence" stems from America being forced into a financial dilemma that has taken place over a period of about 20 years. This financial crisis slowly developed and quickly picked up speed once the Enron scandals were publicized. The level of belief, trust and assurance in the Enron's way of financial security was lost. Thus, America's confidence came crashing down along with the billions they lost in investments, retirement funds, and jobs.

Everything starts at the top and trickles down to the ladder. Because the scandal(s) took place over consecutive CEO positions, those involved over the past 20 years, all have a hand in being responsible for the noted fraud of the company. I feel that the CEO's are to blame for this cause of disbelieve among the American society, because they knew about the inflated profits, reported financial conditions had sustained substantially by institutionalized, systematic, and creatively planned accounting fraud along with many other reported company downfalls. Then there are the numerous failures by the board and central management, including the failure to stop Enron from using misleading accounting, the failure to ensure the independence of the company's auditor, Arthur Andersen, and the failure to protect shareholders from unfair dealings in an outside partnership run by the company's chief financial officer. And finally, the Enron accountants who incorrectly listed third party investments notes as receivable on balance sheets which later caused billions of invested dollars to be lost. The accounts were able to scam and provide misleading finical accounts to the National Securities Markets, investors, stockholders, creditors, and central public. These are the three main groups of individuals that I would say are responsible for the largest corporation bankruptcy in U.S. history which inevitably caused the America's to go into a "crisis of confidence."


Knapp. Contemporary Auditing, Real Issues & Cases, 7th ed. Pgs. 3-20.,,

Enron Case

Question 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 give service can pose for an audit firm's independence.

The purpose of accounting is, in a broad sense, to give an accurate view of a company's inner workings and actual earnings. But as the Enron along with other events have shown, numbers can be manipulated and a select few benefit. A slight focus of the debacle was Enron and the related accounting and investor protection issues. Thus, the Sarbanes-Oxley Act on July 30, 2002 was enacted. These accounting laws nearly "a mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the Act.

The text indicates that Enron took advantage of the minimal legal and accounting guidelines for SPEs to divert huge amounts of their liabilities to off-balance sheet entities. Enron used SPEs for the sole purpose of downloading underperforming assets form its financial statements to the financial statements of related but unconsolidated entities. This caused Enron to manufacture large "paper" gains on each transaction. indicates the following changes have been made after the Enron scandal to elevate the previous SPE issuse. Current FASB guidance on removing assets and liabilities from the financial statements permits issuers of financial statements to report transfers of components of financial assets as sales. In the current change, FASB removed (i) the concept of a qualifying SPE from Statement 140, and (ii) the scope exception for qualifying SPEs from Interpretation 46(R). Under the new rules, a transfer of a portion of a financial asset may be reported as a sale only when that transferred portion is a pro-rata portion of an entire financial asset, no portion is subordinate to another, and other restrictive criteria are met. As a result, if a company has control over an SPE's most significant activities, it must be included in the consolidated financial statements. This will (i) prevent the current complex dissection and removal of portions of transactions from the financial statements, and (ii) eliminate an exception that allows a company to "derecognize certain



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