Enron Corporation case study
The debacle of Enron, a US firm is looked upon as the worst debacle and fall out in the history of US bankruptcy filed cases. There are many parties involved when it concern to Enron debacle, which was accorded to accounting instability and the compromising factor of accounting profession itself. Out of the many parties in the league and the major force behind the debacle of Enron concern Andersen’s, the accounting and auditing firm that once deserved name in the industry for its conscience in accounting professional services and auditing.
As the case relates to, accounting audit for Enron is attended by Andersen’s since long enough. However, the interesting feature is that some compromise in the profession of accounting services by Andersen’s was notable, given that there are noteworthy feature of stock manipulation, especially in financial statements of Enron attended and audited by Andersen’s. The statement and restatement of Enron also gives some probable indication for manipulation of accounting, where debate and counter debate in that regard from the prying eye of the media was a common feature.
Thus, the involvement of Andersen’s in Enron consultancy and professional auditing makes it rather more imploded for the direct involvement of Andersen’s that also successively ushered the debacle and bankruptcy of Enron for the entire sheer element attached to it.
Moreover, the accounting scandal involving Enron have been subject to criticism from many quarters. However, insiders who testify against the auditing firm make it the biggest party of the fall out and bankruptcy of Enron and the revelation of accounting irregularities that created uproar for stakeholders and the likes in the early part of 2001 also come close to the notion of crisis of confidence. Add to it, the interesting development to all the lopsided part on Enron fall out can be aid emphasis to the development in which Enron also testified against it audit firm, which bring to force the major involvement of Andersen’s and its auditing and accounting irregularities. Hence, such development also can be linked to the scenario in which there is a crisis of confidence among parities and the notable question being raised on auditing and accounting profession.
Audit firms and their services strictly adhere to the professional inspection of the accounting procedures and record all notable face of the auditing process attended and dispatched by a certified and trained accountant at the behest of the company. Any major lapses in financial statement and the likes are reported by auditing firm for necessary action.
Three type of consulting services that audit firm have provided to their audit client are:
- Inspection of accounting procedures
- Auditing firm financial statements
- Professional consultancy in tax and other accounting procedures and directory and group policy audit.
When it comes to inspection of accounting procedures, there are certain threats, given the decision that matter. Hence, inspection of accounting procedures makes it more treatable in case of errors that can impact the company and audit client in the most unforeseen ways. When it matter to Andersen, the same professional services in auditing Enron accounting procedures are also withheld and dispatched. However, decision when it matter to Andersen and its audit client firm, that is to say Enron also was reached intimately most o the times. But the threat in matter of SPEs (special purpose entities) displays 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.
In another case, such as the auditing financial statements, there are also greater risks, given that one wrong accounting procedure can haunt the company long enough that can also result in bankruptcy. Financial statements are an important component of the company revenue and all the financial processes. Manipulations of these data are likely to show up when it is audited accurately and with more precision. Moreover, the increasing enforcement and legal binding also make it more risky.
Finally, when it matter to group policy audit, the case of threats is also more imploded and the question of independence when it mater to auditing also crop up. Moreover internal and external audit also finds consideration in the third consultancy services as detailed herein. Hence in such a scenario there is very likely that professional ethics or accounting ethic also come to fore, where the notion of manipulation are also very likely and comes as one of the biggest threats to audit consultancy services and its credibility that can hurt the reputation of the audit firm in the first instance, and its client, plus the economic loss that audit irregularities can amount to. Hence, self governance of corporation is largely a matter of debate that can pose greater risks. The idea of corporate governance also makes sense, however, internal and external audit are two different sides of the same coins that posits independent service firms.
For purpose of this question, assume that the excerpts from the Power Report shown in Exhibit 3 provide accurate description of Andersen’s involvement in Enron accounting and financial reporting decision. Given this assumption, do you believe that Andersen’s involvement in those decisions violated any professional auditing standards? If so, lists those standards and briefly explain your rationale.
From the case study given and assimilating the Excepts 3, there is clear indication that notable decision when it matter to auditing and all its process involving Enron are attended from Andersen’s end. Thus, advices and recommendation of Andersen’ also make way to the board of the company. However, when it again concern to professional auditing standards and its compromise or its violation there is probable factor. From the excerpts it is learned that Andersen’s have failed to bring attention of Enron internal Audit and Compliance committee, which bring back the question of professional auditing standards that are violated in all circumstances.
Some of the standards that amount to accounting procedures at the very first instance can be laid emphasis to the notion of accounting ethics itself that bears a conscience stamp in principle. However, Andersen’s failed obligation with its audit firm goes against the very reason of accounting ethics. Moreover, non compliance and coordination with Enron internal auditor in reaching a decision also amounted to violation of decisions. Add to it, overcoming proper financial accounting also violated the very notion of professional auditing standards. Moreover, in economic sense, the large lump sum amount charged by Andersen’s for its professional dispatch also did not translate into effectiveness in auditing process and procedures, which again violated the professional standards and business ethics is all essence. Moreover, auditing from the end of Andersen also did not take into account to review the disclosure from various parties, which again bring back the question of violating professional auditing standards for reason known and unknown by the Andersen’s executive and CFA.
Finally and the most important facet of violation in accounting standards can be laid emphasis to the matter concerning Andersen’s certified and trained accountant that did brought the measure of objectivity and perspective to all the transaction carried out during the phase before the Enron bankruptcy. Moreover, Andersen accountant are also not in a position to understand all the critical features related to Enron audits and its processes. However, the revelation that Andersen’s advice its client that paid a huge amount for professional service can be reasoned to be rational factor and the question of professional violation in accounting standards.
Professional auditing standards define the core value of accounting ethics. Working paper also define the skills of an auditor. Hence the basic requirement in auditing standards at the very behest of accounting profession sticks to the basic concepts of accounting ethics. However, in the current scenario where the cases of financial fiasco have increased, government defined auditing standards take centre stage and differs from one nation to the other.
But once again when it matter pertaining to the reparation of and retention of audit work paper, the requirement prepare by auditor should be in a manner that it helps the auditors to carry out auditing services in the most appropriate way. That is to say, auditor should do away with inappropriate representation while preparing audit report. Hence the working paper requirement at most should avoid accumulating unnecessary working papers for the sake of client and for the requirement of professional auditing standards.
Moreover, when it matter to the ownership of audit work paper and as it is with the general principles, audit paper is the property of the auditor concerned in all circumstances. Given the case attached to working paper as an evidence of the audit process that are usually obtained during financial assessment also withhold that audit paper are likely to remain with auditors and audit firms. And to profess the ethics attached to accounting profession, again audit papers sole ownership lays with the auditors. However, the auditor and the audit paper are also subject to some compliance. That is to say, auditor who owns the working paper cannot disclose the same to third party in any circumstances. Hence, in the first instance audit firm own audit papers, but are not likely to disclose the same to third party, which means that as per the principle audit client also gain some form of ownership and any misuse of the audit paper can intimidate legal discourse from the client part.
The ways company is governed today have gone on for a change given the reform in audit functions and the likes. As it is with the case, effective financial reporting is the sole concern of companies. Hence, in recent development there has been a dramatic shift towards corporate governance, because the capital market mostly feeds on the effectiveness of corporation and their governance internally or by independent audit firms. The stake when it matter to the independent function of audit also is much higher.
A list of the five recent recommendations is summed up as follows:
- Rationalizing work programme in detecting fraudulent and misappropriation of financial statements for the sake of stakeholder, the company and the economy at large.
- Strengthening the infrastructure stock exchanges that should be able to meet the requirement of the current scenario in auditing process.
- Self evaluation of companies, that is to say the core and basic idea of corporate governance that is subject to public review.
- Improving the effectiveness of Audit committee
- Raised membership and sole audit committee responsibility and authority in the composition of audit regulation and the likes.
Hence when it comes to these five recommendations in general perspective to the function of audit, such measure adds to the values and ethics attached to accounting profession. In order to make way for change and improved the effectiveness, these above recommendation are likely to work its ways in strengthening the core principle attached to audit functions.
However, corporate governance also at times is subject to public outcry. That so to say, the concept of corporate governance at most times take leverage to propagate a clean image in the market. Hence, the idea of corporate self-evaluation is not well in the line in strengthening independent audit function, because it is likely to be misappropriated. But when it matter to the remaining four general recommendations, there is some assurance that such given measure can work wonders that should display audit committees best practices in the monitoring process, internally and externally.
As we can see with cases happening in and around, there are probable circumstances that there have been significant changes in the auditing process over the past several decades. Moreover, with the tightening of governmental regulated norms and reforms, auditing and the professional seal attached to accounting also have rather gone in for a change. However, the disappointing fact is that despite tightening governmental regulation and the likes, the increasing ethical issues attached to the profession of accounting are increasing, which is indeed a sort state of affairs.
But the concepts of professional accounting and the large spread frauds and scams which are attached to accounting profession also are subject to public criticisms in all forms.
Moreover, there is no denying the fact that when it matter to the concepts of professionalism as it relates to public accounting discipline there is some factor that have rather gone for a dramatic change all around, especially the involvement of independent governmental agency to review the audit process. And interestingly, auditing also have gone a notch above, given that laws in that regards are also passed with necessary reforms in order to propagate an image of the professional concepts as it relates to accounting discipline.
The case study that concern Enron Corporation clearly defines that SEC does not require public companies to have their quarterly financial statements audit. Thus the responsibility that lies with audit firm solely lies within the client behest, which at times is subject to manipulation and the likes, as it is with the many recent cases of financial scam that are manipulated out of the gross and disapprobation of financial statements.
For the sole concern of audit firm, their audit responsibility sticks to the limit as defined. That is to say as per client preferences, whether or not it calls for quarterly financial statement. However, quarterly statement, whether it concern public company or private enterprise is one main avenue for auditor to review as well as for the regulated agencies to considers the pro and cons of the financial statements, whether be it quarterly, half yearly of the annual financial statements for the sake of stake holders delight.
Quarterly financial stamen in all circumstances should be audited. Given the shortest possible time in which the working papers are prepared, it is also subject to errors. Hence, when audit are carried out, restatement can be drawn and adjusted, and also it does not compromise with corporate ethics or so.
By auditing quarterly financial statements, there is very likely that ethics also take centre stage. That I to say, most of the times the smallest possible frauds and manipulation can be addressed logically so as to do away with losses for all parties involving the audit client and for the sake of professional auditing profession and accounting discipline itself.Order Now