Enron Case
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 who you believe are most responsible for that crisis. Briefly justify each of your choices.
a) With Enron, the responsibility and blame started with Enron’s executives, Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. Their goal was to make Enron into the world’s greatest company. To make this goal a reality, they created a company culture that encouraged “rule breaking” and went so far as to “discourage employees from reporting and investigating ethical lapses and questionable business dealings” (Knapp, 2010, p. 14). They insisted the employees use aggressive and illegal accounting procedures.
b) Anderson was also responsible because they allowed Enron to use these fraudulent statements for 15 years. It is the auditor’s responsibility to question any unusual circumstances and reports and they failed to do so. They should have questioned the SPEs, should have noticed that notes receivable were reported wrong, and should have noticed that there was no internal control being practiced. Also, Anderson should never have practiced consulting services for a company that they audited.
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 given service can pose for an audit firm’s independence.
a) Designing information systems for the company – a threat associated with this activity would be that they would have to assess the system that they had created. This would be a very difficult task to keep unbiased.
b) Executive search services – if they help to find prospective executives for a company that they audit, they might overlook some problems that those executives might be involved in.
c) Internal audit services – sometimes audit firms recommend others for
a) With Enron, the responsibility and blame started with Enron’s executives, Kenneth Lay, Jeffrey Skilling, and Andrew Fastow. Their goal was to make Enron into the world’s greatest company. To make this goal a reality, they created a company culture that encouraged “rule breaking” and went so far as to “discourage employees from reporting and investigating ethical lapses and questionable business dealings” (Knapp, 2010, p. 14). They insisted the employees use aggressive and illegal accounting procedures.
b) Anderson was also responsible because they allowed Enron to use these fraudulent statements for 15 years. It is the auditor’s responsibility to question any unusual circumstances and reports and they failed to do so. They should have questioned the SPEs, should have noticed that notes receivable were reported wrong, and should have noticed that there was no internal control being practiced. Also, Anderson should never have practiced consulting services for a company that they audited.
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 given service can pose for an audit firm’s independence.
a) Designing information systems for the company – a threat associated with this activity would be that they would have to assess the system that they had created. This would be a very difficult task to keep unbiased.
b) Executive search services – if they help to find prospective executives for a company that they audit, they might overlook some problems that those executives might be involved in.
c) Internal audit services – sometimes audit firms recommend others for
References: AICPA. (2012, August 13). Generally Accepted Auditing Standards. Retrieved October 28, 2012, from AICPA.org: http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00150.pdf Knapp, M. (2010). Contemporary Auditing: Real Issues and Cases. Mason: Cengage Learning.