Case 1.1 – Enron Corporation
Case 1. 1 - Enron Corporation ------------------------------------------------- Discussion 1 The parties we acquire to be best at accountability for the crisis in this case are a) the Analysis Close affianced in the Enron analysis (Arthur Andersen); b) Enron Administration (Kenneth Lay, Jeffrey Skilling, Andrew Fastow; and c) the SEC. The Accessible Accounting Firm: Arthur Andersen
The accountant has the albatross to appraise the accident of actual fraud, including: * Incentives and motives for artifice : Enron was a fast growing aggregation with abounding start-ups projects, such as the Activity Wholesale Casework (a B2B cyberbanking barter for the activity industries) or the Enron Broadband Casework (an operating assemblage confined as agent amid users and suppliers of broadband services,) that consistently bare huge bulk of money to succeed. * The befalling to accomplish fraud: Enron centralized controls were anemic and the administration was announcement a adeptness that encouraged artifice rather than honesty. Rationalizations that adeptness acquiesce accession to accomplish fraud: the administration at Enron believed that they were alone aggravating to abound the aggregation and access their banal amount by misrepresenting their banking statements. Once their new ventures would succeed, they would be able to awning the losses ahead incurred. All the capacity were present for Anderson to bare the fraud. Moreover, the auditors acquire a albatross to accede actual artifice and actionable applicant acts to the analysis board and the Board of Directors.
If the banking statements are not restated, the accountant should affair a qualified, an adverse assessment or accede abandoning from the engagement. The aggregation auditing Enron should acquire followed the advice back the administration acted with scienter. As mentioned in the case, Arthur Andersen was actuality paid absonant amounts of money to analysis Enron and adjure to the authority of its banking statements. The close bootless on every advanced to bolt any of the counterfeit accounting transpiring and abounding critics questioned whether Anderson was complex with “cooking the books”.
Given the calibration of the advantage and how accepted the close was in Enron’s banking operations, it is adamantine to acquire that the Andersen auditors, CPAs, bootless to apprehension such acutely actionable accounting treatments of transactions. As so able-bodied said by the accountant of Accounting Today, “if a close accepts and collects the analysis fee, again it should be able to acquire the blame, contrarily it is not allotment of the solution, but allotment of the problem”. The accountability not alone goes to the auditors, but to the company’s administration as well.
Enron’s administration Kenneth Lay angry a dark eye to annihilation that could arrest Enron’s growth. He said that his ultimate ambition was to accomplish Enron “the world’s greatest company. ” This is a abundant ambition for any CEO to have; however, in his attempts to adeptness this goal, he developed a case of adit eyes that led to abrupt consequences. Back Sherron Watkins wrote him a letter analytic the analysis of assertive accounting affairs and puzzled disclosures, he abandoned her and declared that “he’d rather not see it”.
Kenneth Lay alike bootless to accede or abode the issues afterwards best of the Enron aspersion had absolutely unraveled by abnegation to affirm afore Congress in 2002. Jeffrey Skilling basically followed in the footsteps of Kenneth Lay and brought with him a agnate access to active a business. Skilling aggregate the aforementioned adit eyes access as Lay as apparent by their “laser-focus on balance per share”. They both were accommodating to abstain any atrocity in the aggregation as connected as balance per allotment connected to increase.
Skilling additionally developed a assertive akin of airs afterwards actuality singled out as the cardinal one CEO in the country. He would accomplish “brassy and tacky” comments apropos Enron’s competitors and critics. This airs acceptable aided in his adeptness to absorber out the abrogating aspects of Enron’s operations and to alone see the positives. He was the “best CEO in America”, so Enron couldn’t possibly do annihilation awfully amiss beneath his watch. Back actuality questioned by Congressional board apropos the scandal, he artlessly anesthetized the accusation by advertence that “he is not an accountant. Andrew Fastow was the CFO and created the banking basement for Enron. He, like Skilling, was hailed as one of the top admiral in the country as apparent by his Excellence in Capital Structure Administration accolade presented to him by CFO Magazine. As the CFO of Enron, Fastow should acquire accepted bigger than to do what he did with the conception and operation of the SPEs. His assumption was at such a aerial akin that he alike called several of them afterwards his children.
He, like Kenneth Lay, banned to booty any accountability by abnegation to affirm afore Congress in 2002. SEC and FASB The SEC and FASB additionally allotment the albatross for the artifice aspersion that took place. The bacilli should acquire anesthetized stronger accounting standards to adapt auditing. Both organizations were in favor of the 3% aphorism for SPEs. This aphorism declared that a SPE bare alone a 3% advance from an alfresco broker to be advised independent. This aphorism accustomed Enron to acquittal all its barren businesses in SPEs to abstain accumulation losses.
That is, the SEC and FASB accustomed a law that accustomed companies to dump ample losses in asymmetric entities. A case of artifice was apprenticed to happen. The Auditors, the SEC, and the FASB fabricated it accessible for Enron’s administration to accomplish one of the better frauds in the history of accounting. ------------------------------------------------- Discussion 3 Andersen’s captivation in Enron’s accounting and banking advertisement decisions abandoned the afterward able auditing standards: AU 220, Independence, SAS 1) – this accepted requires the accountant to be independent.
Auditors affair an analysis assessment that will serve as a reliable antecedent of advice on the aggregation to alien parties (investors). Thus, it is all-important for the accountant to be aloof back advertisement his allegation to the public. The abridgement of ability of the aggregation auditing Enron can be acquired from the actuality that Andersen was accouterment consulting casework as able-bodied as auditing casework to Enron, with consulting assignment accounting for added than 50% of the absolute annual acquirement accustomed from Enron.
This bearings led Andersen to be at the aforementioned time alien accountant and centralized accountant to Enron. AU 316, Consideration of Artifice in a Banking Account Analysis (SAS 99) – this accepted apropos “fraudulent acts that account a actual baloney of the banking statements. ” Andersen helped Enron adulterate cogent advice in the banking statements. The aggregation auditing Enron advised misapplied accounting attempt apropos to the classification, the abode of presentation, and the acknowledgment of the banking statements. To clarify, Enron would use the mark-to-market ccounting adjustment on abiding accounting contract, which anon recognizes balance back affairs are anchored rather than back casework are rendered. That accounting adjustment after-effects in banking statements actuality materially misstated and at the aforementioned time, it appreciably added the advantage of Admiral at Enron that was based on earnings. AU 317. 05, Actionable Acts by Audience (SAS 54) – this accepted indicates that the auditor’s albatross for misstatements consistent from “illegal acts accepting a absolute and actual aftereffect on the assurance of banking account amounts” is the aforementioned as that for errors or fraud.
Enron would affair stocks to altered SPEs in barter for addendum receivable; however, US GAAP does not acquiesce for the recording of receivables in barter of stocks issued. These misstatements led to a abridgement of $1. 2 billion in Owners’ Equity afterwards the changeabout of ahead recorded affairs as assets. In addition, Enron had investments in companies (not SPEs) that it consolidated, but back the investments began to appearance losses, they were transferred to SPEs so that it would not acquire to reflect these losses on the banking statements.
AU 334, Accompanying Affair Transactions, SAS 45 – this accepted requires auditors to chase GAAS accustomed procedures back auditing banking statements in adjustment “to analyze accompanying affair relationships and transactions” and to appraisal whether or not the appropriate banking account accounting and acknowledgment had been followed. This accepted was additionally abandoned as Admiral of Enron were managing some SPEs (p. 13. ) Andrew Fastow, Enron’s CFO, acceptable a accumulation amounting to $30 actor on one of his advance in an SPE that he was managing.
Furthermore, “Fastow’s accompany accomplished a accumulation $1 actor on advance of $5,800 in 60 canicule in the aforementioned SPE. ” AU 319, Consideration of Centralized Controls in a Banking Account audits – The auditor’s abode on centralized ascendancy over banking advertisement that goes to the accessible allegation abode actual weaknesses in centralized control. Andersen analysis aggregation in allegation of Enron auditing bootless to accommodate an aloof assessment on the capability of the arrangement of centralized ascendancy over banking reporting. ------------------------------------------------- Discussion 6
After Enron and alternative artifice scandals, we see a about-face from the self-oversight of accessible accounting firms to an absolute blank of accounting firms auditing accessible companies by government bodies such as the PCAOB. Congress anesthetized the Sarbanes-Oxley Act (SOX) in 2002 which ambition was to strengthen the banking advertisement rules for accessible companies. It additionally affected accessible companies to adapt letters on the affection of their centralized controls as able-bodied as absolute the types of consulting casework that an accounting close is accustomed to accommodate to its audience in accedence with analysis casework provided.
Fraud scandals additionally led to the enactment of the adjustment acute administration of accessible companies to accommodate a letter asserting that the banking statements are adequately stated. Best recently, the SEC voted to accept bigmouth rules allowable by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). “The rules apparatus the Act’s claim that the Commission pay an accolade to whistleblowers who voluntarily accommodate aboriginal advice to the SEC that leads to a acknowledged administration activity with sanctions of over $1 million. Professionalism in accessible accounting has afflicted over the accomplished decades for a array of affidavit from the advances in technology to the globalization of the economy. One of the means professionalism has afflicted is that ability has become a above basic for accessible accountants. Ability confirmations afore the analysis and during the analysis are above genitalia of actuality able in today’s definition. Ethics are accession above allotment of professionalism. Actuality ethical in your decisions is fatigued added now than anytime before. Actuality affable of others cultures, beliefs, and religions are a new accession to actuality professional.
With aggregate acceptable all-around and advice bound actuality advance by technology, actuality careful of what is said and done is actual important for accountants for one bad affair can acquire astringent implications. Actuality able is added than aloof how you act in the business abode for back you represent the company, your accomplishments are watched on and off the job. With the accretion numbers of investors in the bazaar it becomes added acute to acquire reforms to adapt the apportionment of advice and assure investors that they are application the accomplished affection of banking statements. ------------------------------------------------ Discussion 7 The SEC has appropriate accessible companies to acquire their annual banking statements audited afore filing of endemic annual abode on Form 10-Q. Therefore, analysis firms will charge to chase all the analysis standards set out, from establishing an compassionate with the applicant to assuming analytic procedures, inquiries and alternative analysis procedures to adapt an analysis abode on the analysis of acting banking information. It is our assessment that annual banking statements should be audited because they will be added reliable and aboveboard to the investors.
Auditing annual banking statements will additionally adumbration lights on ambiguous management’s earnings. At the aforementioned time, a connected (quarterly) analysis will acquiesce for beneath digest at the end of the year; that is beneath abruptness for investors. The accountant will be appropriate to chase the clients’ banking bearings added carefully and abode any actual issues sooner. Annual audited banking statements will accord investors aplomb in relying on the company’s banking information.
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