Diana Ramsey

Professor Murovitz
ACCT 8610
11 June 2014
Enron Case Write-Up
1. The parties most responsible for the Enron debacle was Jeffrey Skilling, Kenneth Lay,
and Andrew Fastow. They are apart of upper management and set the tone that trickles
down to very bottom. They insisted that employees use illegal accounting procedures. In
addition to management being responsible, the auditor was also at fault. It is the
responsibility of the auditor to question everything and in this case, they did not.
2. The three types of consulting services that audit firms are now prohibited from providing
to clients that are public companies are designing accounting procedures, review financial
statements, and provide consulting services such as tax. A major threat if an audit firm
performs any of these services is a lack of independence and biases. There is a high
probability of manipulations when audit firms are involved in consulting services. If an
audit firm designs an information system, it would be hard for them to remain unbiased
and perform a proper audit. If auditors reviewed financial statements and performed an
audit of financial statements, there would not be any independence and the likelihood of
misstatements would be high. If auditors provided consulting services, such as tax, there
would be a lack of independence.
3. Andersens involvement did violate professional auditing standards. His involvement
violated independence and reporting. Andersens auditors provided more consulting
activities than actually auditing their work. The auditors lacked independence and were
therefore biased. Andersens auditors did not have a full understanding of how some
transactions worked, they should have maintained professional skepticism and inquired
about those transactions.
4. The requirements included in professional auditing standards regarding the preparation
and retention of audit work papers are
a. The auditor must state whether the financial statements are presented in
accordance with GAAP.
b. The auditor must identify in the auditor's report if there are instances where
GAAP is not consistent from the prior period.
c. When the auditor determines that informative disclosures are not reasonably
adequate, the auditor must so state in the auditor's report.
d. The auditor must either express an opinion regarding the financial statements in
the auditor's report. If the auditor cannot express an opinion, the auditor must
explain why in the report.
The audit work papers belong to the audit firm, not the client.
5. After the Enron scandal, there were five recommendations made to strengthen the
independent audit function. They are
a. Establish an independent audit agency.
i. I do not agree with this. I think with government regulations, auditing
companies can be independent and provide a high level opinion.
b. Prohibit the provision of all non-audit service to audit clients.
i. Auditors should no offer any non-audit services. If a firm wished to have a
consulting department and a auditing department, they must be able to
show that those division are completely independent.
c. Require that audit clients periodically rotate or change their audit firms
i. It is important that auditors do not get comfortable with clients. Requiring
auditors to rotate will prevent clients and auditors from getting to
comfortable to where the audit is no longer independence and the auditor
does not have a level of professional skepticism.
d. Require independent auditors to work more closely with clients audit committee.
i. Independent auditors should work with internal auditors in order to get the
right information. However, this relationship should be very limited. An
external auditor is independent and needs to maintain independence.
e. Establish more explicit statutory requirements that prohibit clients executives
from interfering with the independent auditors.
i. I agree with this. It is important that executives not interfere with auditors.
It is the goal of an auditor to come to its own opinion of the company
based on independence and professional skepticism.
6. Over the years, the concept of professionalism has changed. The concept has changed
because of scandals like Enron. It is the responsibility of the auditor to provide a
professional opinion and the big scandals provide a change in regulations to make these
opinions valuable.
7. Audit firms do not have a responsibility to audit quarterly financial statements. I do not
think it is necessary for audit firms to audit quarterly financial statements. However,
audits provide security to investors and it would be beneficial for public companies to
have their quarterly financial statements audited.