...1:00-2:15 Enron Case Due 2/10/05 1. What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? Auditor independence involves the auditor and the company being audited. It requires them to maintain separate business and personal relations. This is imperative because personal feelings can hinder the ability of an auditor to perform the required tasks. Expectations and assumptions can result from this as well. It is expected from an auditor that they be independent and unbiased. This is imperative when they are dealing with the financial statements because it is extremely important that they be impartial during the audit, which means that personal relations and former employees with strong relationships with there former employers would not concede to these standards. Independence in appearance is avoiding financial and managerial relationships with clients; this is necessary because this is the only portion that the public can actually see. The general public will only grant social recognition of professional status to auditors when they are perceived as independent. Independence in fact to the contrary from appearance is the ability for an auditor to remain unbiased during an audit of financials. Independence is the first aspect of an audit that the public sees. Although all stages of an audit are of equal importance, it is the independence aspect that...
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...Case Study: Enron Corporation and Andersen, LLP----Analyzing the Fall of Two Giants The accounting issues involved in Enron’s case are: 1) Valuation issues with international assets; 2) Aggressive accounting treatments towards SPEs; 3) Negligence of information disclosure, and 4) Dereliction of duty of internal auditing department. The auditing issues involved in Enron’s case are: 1) Putting its reputation at risk, Andersen issued “clean” audit opinions on Enron’s financial statement; 2) Auditing and consulting services were provided by the same accounting firm, which led to conflict of interest and jeopardized integrity, and 3) The revenue of providing auditing service to Enron occupied so large a share of Andersen’s total revenue that it lost its independence when confronted to Enron. Questions: Q2. a. Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. The board is responsible for providing entrepreneurial leadership of the company within a framework of prudent and effective controls that enables risk to be assessed and managed. The board should set the company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet his objectives and review management performance. The board should set the company’s values and standards and ensure that its obligations to shareholders and others are understood and met. But the...
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...Enron Corporation: THE RISE AND FALL; ACCOUNTING SCANDAL Submitted To: Professor Bill Bristol Submitted By: Kenneth Rhodes, Jr. Metropolitan College of New York (MCNY) TABLE OF CONTENTS I. ABSTRACT...............................................................................................................................2 II. purpose and service....................................................................................................3 III. HistorY............................................................................................................................3-5 IV. The Downfall..............................................................................................................5-6 V. Accounting Scandal................................................................................................6-7 VI. Accounting Practices...........................................................................................7-8 VII. Files’ for Bankruptcy.............................................................................................9 VIII. Auditing.....................................................................................................................9-10 IX. Conclusion: THE AFTERMATH..........................................................................10-11 XI. BIBLIOGRAPHY................................................................................................................12 I. ABSTRACT ...
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...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 were most responsible for that crisis. Briefly justify each of your choices. In our opinion, we believe that Enron’s top executives- Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and the Andersen auditing firm are mainly responsible for the “crisis of confidence.” As the top executives of the Enron Corporation, Lay, Skilling, and Fastow had obligations to their board of directors and shareholders. These three men managed to find accounting loopholes with the use of special purpose entities (SPEs) to move around assets and profits to mislead their Financial statements. Not only did these men commit illegal and unethical acts, but they also used their positions in the company to convince Enron’s shareholders, board of directors, and their independent audit firm, Andersen, that Enron was functioning excellently. Enron’s first two quarterly financial reports showed great growth, causing the public to be optimistic and trusting of the company’s future. In late 2001, when the actual truth came to light, the public’s confidence in Enron and the accounting profession was broken. Enron’s independent auditing firm, Andersen, should also be held responsible for the Enron scandal. During an SEC investigation of Enron’s financial affairs, Andersen’s Houston office was found guilty of destroying documents...
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...Arthur Andersen: Questionable Accounting Practices Steven Young Strayer University Business Ethics: Ethical Decision Making and Cases Dr. Mary Tranquillo November 13, 2012 Arthur Andersen: Questionable Accounting Practices p1 Arthur Andersen, one of the largest accounting firms in the United States, “a name that was synonymous with trust, integrity, and ethics” (Ferrell, Fraedrich, & Ferrell, 2011, p. 348), through a loss of its founder Arthur Andersen, and change in its corporate culture resulting in many unethical business transactions that affected multitudes of primary stakeholders had to close its doors in 2002 after 90 years of business. Review the mandated requirements for legal compliance (from chapter 4) and determine which requirements apply to the Arthur Andersen case. Explain your rationale After re-reading Chapter 4 there are five areas that separate the mandated requirements for legal compliance, and I feel the that two apply to the Arthur Andersen case; the protection of consumers, and incentives to encourage organizational compliance programs. In the laws that protect consumers they require businesses to provide accurate information protecting them from financial scams, unfair, fraudulent, or deceptive practices. There are “Gatekeepers” that are in charge of that such as lawyers, financial rating agencies, and financial reporting services that help enforce high ethical standards. This...
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...Summary Enron Corporation is an energy trading, natural gas, and electric utilities company based in Houston, Texas. Formed in 1931, it was originally known as Northern Natural Gas Company. In 1985, Enron was formed by Kenneth Lay after the merger of Houston natural Gas Company and Inter North (Nebraska Pipeline Company). Fortune magazine named Enron “America’s most innovative company for 6 consecutive years. But all that came crashing down in a very bad scandal better known as the Enron Scandal, and it also led to the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. Enron’s stock price went down to pennies from over $90. It is ever the most famous company in the world, but it also is one of companies which fell down too fast. The aim of this paper is to analyze how and why the Enron Scandal took place, how the energy giant suddenly collapsed and eventually filed for bankruptcy. I. Special Purpose Entities Enron created partnerships within their own organization which led to them creating new financial instruments, called SPE’s which was used to falsify the accounting. Enron used SPE’s such as LJM Cayman LP, LJM2 Co-Investment LP, and Raptor vehicles, which is designed in part to hedge an Enron investment in a bankrupt broadband company Rhythm NetConnections, to “increase leverage and ROA without having to report debt on its balance sheet” (Journal of Accountancy, 2002). Enron entered into a series of transactions...
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...The Enron and Corporate Governance Company Enron Corporation Industry Energy Founded Omaha, Nebraska, USA (1985) Founder Kenneth Lay Employees approx. 22,000 (2000) Fate Bankruptcy, 2001 Website enron.com To write about Enron I was inspired by documentary movie “Enron: The Smartest Guys in The Room”. It explains in details how negligence and ‘cheating’ in corporate governance can lead to disaster for whole nation. The case of Enron became classical example of the company where executives can manipulate whole industry using ‘creative accounting’ and corporate governance. Enron bankruptcy is the greatest knowing corporate failure in the US from the time when the crash of numerous savings and loan institutions in the 1980s. This scandal showed the necessity for important improvements in accounting and corporate governance in the country, along with a tight control at the moral values in the culture of business in whole and of enterprises in the country. Actually, one can find a lot of reasons why this collapse happened. And there is the problem of interest between the two roles played by Mr Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of the collapse...
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...THE COLLAPSE OF ENRON & THE INTRODUCTION OF THE SARBANES OXLEY ACT BY TREVOR GARRETT 02/25/2011 Abstract Enron Corporation was one of the largest energy trading, natural gas and Utilities Company in the world that was based in Huston, Texas. The downfall of Enron is one of the most infamous and shocking events in the financial world, and its reverberations were felt around the globe. Prior to its collapse in 2001, Enron was one of the leading companies in the U.S and considered among top 10 admired corporations and most desired places to work at. Its revenues made up US $139 to $184 billion, assets equaled $62 to $82 billion, and the number of employees reached more than 30,000 people in 20 countries around the world. While on the surface it seemed like the perfect Corporation, internally it had highly decentralized financial control and decision-making structure, which made it practically impossible to get coherent and clear view on corporations' activities and operations. Enron manipulated its books and assets to help it report steady profit growth to Stock Exchanges and Credit-rating agencies. Investors generally are not willing to pay as much for the stock of a volatile trading operation, and this gave rise to manipulations. This paper briefly describes the legal and ethical breaches by Enron, the key factors and events that led to its collapse and the passing of the Sarbanes Oxley Act as a consequence of such a catastrophe. The paper also discusses the...
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...ENRON CASE Please read the Enron cases posted on blackboard and the one in your book then answer the following questions based upon the case and Chapter 9. Make sure that your answers are supported by the facts of the case and the concepts you learned from Chapter 5. Please rely only on the case/chapter 9 to answer the questions except for question # 12—requires outside search. Make sure your answers are sufficiently brief, concise, and relevant to the question. Please avoid general, round, and long statements based upon speculations. “Briefly explain” means an explanation requiring 2-5 sentence elaboration of the topic in hand. This is an independent and individual project that should be done by each individual student alone. Any extensive similarities and consistent patterns among students will result in a grade of zero for any student involved in the situation. If you need assistance I should be the source to answer any questions and respond to any concerns regarding the case. It is also not acceptable that the student plagiarizes through internet sources, written documents and reports of others, and etc. Any outside source should be correctly cited with a reference. Each case will be electronically submitted to Safe Assignments on blackboard (Go to assignments tab, click on create assessment, pick safe assignment from the drop down menu and upload your case there). Due date is Thursday Nov 29, 2011. Please bring a hard-copy to the class...
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...Case 1.1 Enron Corporation Saint Leo University 1. a. Andersen auditors – the auditors from Andersen failed to properly perform their professional auditing duties. b. Enron Board of Directors and top executives – the Enron executives focused on creating the foremost corporation, and with that goal performed many actions that would lead to the demise of Enron. Specifically, Kenneth Lay, Jeffrey Skilling, and Andrew Fastow are the masterminds behind the scheme. c. Accounting regulators – at the time of Enron, there was not as much regulation as there is post-Enron, so while there was no one specifically at fault for catching Enron in their actions, there should have been more regulation put in place as there is today to prevent this fraud. 2. a. Executive professionals search/human resource services – a company’s auditing firm cannot also provide employee search services for them. The potential executives have a large amount of power in the company, therefore relating the two can serve as a powerhouse for internal fraud. b. Software design services – if the company’s auditor is the designer of the software being audited, there would be a large amount of bias on the auditor’s part to put the software in a positive light. This would make it difficult for the company to see where real improvements need to be made. c. Investment adviser – essentially the auditor’s job description is to evaluate the firm’s financial escapades. If an auditor suggests a certain investment...
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...1. Perform an initial ratio analysis with Enron’s 2000 10-K Report, using the “Irrational Ratios”, the “Key Ratios for Investing” and the “Emerging Ratios”. Irrational Ratios Days Sales in Receivable Index | 1.376 | *This could be a red flag because this comes in closer to the mean manipulators index than the non-manipulators index. | | | | Gross Margin Index | 2.144 | *This is definitely a red flag because it is much higher than the average manipulators index of 1.193. | | | | Asset Quality | 0.7714 | *Not a red flag because it is smaller than the mean non-manipulators index. | | | | Sales Growth Index | 2.513 | *This is also a red flag because it is much higher than the mean manipulators index. | | | | Total Accruals to Total Assets Index | -0.0121 | *TATA is not a red flag because it is very close to the non-manipulators index. | Key Ratios for Investing Price/Book | 5.597 | | | | *Red flag because industry average is only between 2 and 3. | Price/Earnings | 71.429 | | | | *Red flag because average is between 20 and 25 which is significantly lower. | Price/Sales | 0.637 | | | | *Not a red flag because this falls below the benchmark of 1.9. | Price/Cash Flow | 13.433 | | | | *Not a red flag because this falls below the benchmark of 15.1. | Profit Margin | 0.9713% | | | | *Red flag because this does not fall within the benchmark of 4%-8%. | Top-Line Growth | 151.269% | | | | *Red flag because...
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...Enron was a well established company registered in the United States of America which was ranked 7th in the Fortune 500 magazine and arguably the most innovative company in the United States. Hanson (2002), as quoted by Nakayama (2002) argues that the Enron scandal is the most significant corporate collapse and it demonstrated the need for significant reforms in accounting and corporate governance, as well as a close look at the ethical quality of the culture of business generally. There are many causes of the Enron collapse. Among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron; the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business; and the lack of truthfulness by management about the health of the company and its business operations. In some ways, the culture of Enron was the primary cause of its failure. Zimbabwean companies can draw a number of lessons from the Enron scandal. The lessons learnt from the Enron scandal have been one of the bases for the development of more robust corporate governance recommendations and legislation in some countries, for example the Sabanese-Oxley Act in the United States. According to Nowroozi (2002), the failures and lessons associated therewith can be classified as follows: Fudiciary failure Enron’s board clearly failed in its fudiciary duties to safeguard the shareholders’ interest...
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...Auditor Independence “Independence” refers to a person not being influenced or controlled by other people but free to make his or her own decisions or example, an independent auditor does not have any business dealings with the clients’ companies. Owing to many incidences of financial scandals worldwide, it is now crucial to ensure that financial statements of companies are properly audited by auditors. Corporate reporting should comply fully with financial reporting standards and international auditing standards. To be an independent auditor, one must not have close relationship or direct connection with the company directors and shareholders. Besides, an independent auditor must not have relatives or close friends working in the company. If auditors have direct relationship with the client companies, their board of directors or shareholders, the danger is that their judgments and opinions will be severely impaired or affected. One of the most high-profile auditing scandals in recent times is the one involving the Enron Corporation, an American energy company based in Houston, Texas. The scandal came out in the open on 12 October 2001 due to the non-transparency of the company’s financial statements. The financial statements did not clearly reflect its operations and used accounting loopholes. Its poor financial reporting allowed Enron to cover up billions of dollars in debt from failed projects and deals. Enron’s auditor, Arthur Andersen had provided...
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...Andersen: An Obstruction of Justice? 1. Look up the term corrupt in the dictionary. What is the definition? Was corrupt appropriately applied to the actions of Andersen? The dictionary defines corrupt as, “having or showing a willingness to act dishonestly in return for money or personal gain”. In the case of Andersen and Enron, the question of corruptness relates to the destruction of documents. While at first appearance it seems like an easy question to answer, many details come into play. The destruction of documents is a normal audit procedure used to protect the firm and company (client). Auditors are instructed to destroy any documents that are not needed. In the case of Andersen, this was a normal and legal policy. In the case of Andersen the destruction of documents all happened at one time, when the chances of a case against Andersen were likely to occur. Is this corrupt? It is hard to say. IN MY OPINION, Andersen was NOT corrupt in their practices. They were following the letters of the law and providing the best services they could for their client. Andersen did not lie about their actions and thus were not dishonest. I do believe that there were “red flags” surrounding Andersen, but without breaking a law they were not corrupt. Ultimately corrupt and acting unethically is not the same thing, and while Andersen may not have been ethical they were not necessarily corrupt. They believed they were following the GAAS principles and providing a fair and thorough...
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...The Enron Collapse Enron, a high profile organization which ranked as the seventh largest company in the United States during the 1990’s consisted of approximately 25,000 employees worldwide and held revenues in the tune of over 100 billion dollars in 2000. Enron controlled about one quarter of the gas companies in the United States and also expanded into Myriad energy products during its years of operation. The company traded hundreds of products throughout the wider Continentals including South America, Asia, Europe, Australia and also the United States, and was considered to be very successful with their trading strategies. An excerpt from an article in the CRS Report for Congress entitled The Enron Collapse: An Overview of Financial Issues, Mark Jickling, (February 4, 2002), states that “the firm was widely regarded as one of the most innovative, fast growing, and best managed businesses in the United States.” However, despite all of Enron’s fame and glory, the company crumbled as a result of bad management and unethical practices. According to Donaldson & Werhane (2008), “The controls as designed were not rigorous enough and their implication and oversight was inadequate at both Management and Board levels,” (p. 313). The purpose of this paper is to discuss the Enron Collapse and explain how the virtuous manager would have responded to working for Enron. Also being discussed is what the virtuous manager is expected to do if confronted with these decisions. Unfolding...
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