Case Study Of The Collapse Of Enron
• Arthur Andersen – Allowing the fees to cloud their professional judgement. To allow for questionable and complex accounting practices to continue via the SPE’s. Also, the destruction of Enron audit documents
• Enron – Kenneth Lay/Jeffrey Skilling – The emphasis that was placed on a big profitable bottom line to increase the value of their company and their direct reward for such profits. They discounted the loyalty and the harm that it would have when the scandal began to unravel would have on their employees.
• SEC – Lack of oversight at the time to allow for these type of activities to occur. To allow the auditors to basically be the gatekeepers of the findings. …show more content…
In effect, they would be auditing their own work.
The standards that Arthur Andersen violated are as follows:
Independence – With their heavy involvement in the SPE Andersen violated an auditing standard
Reporting - With Andersen’s heavy involvement it can be said they were in violation of producing biased and misstated financials.
Planning and Supervision – If Andersen had done their due diligence on the front end they should have recognized the conflict of interest of their deep involvement.
Evidence – If they would have requested documentation and analyzed the SPE data they would have seen that the accounting practices of Enron were not legal.
The preparation of the audit work papers should be a complete and understandable collection of documents that would allow for a senior manager or partner the ability to understand the scope and results of the audit.
The audit firm is responsible to retain the audit documentation.
Establish Independent Audit Agency – Removes the incentive for a firm to give favorable audit results to obtain additional revenue through our services …show more content…
It puts the client on the hook as well that they are not misleading or misstating the data to the auditors. This gives another level of accountability and the building of trust with the investing sector.
After the multiple scandals where it was apparent that the accounting firms no longer had the public’s interest as an important factor of their’ s company mission statement mistrust grew through this sector. It was clear that the accounting firms became more of a marketing and revenue generating machine then they did a professional organization who was to report an unbiased and fair manner for educated decisions to be made on further investment in the companies.
The enactment of the Sarbanes-Oxley of 2002 was the single most import event that happen to restore the faith into the public accounting auditing services. It has now ensured a level of independence, oversight and regulation for the preparation of fair financial statements. Also, by requiring the CEO and CFO to sign off on the audit reports, it has put accountability on the corporate executive to make sure that they are following the framework of GAAP.