The Enron Case: An Overview Of Arthur Andersen's Case

Register to read the introduction… Clearly, the Enron case satisfies those criteria. The purpose of presenting such a case early in the semester is not only to acquaint students with the nature of auditing but also to make them aware of why the independent audit function is so important. Many accounting students are not well acquainted with the nature of the independent auditor's work environment, nor are they generally familiar with the critical role the independent audit function plays in our national economy. Hopefully, cases such as this one provide students with a "reality jolt" that will stimulate their interest in auditing and, possibly, make them more inclined to pursue a career in the auditing field. The Enron case also serves as a good starting point for an auditing course since it provides students with an overview of how the auditing profession developed and evolved in the United States over the past century. The vehicle used to present this overview is the history of Arthur Andersen & Co. You will find that the case attempts to contrast the “Think straight, talk straight” philosophy of Arthur E. Andersen, the founder of the Andersen firm, with the more business-oriented approach to auditing that his predecessors adopted in the latter decades of the twentieth …show more content…
Given the assumption that the Powers Report excerpts included in Exhibit 3 are accurate, one could plausibly argue that Arthur Andersen violated several of the ten generally accepted auditing standards, including the following: (Independence (second general standard): by becoming too involved in Enron’s decisions for important accounting and financial reporting treatments, the Arthur Andersen auditors may have forfeited some degree of objectivity when they reviewed those decisions during the course of subsequent audits. (Due professional care (third general standard): any violation of one of the other nine GAAS effectively results in a violation of the catchall due professional care standard. (Planning and supervision (first fieldwork standard): a reliable quality control function, including proper audit planning decisions and effective supervision/review during an audit, should result in the identification of problematic situations in which auditors have become too involved in client accounting and financial reporting decisions. (Internal control evaluation (second fieldwork standard): one could argue that given the critical and seemingly apparent defects in Enron’s internal controls, Andersen auditors failed to gain a “sufficient understanding” of the client’s internal control …show more content…
In fact, many parties have advocated an even more extreme measure, namely, that independent auditors continually monitor and report on the integrity of their clients’ financial disclosures. In the current environment when information is distributed so readily and widely to millions of investors and other decision makers, the validity or utility of independent audits that focus on discrete time periods has been challenged. As recent history has proven, by the time that auditors issue their reports on a client’s financial statements for some discrete period, the “horse may already be out of the barn”—the “horse” in this case being the damage to investors and other parties resulting from oversights and other misrepresentations in the given financial statements. This problem could be cured, or, at least, mitigated to some extent, by requiring auditors to provide real-time disclosures of potential problems in their clients’ financial