Enron was a strong player Case Study
Enron took advantage of this and utilized the Spec’s extensively to cover p their capital and cash flow shortages. Enron’s board of directors is responsible for not having a strong audit committee with members that could decipher the financial and question all the ambiguity themselves.
Also, the audit committee lacked independence and had a financial connection to the company.
The government had a large part as well, by supporting the company’s initiatives through various economic regulation and policy during that time. Enron was a strong player and influence during the Bush administration, and a certain level of politics were also what allowed this scandal to happen. Also, certain tax laws that were In place did not encourage long-term holding of stock. Briefly describe the key requirements in AS 3 regarding the preparation and 2. Retention of audit documentation.
According to paragraphs 4-9 (AS No. 3), since the documentation is written record that provides support for representations in auditor’s report, it should demonstrate that the engagement complied with the standards of the PEPCO and the underlying accounting records agreed or reconciled with the financial statements. The other key requirement is the auditor must document the procedures performed, evidence obtained, and conclusions reached with respect to relevant financial statement assertions.
The documentation must contain sufficient Information to enable an experienced auditor who have no previous connection with the engagement understand the nature, timing, extent, and results of the procedures performed. In order to determine the nature and extent of the documentation for a financial statement assertion, the auditor should consider couple factors such as; nature of the auditing procedure, risk of material misstatement associated with the assertion, and significance of the evidence obtained to the assertion being tested.
Also, documentation must include information the auditor has identified relating to significant findings or issues that is inconsistent with or oppose to the auditor’s final conclusions. Briefly explain who owns the audit documentation and how long must audit 3. Documentation be kept. Adulating standard No. 3 can De ten reticence Tort tens quietest.
I Nils adulating standard established the general requirements for documentation that the auditor should prepare and retain in connection with engagement conducted pursuant to the standard of PEPCO.
This standard specifies the objectives of auditing accumulation, audit documentation requirement, documentation of specific matters, retention of and subsequent changes to audit documentation and an appendix regarding background and basis for conclusion. To answer question NON, since Enron corporation was a public company, the audit standards of PEPCO should be followed. According to Auditing standard NON, the auditor should prepare and maintain the audit documentation.
The auditor must retain audit documentation for seven years from the date the auditor grants permission to use the auditor’s report in connection with the issuance of the company’s financial statements (report release ate unless a longer period of time is required by law.
If a report is not issued in connection with an engagement, then the audit documentation must be retained for seven years from the date that fieldwork was substantially completed. If the auditor was unable to complete the engagement, then the audit documentation must be retained for seven years from the date the engagement ceased.
Recently the European Parliament approved mandatory audit firm rotation. 4. Explain your reasons for supporting or not supporting such a proposal in the United States.
The European Parliament approved mandatory audit firm rotation. The reason for this change was to enhance the quality of an audit as well as improve independence within the profession. The PEPCO came up with a concept release on auditors independence and Audit Firm Rotation and opened it for the public opinions and suggestions.
The concept was finally closed for lack of agreement among the public, presumably. People have different opinions but the majority was against this idea of rotation.
We support the rotation concept as we believe, it will promote the quality of engagements. We agree for several reasons; It will decrease familiarity between the auditor and the audited and increase the auditor’s independence. The auditor will be more likely to develop more professional skepticism than the auditor already accustomed to the audited.
It will increase the new auditor workload, but nevertheless, we can recommence that the previous auditor prepare a document containing a summary of the previous years working with the company, including the most important factors accounted within his or her engagement. The document will cover the companies risks and weaknesses. Explain “Professionalism” as it related to auditors and how did Arthur .
Andersen’s behavior fit or not fit your definition. Professionalism can be simply define as the competence or skill expected of a professional.
However, professionalism as it relates to auditors has to consider due professional care in the performance of work. According to AU section 230, due professional care requires an auditor to exercise professional skepticism in order to total reasonable assurance auto winner a company’s Atlanta statement Is Tally stated. In addition to having due professional care, auditors must also have integrity, good Judgment, and above all ethics. Arthur Andersen’s behavior in the Enron case did not fit the definition.
Firstly, Enron was rated as risky by Arthur Andersen’s risk assessment due to Enron’s accounting method.
However, the audit procedures did not reflect the consideration of the risk assessment. Thus, Arthur Andersen did not exercise professional skepticism and recklessly issued unqualified opinions on 1998-2000 audits. Secondly, the investigators were able to obtained an email from senior Arthur Andersen executives discussing the possibility of dropping Enron as a client due its risky accounting method. By not dropping Enron as a client, Anderson id not use good Judgment and continued to work with a fraudulent company.
Thirdly, the lead partner David Duncan started destroying documents a day before learning that the SEC was opening preliminary inquiry on the Enron case.
This action alone showed that Arthur Andersen lacked integrity and ethics because the auditors knew that there were possible accounting improprieties at Enron. However, Arthur Andersen did not voice their concern when issuing their opinion. Instead, Arthur Anderson chose to destroy all documentations that were vital to the investigation against Enron in to cover up.