TITLE : CASE STUDY ANDROIDS UNDER ATTACK

1) EXECUTIVE SUMMARY
The case study is about Androids is under attack as it was already in the news, and
what made Androids a tastier target was the fact that Enronaa was not the first time. Its start
from they had used accounting practices that allowed Enronaa to hide its debts, but really
these are all within the context of fair value accounting. Androids was critics that the auditors
were incompetent, at worse, they deliberately overlooked irregularities at Enronaa in order
not to lose the lucrative stream of consulting and other work it provided. Androids also had
prior entanglements with the Securities and Exchange Commission (SEC). Androids agreed to
pay the SEC a civil penalty of USD 7 million to settle charges related to the firms work as
auditors of Solid Waste. This issue is the US SEC found Androids guilty of issuing materially
false and misleading audit reports on Solid Waste financial statements for the period 1993
through 1996.
Then, Androids also issued an audit report on Solid Wastes financial statements in
which it stated that the companys financial statements were presented fairly, in all material
respects, in conformity with generally accepted accounting principles (GAAP) and that
Androids had conducted its audit of those financial statement in accordance with generally
accepted auditing standard (GAAS). So, SEC found that Androids representations were
materially false and misleading. While, Solid Wastes financial statements were not presented
fairly, in all material respects, in conformity with GAAP. Androids had allowed the
management of Solid Waste to use improper accounting to inflate its operating income and
other measures of success. It was the largest restatement of results in the history of the SEC.
Besides that, SEC found Androids failed to ensure that all known misstatements were
quantified and all likely misstatements were estimated. SEC also found that Androids knew or
was reckless in not knowing that the auditors of the financial statements on which Androids
issued unqualified audit reports during those years that were not conducted in accordance
with GAAS.
Androids thereby, engaged in improper professional conduct. The Solid Waste case
followed Androids decision to pay USD 110 million to settle a lawsuit on audits at Sunbeamic,
another US client found to have less than reliable accounts. David and Ken knew that the firm
would be in deep trouble for its role in Enronaas collapse. Androids was already under
probation with the SEC and another scandal in the likes of Enronaa would mean the end of
their business. The sessions would pressure Androids auditors to view accounting issues
Enronaas way. Androids knew that what Enronaa wanted and usually sought to give it to
them. The Enronaa account had become so lucrative for Androids that the firm was unwilling
to step away.

2) INTRODUCTION
Androids & Co started in 1913 when Arthur and Clarence, both from the audit firm of
Price bought out a small audit firm in Illinois to form Arthur, Clarence & Co, which became
Androids & Co in 1918. Android headed the firm of Androids & Co until his death in
1945.Besides, Android who is founder of Androids & Co was a zealous supporter of high
standards in the accounting industry. In 1945, Leonardo Sparky, who succeeded Android at
the founders death, continued this emphasis on honesty. Androids have 85,000 staff in 390
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offices in 84 countries. For many years, the Androids motto was Think Straight, Talk
Straight.
Androids is an audit firms which provide audit service and consulting to their client.
Androids has close relationship with Enronaa and Solid Waste in conducting and providing
auditing and consulting to them. It means that, Enronaa and Solid Waste are Androids clients.
Androids audited Solid Wastes annual financial statements since before Solid Waste became
a public company in 1971. Until 1997, every Chief Financial Officer (CFO) and Chief
Accounting Officer (CAO) in Solid Waste history as a public company had previously worked as
an auditor eat Androids and 14 former Androids employees worked for Solid Waste, most
often in key financial and accounting positions.
David Lawrence, 43 years of age, joined the auditing firm of Androids 20 years ago.
David earned salary of USD 700, 000 per annum when he works in Androids. He was the
Androids partner in charge of auditing Enronaas accounts since 1987. His job was to check
Enronaas accounts and make sure that they fairly represent the state of the business.
Androids had been Enronaas auditor for the past 16 years. David is one of the Androids
partners, who are responsible to check Enroonas account and to ensure they are fairly
representing the state of the business. The issues arise when David conducts the audit in
Enroona and there are evidence suggesting Android assisted to puff up reported returns of
off Balance Sheet activities.

3) TERM OF REFERENCE
David Lawrence, joined the auditing firm of Androids 20 years ago. He and his auditing team
listened in on a call between stock analysts and Enronaa executives, who were trying to
explain the companys financial free fall. David began painfully explain the technical
intricacies of Enronaas accounting to Ken Bailey. Ken Bailey is a junior partner in Androids and
he also one of the auditor in Androids firm. He explained how he learned from Tom Fitzgerald,
a co-partner of the Enronaa job, that some of the many off-the-books partnerships had not
been properly accounted for and were not independent entities. David and Ken knew that the
firm would be in deep trouble for its role in Enronaas collapse. The general expectation was
that the auditor would have been able to spot large scale fraud or deception.
Nancy also one of the important characters in Androids case and Androids auditing firm.
Actually, Nancy is a lawyer at Androids Chicago Headquarters. She also one of the person
who are advised David Lawrence about Androids policies regarding retention of documents
from client engagement. Besides, she also play key role in the conviction of Android on
charges of Obstruction of Justice when she give email to Androids employees on the policy of
routine document shredding.
Solid Waste also one of the organization that involved in this case, where Solid Waste is also
one of the Androids clients in 1971 before Solid Waste become a public company. For
Androids, Solid Waste is a crown jewel client. Until 1997, every Chief Financial Officer (CFO)
and Chief Accounting Officer (CAO) in Solid Waste had previously worked as an auditor in
Androids firm.

4) PROBLEM / OPTION
Audit issue
There are 2 crucial audit issue discovered in this case study which are,
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Independence

Two topics are involved in this issue which are about Enronaa and Casey. According to
independence concept, auditors should do their works freely without any restriction or
pressures. But in this case, we could see that Androids willing to follow the instruction of
management of Enronaa as they afraid of losing this audit engagement. This is because,
Enronaa is Androids single biggest client, reaching audit fees of up to $100 million per
annum.
Relationship between Enronaas CAO Casey with their auditor David Lawrence is another
issue that could affects the independence of the audit team of Androids. There are a clear
conflict of interest which would hinder an auditor's independence and their ability to perform
audit independently.

Integrity

Integrity require an auditor to be straightforward and honest in all professional and business
relationship. In this case, Androids integrity scratched as Androids assisted their client,
Enronaa and Solid Waste to issue a false audit report for their financial statements . Androids
also did not conduct the auditors integrity responsibility well when they shredding their
clients documents .

Accounting issue

Creative Accounting

Creative accounting define as the accounting process consisting of dealing with many matters
of judgment and of resolving conflicts between competing approaches to the presentation of
the results of financial events and transactions.
The issues related to creative accounting is when Androids used accounting practiced that
allowed Enronaa to hide its debts.
In the case of solid waste, Androids audit team recognized that Solid Waste employed
Aggressive accounting practices to enhance its earnings and break GAAP policy. Other than
that, Solid Waste was repeated final year adjustments to reduce depreciation expenses on its
property plant and equipment cumulatively from the beginning of the year.
Solid Waste also adoption of :

non-GAAP method of capitalizing interest of landfill development cost,

improper use of purchase accounting to increase its environmental remediation,

improper charges of operating expenses to the environmental remediation reserves

refusal to write-off permitting and project cost on impaired or abandoned landfills.

Those accounting practices are to increase reported operating income by understating
operation expenses and its show both clients involved in using improper creative
accounting.
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5) RECOMMENDATION
There is two situation that arise in this case, which is David agree the advice from Nancy to
shred the document of Enronaa or the other situation were David decide not to shred the
document of Enronaa. Other than that, David should also issued an adverse opinion report to
Enronaa, and admit the previous misstatements and false issuance of reports to SEC since the
financial reports consist of a lot of fraud and mistake for the past 16 years.
First situation, while David choose to shred the document mean he doesnt admit the guilt as
an auditor for Enronaa, therefore SEC will immediately start investigations towards Androids.
Thus, it is impossible for Androids to destroy all the evidence of wrongdoing, since document
is not the only evidence, when comes into inspection to the auditors, the truth will be review
and finally SEC will discovered all the fraud that had been done by Androids and Enronaa. At
the end, the penalty and loss will be horrible than to admit the guilty. Because the company
might not have the chance to retain their reputation and other customer, at last, Androids
might go into bankruptcy.
The other situation will be David choose not to shred the documents, in the same time, mean
David admit the guilty between them and Enronaa. However, the consequences that arise
from it will be not only the penalty but also SEC will start to investigate towards other clients
of Androids, since people believe that while one clients have the problem, other clients as well
might have the same problems too. However, since they admit the fraud that had been done,
they will immediately take action to retain their reputation and improve their performance to
maintain their market. For example, they might find out and terminate the responsibility
engagement team. And they might also need to restructure their organization in all
perspective as well. Also, by admitting Androids' mistakes, they are actually splitting the
trouble with clients as well. So even though Androids have to pay the penalties; theirs clients
also need to do the same. On the other hand, if the SEC found out themselves, the penalties
will be much more severe.
We also would recommend legislation to create an independent, self-regulatory organization
(SRO) to oversee accounting firms. In where, auditing firm would remain in the private sector,
but the government would be involved in the same time to restore the confidence of the
stakeholders. The SRO would have rule-making, supervisory and disciplinary powers.
Besides that, we also recommend all of the auditor and professional bodies to focus more the
independent issues. Since, an auditor not only has to be independence in appearance but also
remain independence in mind. Therefore, audit firm, professional bodies and auditor
themselves need to be clear of the true meaning of independence.
Other than that, audit firm should look more closely at the relationship between auditors,
managers and the company audit committee. In addition, Auditors should be rotated every
few years to prevent long-term, close ties between the management and audit firm to ensure
the independence of an auditor towards their audit opinion.
Lastly, we would like to recommend that all companies need to build a robust ethics
infrastructure and follow it in the daily business. For example, Androids might need to rebuild
their policy such as comply with by-law principles to ensure their auditor professionalism. And
they also need to ensure the policy is strong enough, it is to make sure all auditors will comply
with it. Other than that, audit firm must ensure that one auditor is only available for one
responsibility in a company. Thus, the professionalism will be good enough for the audit firm
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6) ACTION PLAN
i.

ii.

iii.
iv.
v.

vi.

Androids not to shred the document and admit the guilty - Androids have to pay
the penalties, theirs clients also need to do the same, the audit report for the
year should be issues as adverse opinion reports.
Androids shred the document Since document is not the only evidence, when
comes into inspection to the auditors, the truth will be review and finally SEC will
discovered all the fraud that had been done by Androids and Enronaa. The
penalties and loss will be horrible.
Create an independent to remain the public sector but government will
intervention to restore the confidence of the stakeholders.
Self-Regulatory Organization (SRO) to oversee accounting firm SRO can work
together with SEC to watch over the conduct of all audit firm and their clients.
Focus on independent they must clear meaning of independence, audit firm
and professional body might work together to provide some courses and
counselling session for auditor to avoid over pressure.
Companies build up a robust ethics infrastructure - auditors and consultant
positions must be taking by different people to ensure their auditor
professionalism and the policy is strong enough.