Case 1.

1: Enron
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 are
the most responsible for that crisis. Briefly justify each of your choices.
Executives of Enron - Kenneth Lay, Jeffery Skilling, and Andrew Fastow were all responsible for
the crisis. The executives of Enron orchestrated the big earnings and pushed up the stock prices
for their own benefit. When misstatements and irregularities emerged and were made clear to the
public, the executives of Enron lost the confidence of the stakeholders in the company and the
crisis of confidence spread.
Arthur Andersen - The auditing firm did not present itself with the professionalism and
responsibility that an audit firm should. When the firm noticed that the amounts recorded on
Enrons financial statements were misstated, it was ignored in order to continue receiving the
enormous amounts of fees and payments from the corporation. In doing so, the confidence that
the public had in the company was diminished.
SEC - The government agency who allowed Enron to use Mark-to-Market Accounting practice.
This kind of creative accounting practice allowed the Enron CEO to perform his Ponzi scheme
legally and led to the sudden collapse of Enron.
2. List three types of consulting services that audit firms have provided to their audit clients
in recent years. For each item, indicate the specific threats, if any, that the provision of the
given service can pose for an audit forms independence.
Internal Auditing should be conducted within a company instead of having an outside audit
firm to perform the service. If an outside audit firm was hired then it will present a threat to the
legitimacy of the internal audits.
An audit firm should not be Designing Accounting Systems for a firm while performing audit
services to the same firm. It is too easy for the audit firm to alter the accounting systems within a
company, an auditor can fabricate the financial situations of a corporation and make it appears to
be more profitable or more attractive to investors.
An outside audit firm should not provide Professional Consulting and auditing service to a
same company. Auditors involved in the dealings of a business are at risk for becoming
subjective to the success of that organization. When an auditor is involved in such happenings,

they are not able to perform their duties as an external auditor to the best of their ability. Their
opinions are subject to change based on biases.
3. For purposes of the question, assume that the excerpts from the Powers Report shown in
Exhibit 3 provide accurate descriptions of Andersens involvement in Enrons accounting
and financial reporting decisions. Given this assumption, do you believe that Andersens
involvement in those decisions violated any professional auditing standards? If so, list those
standards and briefly explain your rationale.
Yes, Andersens involvement in the accounting and financial reporting decisions violated
professional auditing standards of the independence in mental attitude. Andersens interests were
not independent of the company, but the audit firm invested themselves in solidifying the
security of the company and its success.
The significant amount of earnings that Andersen received when performing accounting services
to Enron goes against auditing standards.
4. Briefly describe the key requirements included in professional auditing standards
regarding the preparation and retention of audit workpapers. Which party owns audit
workpapers: the client or the audit firm?
The key requirements included in professional auditing standards regarding the preparation and
retention of audit workpapers are:
i) The auditor must state in the auditors report whether the financial statements are presented in
accordance with GAAP.
ii) The auditor must bring to light an instances in which the GAAP were not consistent during the
current period.
iii) When informative disclosures are not adequate, the auditor must state so in the report.
iv) The auditor must state an opinion in regards to the financial statements. If the auditor cannot
state an opinion, this much be noted in the report. If the auditor is taking any responsibility in
relation to the financial statements, it must also be stated in the auditors report.
The audit workpapers belong to auditing firm. The auditor does hold responsibility for the
evidence and reports, and is to make sure that the information is not misused in any way.

5. Identify and list five recommendations that have been made recently to strengthen the
independent audit function. For each of these recommendations, indicate why you support
or do not support the given measure.
i) Revise the rules related to the non-audit services that, if provided to an audit client, would
impair an accounting firm's independence.
Support; independence is the key in performing an audit.
ii) Require the auditor to report certain matters to the issuer's audit committee, including
"critical" accounting policies used by the issuer.
Support; in many cases, the internal auditors need to have access to the information that external
audit firms happen upon.
iii) Require the issuer's audit committee to pre-approve all audit and non-audit services provided
to the issuer by the auditor.
Support; the audit committee should know beforehand what the auditor will be providing for the
company.
iv) Require disclosures to investors of information related to audit and non-audit services
provided by, and fees paid to, the auditor.
Support; the cost of audit should be disclosed. An abnormal high audit fees is also an indicator of
something doesnt smell right.
v) Establish rules that an accounting firm would not be independent if certain members of
management of that issuer had been members of the accounting firm's audit engagement team
within the one-year period preceding the commencement of audit procedures.
Support; this allows the accounting and auditing teams to remain separate in their powers.
6. Do you believe that there has been a significant shift or evolution over the past several
decades in the concept of professionalism as it relates to the public accounting discipline?
If so, explain how you believe that concept has changed or evolved over that time frame
and identify the key factors responsible for any apparent changes.

Yes, I believe that there has been a significant shift over the past several decades, in which it has
occurred towards a standpoint via setting up standards and regulations which allows accountants
and auditors to be more accountable for their work. Key factors in this evolution are laws,
regulations, and the implantation of GAAP and GAAS.
7. As pointed out in this case, the SEC does not require public companies to have their
quarterly financial statements audited. What responsibilities, if any, do audit firms have
with regard to the quarterly financial statements of their clients? In your opinion, should
quarterly financial statements be audited? Defend your answer.
I believe that it is the responsibility of an auditor to examine quarterly statements during a yearly
audit. An auditor should always be skepticism when performing audit service to any client. If an
audit was done quarterly on a company opposed to yearly, and misstatements and fabrications
would appear sooner to an audit firm.