1. more time on the audit process

1. more time on the audit process

1. The Enron executive team including Kenneth Lay, Jeffrey Skilling, Andrew Fastow and other executives, were the key players in the crisis. The business practices they used when creating hundreds of SPE’s and diverting large amounts of liabilities to those off-balance sheet entities.

Enron was aware of the minimal accounting guidelines for SPE’s and used them to their advantage. To create such a complex “paper” structure, the executives had to have coordinate their plans with the accountants to ensure the transaction were done to benefit the company’s financial statements.Skilling had a goal to transform Enron into “the world’s greatest company”.

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His determination to achieve this goal was the ultimate demise of Enron. The finding from the case against Enron stated that the notes in the financial statements regarding the transactions with deliberately vague or used confusing language. The accountants at Enron preparing the 10Q and 10K documents would be well aware of the transactions and would be the people responsible for the preparation of the footnotes in the filings.Sherron Watkins, the vice president of corporate development with an accounting background was one of the only executive members to aggressively reach out to Kenneth Lay to express her concern with the accounting decisions. The role of the Arthur Anderson audit team in the Enron crisis was not as direct as those on the executive committee.

However, Arthur Anderson completed the annual audits of the Enron financial statements and issued an unqualified opinion. Anderson failed to make proper acknowledgement of the revenue recognition practices and use of SPE’s to divert debt.They did not react until Enron started its financial decline. Anderson spends over 50% of its time at Enron consulting. Had they invested more time on the audit process reviewing the accounting practices, the loss may have been minimized and clearly defined Anderson’s as an independent auditor.

2. In recent years, audit firms have provided their clients with consulting services such as reviewing and commenting on business plans, defining requirements for information systems and assisting in the installation of an information system.Audit firms may also assist in merging organizations.

If an audit firm provides a consulting service, they must be aware of any potential treat that service made present when the firm completes an audit. According to the AICPA Guide to Independence, activities in any of the above mentioned services that may impair independence are authorizing or a transaction on behalf of a client, preparing the client’s source documents, having custody of a client’s assets and establishing internal controls, including those that monitoring ongoing activities.To help ensure the audit firm’s independence, the client must agree to make all management decisions and perform all management functions, evaluate the results of the services performed an accept responsibility for the results of the services.

3. The excerpts from the Power’s Report regarding Anderson’s involvement in the Enron SPE transactions detail a list of actions that would violate professional auditing standards.The first item noted states that Enron’s accounting treatment was determined with the extensive participation and advice from Anderson. In addition, some of the SPE structuring and transactions were approved by one or more of the Anderson auditors. This shows a lack of independence by the firm. Anderson should not be authorizing transactions of the company in their consulting capacity.

If this is true, Anderson would be auditing work that they created and approved.And these transactions created the understated debt at Enron and over stated earnings. 4. Key requirements for the preparation and retention of audit work papers can be found in SAS 103.

Documentation should be detailed to give experienced auditors who were not previously involved in the audit a clear understanding of the work performed, the evidence obtained and the conclusions reached. Oral explanations are not sufficient to document auditors’ work or conclusions, but auditors may use them to clarify or explain information in the documentation.Auditors should document audit evidence that is inconsistent with audit conclusions regarding significant issues and explain how they addressed the contradiction in forming the conclusion. Auditors should complete audit documentation within 60 days from the audit report date.

Subsequent deletions from the documentation are prohibited and any additions should be documented. Audit documentation should be retained until at least five years after the report release date. The audit work papers belong to the audit firm.

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