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Enron: An Analysis Of Auditing Standards

2181 words - 9 pages

Enron: An Analysis of Auditing StandardsIntroductionThe Enron scandal was a financial scandal involving Enron Corporation and its accounting firm, Arthur Arthur Andersen. A major portion of the company's profits and revenue were resulted from deals with special purpose entities (SPE) that they controlled, like limited partnerships. Furthermore, the company's debts and losses were not reported in the financial statements. The Enron scandal was revealed in late 2001, ultimately leading to the dissolution of Arthur Arthur Andersen, which was one of the five largest accounting firms in the world at that time. Enron was on the edge of bankruptcy by November of 2001 and filed for bankruptcy on December 2, 2001. After the discovery of the scandal, Enron shares fell from over US$90.00 to less than 50¢. This was a shocking, incomparable, and catastrophic event in the financial world since Enron had always been considered as a blue chip stock.Enron was an energy company which people would never have thought it would fail. Most of the public believed that Enron was a reliable business as everyone in the world needs heat and electricity. No one had knowledge about the numerous number of audit problems associated with this giant corporation until the Enron-Arthur Andersen debacle occurred. There were flaws in the application of accounting standards which enabled manipulation of Enron's earnings. However, if the auditing standards were applied with due care, Arthur Andersen's audit may have been more effective. Indeed, due professional application of auditing standards is essential since Enron operates in a risky environment in an audit's point of view. The company's stock price had strong reliance on constant access to capital and earnings growth. Furthermore, Enron's stock was used to guarantee various off-balance sheet financing arrangements. For these reasons, the audit risk was extremely high for the company. In this paper, these issues will be examined: going-concern matters, related-party disclosures, subsequent discovery of facts, auditor independence, and audit documentation. Audit failures, like Enron's collapse, may be avoidable if auditors follow the auditing standards with due professionalism.Assessment of Risk and FraudOn February 5, 2001, Arthur Andersen partners carried out a meeting regarding whether to maintain Enron as a client or not. They were having doubts due to the high degree of engagement risk. There were numerous related-party transactions, some run by Enron executives and audited by other firms. Furthermore, there was also the uncertainty as to whether the staffs of Arthur Andersen fully comprehend the transactions due to the complex structure of the company. In the end, the partners decided that they were capable of this job.Due to client's confidentiality, the auditor is usually not allowed to discuss with those outside of the company. However, if auditors are uncertain about certain actions of the management, they should...

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