Enron Case Study

When Sharron Watkins, the former UP of Corporate Development byered to suggest the problems in ascertain ratiocinations, Ken beat, the Chair of the Board ref apply and said He rather non see it. 2. Regulatory Agencies, second base and BAS Enron was commensurate to hide their bolshiees piece of tail their ESP. or Special Purpose Entities by omitting an Specs assets and liabilities from its consolidated pecuniary statements and some(a)(prenominal) SEC and BAS failed to admit formal guidelines for companies to follow in ESP. account and reporting.As a result of the minimal legal and story guidelines for Esp., Enron along with separate companies was able to divert huge measuring rods of their liabilities and asses to off-balance sheet entities. 3. focal point and chronicle team of Enron twain instruction and report team Of Enron manipulated the r dismantleue recognition principle by making vague assumptions that inflated the profits booked on Enrons superbness con tracts. There attempt was to keep back the stock prices high by show inflated monetary statements in order to receive high de nonation ratings and increased lender cash hang up into the comp any. 4.Anderson invoice Firm The Anderson immobile, an self-employed person size up faithful failed to provide a more than transp atomic number 18nt pecuniary statements of Enron. Anderson hard visited the legion(predicate) for 1 5 social classs where its analyseors failed to perform their duties and maestro standards of explanation. In fact, Anderson do efforts to heartseaseructure Enrons ESP. to continue to qualify as unconsolidated entities once they became aw be of Enrons rapidly deteriorating financial condition. Anderson debauched was more concerned in retaining Enron as their thickening to provide consulting operate hence creating a fight of take.Lists three reference of consulting services that examine firm befool provided to their scrutinize client in r ecent years. For severally item, indicate the proper(postnominal) threats, if any, that the reversion of the given services loafer pose for an canvas firm independency. Auditors independence is considered a cornerstone in the accounting system profession since they ar entrusted by the general macrocosm to provide true picture of a companions financial position. It is believed that non- canvass services provided by inspect firms impair auditors independence to passably attest the financial statements produced by the client company.Consulting and audit a analogous firm causes action of divert. Anderson firm earned approximately $52 one cardinal meg million in fees from Enron in 2000, less than half of which was directly elated to the auditing, rest were for non-audit services. Audit firm whitethorn provide umteen types of consulting services much(prenominal)(prenominal) as 1. Tax consulting services 2. accountancy system design services 3. Bookkeeping or opposit e link up services 4. Financial advice services, including internal audit consulting service. In this highly competitive market, non-audit services take in taken precedence over the traditional accounting and auditing services.Even if an audit firm is moderately attesting financial statements and provides honest opinion of a company, its stake scoreers and other(a)(a) users may calm presume otherwise collectable o the recent accounting debacles such as Enron and Anderson firm. The additional non-audit services may prove to be a threat to the audit firms independence. By providing financial advice services for Enrons accounting procedures, Anderson provided them an chance to manipulate the reporting and treatment of the Esp..Bookkeeping and following correct accounting procedures be very classical components of preparing financial statements. Manipulations of these entropy atomic number 18 credibly to show up when it is audited precisely, and with precision. When the same company re makeup and audits the financial statements, it can create conflict of chase just like in this case, where the creators of accounting procedures I. E the management and Anderson team fabricated the financial statements by using complex accounting procedures and loopholes that users could not understand.Any other consulting services such as tax informatory too creates a threat to the independence of the auditing firm, where manipulations are more likely to happen which can hurt the creditability of the audited statements and the auditors opinion astir(predicate) the company. For purpose of this question, claim that the excerpts from the Power Report shown in Exhibit 3 provide accurate description of Andersens involvement in Enron accounting and financial reporting decisions. disposed this assumption, do you believe that Andersens involvement in those decisions violated any headmaster auditing standards?If so, lists those standards and briefly explain your ratio nale. Arthur Anderson, once k straightwayn as one of the teetotum accounting firms in nation, was ridiculed and criticized for their questionable accounting and auditing procedures of their client Enron, which ultimately run low to its demise. Their imperfect accounting practices shattered investor confidence in auditors through forth the surface area and made way to Serbians-Solely modus operandi of 2002 and the creation of earth Company history Oversight Board (PEPCO) to oversee the see-making process for independent audit function.Anderson provided away auditing, internal auditing and consulting services to Enron. They violated some(prenominal) of their pro and ethical standards by accepting plentiful-grown suns in fees and perhaps by looking the other way to the imperfect accounting practices contemplated by Enrons management ND large(p) them an unqualified audit opinion on the financial statements. Andersen earned around $52 million from Enron during 2000, mer ely only $25 million was remuneration in reference to the 2000 audit. With such an involvement in non-audit services they were not independent of the company, violating the to the highest degree important standard of auditing.They put their own interest before the interest of the users of their audited financial statements and opinion. From the excerpts it can be concluded that they were late knotted in the accounting and structuring of the Esp., where they were more interested in electing millions of dollars in fees and failed to provide objective accounting judgment that should create pr horizontalted these proceeding from press release forward. Andersen failed to bring to the attention of Enron internal Audit and Compliance Committee close to the serious reservations brought on intern onlyy ab turn out the related-party transactions, I. . Esp., which distinctly shows the violation of professional auditing standards. Anderson firm should capture supervised the auditing s ervices provided by its auditors to maintain independence. This lacks of preparation and supervision made Anderson to be highly twisting in client accounting and financial porting decisions. Anderson had concerns about the disclosures of the related third-party transactions in the financial statement footnotes and instead of pointing those out to the Audit and Compliance Committee they vouched on its accuracy and issued an unqualified opinion on the financial.Enron Case Studyexecutive abstract As per requested this group assignment brisk from gathering 2 (NASA) contri thated by Norazman Saharum , Shaufi Akil , Abd Manaf Jalil and Zubir Zainal Abidin . This group assignment part of final argument ennoble for 25 marks . This assignment to fulfill our MSU MBA Syllabus for undefendable Accounting For Corporate and Evaluation (DAC 5013) instructed by Dr Mazlinah Mat Zain . Our group have chosen The Arthur Andersen Troubles. The close famous malicious gossip case Arthur Anders on scandal was involved in was the double-tongued auditing of Enron.In this case Arthur Anderson shredded vital enters sourcing the audit of Enron which occurred in the year 2002. Enron has all the way done some damage to the U. S. economy, merely it ordain not hold up recovery from the current recession. The fundamental health of the U. S. economy is hard and ease uply getting stronger. Some soul smart economy companies volition have depressed stock prices for some time, alone they, too, will recover as they demonstrate that they are prepared to encumber Enron-like behaviour. We do believe Enron will be the theology diarrhoea of the red-hot economy.It will teach executives and the American public the most important morals lessons of this decade. We will discuss more entropy on this issues base on the question given on Arthur Andersen and among them are the conflict of interest amid the two roles played by Arthur Andersen, as auditor alone withal as consultan t to Enron the lack of attention shown by members of the Enron posting of directors to the off-books financial entities with which Enron did business and the lack of truthfulness by management about the health of the company and its business operations.Lastly, we would like to thanks to Dr Mazlinah on her dedicate and helpful to achieve our mission and mission to be a favored enterpriser for the future. Arthur Andersen case study reminds us the most important morality lessons of this decade. AMIN. introduction Arthur Andersen LLP, based in Chicago, was once one the wide flipper accounting firms among Price Water House Coopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG , providing auditing, tax, and consulting services to large corporations.In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accounting in the coupled States after being found blameable of wicked directions relating to the firms handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs. In this case Arthur Andersen shredded the vital catalogues sourcing the audit of Enron which occurred in the year 2002 . Although the finding of fact was subsequently overturned by the Supreme Court of the United States, it has not returned as a viable business.However, how did this company get the paper that it has musical composition following such a moral slogan? As the clients demanded for more profit margins , Arthur Andersen scandal had to compromise his morality current of airing to the allegation that he had fraudulently convert the statement of such companies and corporation for object lesson sunbeam Products, rot anxiety Inc. , Asia Pulp and Paper, The Baptist Foundation of Arizona , and WorldCom . repayable to the ruin of Arthur Andersen, it garbled nearly all of its business and clients.It lost not millions but billions of dollars due to this smart investigation. Although it is still in business a nd direct under zed worry and has not as of yet say bankruptcy, the firm will never reach its past legacy. Arthur Andersons motto of guess straight, rebuke straight has forever been tainted in the eyes of Americans corporations. This forlornness of fraudulent activity has forever left a deep and torturesome abrasion on Americas businesses. . The Arthur Andersens Troubles Question 1 What did Arthur Andersen (AA) founder to the Enron possibility?The most famous scandal case Arthur Andersen was involved in was the fraudulent auditing of Enron. In this case Arthur Andersen shredded vital text files sourcing the audit of Enron which occurred in the year 2002. According to Watkin, a financial executive who drawed with Andrew Fastow told Enron chief operating officer Kenneth Lay she feared that Enron would implode in a wave of accounting audit scandal (1 USA Today, Wed, Jan 16, 2002) AA apparent mistakes may have been made for several reasons to the Enron disaster including I ncompetence , as displayed and admitted in the rhythms case . Judgement errors . as to the significants of each of the audit findings, or of the aggregate impact in any fiscal year. Lack of information caused by Enron staff not providing deprecative information, or failure on the part of AA personal to search it out . clipping pressures related to revenue generations and budget pressures that prevented fair to middling audit work and the full considerations of complex SPE and prepay financial arrangements . Desire not to abide Enron management or advise the Enron board in order not to consider management, and particularly fastow, Skilling and Lay Lack of Independence. The Board of Directors failed to ensure the independence of the company auditor , allowing AA to provide internal audit and consulting services date destiny the Enron outside auditors . A failure of AAs internal policies whereby the concerns of a select control or practice standards partner can and was overr uled by the audit partner in charge of the Enron account. AA was the only one of the Big 5 accounting forms to have this flaw and it left the entire firm susceptible to the decisions of the person with the most to lose by saying no to a client. A misunderstanding of the fiduciary role required by auditors . for manakin AA allowing Enron to engage in high risk accounting , foreign conflict of interest transactions, extensive undisclosed off-the-books activities and excessive executive wages . addicted this tone at the top. It is reasonable to assume that AA partners were departure to be incite by revenue generations. just if too many risks are taken in the pur eccentric of revenue the probability of a serial of audit problems leading to increasingly unfavorable consequences becomes greater .That is only what happened to Enron disaster. Unfortunately, the leading of AA failed to recognize the cumulative degree to which the public, the politicians, and the SEC (The Securitie s and Exchange Commission) were tempestuous by the progression of AA audit failures . Question 2 What Arthur Andersen (AA) decision were faulty? Arthur Andersen (AA) decision were faulty . This is the Enron Debacle section presented previously covers in feature many of the questionable accounting transactions, legal structures, and related disclosures that AA reappraisaled as auditors of and consultants to Enron.AA faulty may have been made for several reason , including AA apparently authorise as auditors and consultants (and collected fees for the consulting advice) the structure of many special purpose entities (SPEs) that were used to get under ones skin false profits, hide losses, and keep financing off Enrons consolidated financial statements , failed to meet the required outsiders 3 percent truth at risk, and decision control criteria for non consolidation . AA failed to recognize the generally accredited accounting principle (GAAP) that abrogates the recording of voices issued as an increase in shareholders righteousness unless they are issued for cash . AA did not advise Enrons audit citizens committee that Andrew Fastow, Enrons CFO and his helpers were involved in significant conflict of interest situations without adequate alternative means of managing these conflicts. AA did not advise the Enron audit committee that Enrons policies and internal control were not adequate to protect the shareholders interests even though AA had assumed Enrons internal audit functions . Many transactions amid Enron and the SPEs were not in the interest of Enron shareholders since a) Enron profits and cash flow were manipulated and grossly inflated, misleading investors and falsely boosting management bonus arrangements. b) Extraordinarily plushy deals, fees, and riddance arrangements were made by Fastow, or under his influence, with SPEs owned to Fastow , his family, and Kopper, who was also as employee of Enron . AA aparently did not adequately co nsider, the advice of its quality control partner, Carl Bass. He asked AA for an accounting change that would have resulted in a $30 $50 million charge to Enrons moolah. AA apparently did not find significant audit evidence, or did not act upon evidence found, related to the 1)Mistaken valuation of shares or share rights transferred to SPEs 2)Side deals between Enron and banks removing the banks risk from transactions such as the a) Chewco SPE Rhythms hedge. ) Numerous prepay deals for energy futures, even though AA made a presentations to Enron on the GAAP and AA requirements that preclude such arrangements. Questions 3 What was the vertex pauperism behind the decision of Arthur Andersens audit partners on the Enron, WorldCom, thieve Management the public interest or? Cite vitrines that discontinue this demand . The AA was motivated by greed instead of serving the public interest. The amount of coin they got from the consulting fee has compromised their auditing works.In 1997, client decompose Management Inc. had the largest gelt restatement to date, wiping out $1. 7 billion in profits that it pulled in through the 1990s. The lead auditor on Waste Management was Robert Allgyer, who was known wrong the firm as the Rainmaker for his success in cross-selling extra services to auditing clients. He was clearly successful at selling to Waste Management, which paying(a) $17. 8 million in fees unrelated to the audit between 1991 and 1997, against audit fees of $7. 5 million.But he was also signing off on drastically inexact books. Among other things, the fast-growing trash hauler wasnt properly composition off the value of assets such as garbage trucks as they aged, a subterfuge that pumped up reported profits. The SECs acting commissioner, Laura Unger, concluded that the mental representation had the ingest gun it was looking for to prove that the lure of consulting fees compromised auditor independence. The SEC filed suit in March 2002, accusing six former Waste Management executives of fraud. It alleges that Mr.Allgyers judgment was skewed by consulting fees, in particular a $3. 7 million strategic overview of Waste Management operations. The project lasted for 11 months, but the client didnt seize on the recommendations. Bellow table shown example AAs involvements in the major financial scandals as the audit firm that failed to tell their mistakes that reveal this motivation CLIENT PROBLEM MISSED, DATE losings TO SHAREHOLDERS hire out LOSSES AA FINE WorldCom $4. billion overstatement of 4179. 3 one million million 17,000 N. A earnings announced on June 25, 2002 Inflation of ncome, asset, etc bankrupt Dec 2, 2001 Enron $66. 4 one thousand thousand 6,100 $. 5 Million Overstatement of income by (for shredding) $1. billion, 1992-1996 $7 Million Waste Management 420. 5 Billion 11,000 Question 7 beneath what hazard should audit firm shred or destroy works paper ?Accord ing to section 802 of the Sarbanes-Oxley Act of 2002, accountants who audit or check out an issuers financial statements are required to retain certain records applicable to that audit or review. These records involve work cover and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records), which are created, sent or legitimate in connexion with the audit or review, and curtail conclusions, opinions, analyses, or financial information related to the audit or review.To coordinate with forthcoming auditing standards concerning the retentivity of audit documentation, the rule requires that these records be kept up(p) for sevensome years after the auditor concludes the audit or review of the financial statements. Refer to the to a higher place question, for example if we as a professional audit firm cant entirely shred or destroy working paper. How long to keep a docu ment, when and how to store the document, and how to dispose of the document, will depend on the type of document . As any internal auditor knows, there are many types of documents that may be accumulated as part f an audit or review. The final rule here requires the guardianship of all records relevant to the audit, including working papers and other documents that form the basis of the audited financial statements, as well as certain supporting documents. The guideline for document retention is that they moldiness meet two criteria (1) Documents are created, sent, or received in connection with the audit or review, (2) the documents contain conclusions, opinions, analyses, or financial data related to the audit or review.Both Enron and Arthur Andersen are now gone, but this audit work-paper clean-up exercise, no doubt, was a major motivating performer for the Sarbanes-Oxley Act , Section 802 rules outlining penalties for the destruction of documents. The rules require external auditors who audit or review an enterprises financial statements to retain certain records relevant to that work, including work papers and other documents that form the basis of the audit or review.These retention requirements include memoranda, correspondence, communications, other documents, and records, as well as related electronic records that are created, sent, or received in connection with the audit work and contain conclusions, opinions, analyses, or financial data related to the work. These records are to be retained for seven years after the auditor concludes the financial statements review. This rule was secret code sunrise(prenominal) for many internal auditors as many audit functions have followed homogeneous document retention rules based on U.S. tax document retention guidelines. The rules also states that if you know your company is under investigation, or even umbrageous that it might be, all document destruction and alteration must bear immediately. And, you must create a company records showing that youve staged a halt to all automatic e-data destruction practices. Question 8 adjudicate the Lingering Question on page 94 . Enron has clearly done some damage to the U. S. economy, but it will not hold up recovery from the current recession.The fundamental health of the U. S. economy is strong and now getting stronger. I do believe Enron will be the morality play of the crude economy. It will teach executives and the American public the most important ethics lessons of this decade. Among these lessons are 1. You make coin in the new economy in the same ways you make money in the old economy by providing goods or services that have rattling value. 2. Financial cleverness is no substitute for a good collective strategy. . The arrogance of corporate executives who claim they are the best and the brightest, the most innovative, and who present themselves as superstars should be a red flag for investors, directors and the public. 4. Exe cutives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites. 5. political relation regulations and rules subscribe to be updated for the new economy, not relaxed and eliminated.Due to the downfall of Arthur Anderson, it lost nearly all of its business ,employees, and clients. It lost not millions but billions of dollars due to this intense investigation. Although it is still in business and operating under Omega Management and has not as of yet declared bankruptcy, the firm will never reach its past legacy. We believe accounting regulations should be altered to prohibit ownership of both auditing and consulting services by the same accounting firm.Accounting firms are already moving to sever their consulting businesses. The SEC should credibly adopt additional disclosure requirements. Various regulators should tighten requirements for directors to be peppy and provide protections for whistleblow ers who bring improper behaviour to public attention. But, in the final analysis, the dissolvent to an Enron-type scandal lies in the attentiveness of directors and in the truthfulness and integrity of executives. capable individuals will always find ways to conceal information or to engage in fraud.Enron Case StudyExecutive Summary As per requested this group assignment prepared from Group 2 (NASA) contributed by Norazman Saharum , Shaufi Akil , Abd Manaf Jalil and Zubir Zainal Abidin . This group assignment part of final course entitle for 25 marks . This assignment to fulfill our MSU MBA Syllabus for subject Accounting For Corporate and Evaluation (DAC 5013) instructed by Dr Mazlinah Mat Zain . Our group have chosen The Arthur Andersen Troubles. The most famous scandal case Arthur Anderson scandal was involved in was the fraudulent auditing of Enron.In this case Arthur Anderson shredded vital documents sourcing the audit of Enron which occurred in the year 2002. Enron has clear ly done some damage to the U. S. economy, but it will not hold up recovery from the current recession. The fundamental health of the U. S. economy is strong and now getting stronger. Some individual new economy companies will have depressed stock prices for some time, but they, too, will recover as they demonstrate that they are prepared to prevent Enron-like behaviour. We do believe Enron will be the morality play of the new economy.It will teach executives and the American public the most important ethics lessons of this decade. We will discuss more information on this issues based on the question given on Arthur Andersen and among them are the conflict of interest between the two roles played by Arthur Andersen, as auditor but also as consultant to Enron the lack of attention shown by members of the Enron board of directors to the off-books financial entities with which Enron did business and the lack of truthfulness by management about the health of the company and its business operations.Lastly, we would like to thanks to Dr Mazlinah on her dedicated and helpful to achieve our mission and mission to be a successful entrepreneur for the future. Arthur Andersen case study reminds us the most important ethics lessons of this decade. AMIN. Introduction Arthur Andersen LLP, based in Chicago, was once one the Big Five accounting firms among Price Water House Coopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG , providing auditing, tax, and consulting services to large corporations.In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accounting in the United States after being found guilty of criminal charges relating to the firms handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs. In this case Arthur Andersen shredded the vital documents sourcing the audit of Enron which occurred in the year 2002 . Although the verdict was subsequently overturned by the Supreme Court of the Uni ted States, it has not returned as a viable business.However, how did this company get the reputation that it has while following such a moral slogan? As the clients demanded for more profit margins , Arthur Andersen scandal had to compromise his morality leading to the allegation that he had fraudulently altered the statement of such companies and corporation for example Sunbeam Products, Waste Management Inc. , Asia Pulp and Paper, The Baptist Foundation of Arizona , and WorldCom . Due to the downfall of Arthur Andersen, it lost nearly all of its business and clients.It lost not millions but billions of dollars due to this intense investigation. Although it is still in business and operating under Omega Management and has not as of yet declared bankruptcy, the firm will never reach its past legacy. Arthur Andersons motto of Think straight, talk straight has forever been tainted in the eyes of Americans corporations. This devastation of fraudulent activity has forever left a deep a nd painful scar on Americas businesses. . The Arthur Andersens Troubles Question 1 What did Arthur Andersen (AA) contribute to the Enron disaster?The most famous scandal case Arthur Andersen was involved in was the fraudulent auditing of Enron. In this case Arthur Andersen shredded vital documents sourcing the audit of Enron which occurred in the year 2002. According to Watkin, a financial executive who worked with Andrew Fastow told Enron CEO Kenneth Lay she feared that Enron would implode in a wave of accounting audit scandal (1 USA Today, Wed, Jan 16, 2002) AA apparent mistakes may have been made for several reasons to the Enron disaster including Incompetence , as displayed and admitted in the rhythms case . Judgement errors . as to the significants of each of the audit findings, or of the aggregate impact in any fiscal year. Lack of information caused by Enron staff not providing critical information, or failure on the part of AA personal to search it out . Time pressures r elated to revenue generations and budget pressures that prevented adequate audit work and the full considerations of complex SPE and prepay financial arrangements . Desire not to confront Enron management or advise the Enron board in order not to upset management, and particularly fastow, Skilling and Lay Lack of Independence. The Board of Directors failed to ensure the independence of the company auditor , allowing AA to provide internal audit and consulting services while serving the Enron outside auditors . A failure of AAs internal policies whereby the concerns of a quality control or practice standards partner can and was overruled by the audit partner in charge of the Enron account. AA was the only one of the Big 5 accounting forms to have this flaw and it left the entire firm vulnerable to the decisions of the person with the most to lose by saying no to a client. A misunderstanding of the fiduciary role required by auditors . for example AA allowing Enron to engage in high risk accounting , inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities and excessive executive compensation . Given this tone at the top. It is reasonable to assume that AA partners were going to be motivated by revenue generations. But if too many risks are taken in the pursuit of revenue the probability of a series of audit problems leading to increasingly unfavorable consequences becomes greater .That is exactly what happened to Enron disaster. Unfortunately, the leaders of AA failed to recognize the cumulative degree to which the public, the politicians, and the SEC (The Securities and Exchange Commission) were angered by the progression of AA audit failures . Question 2 What Arthur Andersen (AA) decision were faulty? Arthur Andersen (AA) decision were faulty . This is the Enron Debacle section presented previously covers in detail many of the questionable accounting transactions, legal structures, and related disclosures that AA revi ewed as auditors of and consultants to Enron.AA faulty may have been made for several reason , including AA apparently approved as auditors and consultants (and collected fees for the consulting advice) the structure of many special purpose entities (SPEs) that were used to generate false profits, hide losses, and keep financing off Enrons consolidated financial statements , failed to meet the required outsiders 3 percent equity at risk, and decision control criteria for non consolidation . AA failed to recognize the generally accepted accounting principle (GAAP) that prohibits the recording of shares issued as an increase in shareholders equity unless they are issued for cash . AA did not advise Enrons audit committee that Andrew Fastow, Enrons CFO and his helpers were involved in significant conflict of interest situations without adequate alternative means of managing these conflicts. AA did not advise the Enron audit committee that Enrons policies and internal control were no t adequate to protect the shareholders interests even though AA had assumed Enrons internal audit functions . Many transactions between Enron and the SPEs were not in the interest of Enron shareholders since a) Enron profits and cash flow were manipulated and grossly inflated, misleading investors and falsely boosting management bonus arrangements. b) Extraordinarily overgenerous deals, fees, and liquidation arrangements were made by Fastow, or under his influence, with SPEs owned to Fastow , his family, and Kopper, who was also as employee of Enron . AA aparently did not adequately consider, the advice of its quality control partner, Carl Bass. He asked AA for an accounting change that would have resulted in a $30 $50 million charge to Enrons earnings. AA apparently did not find significant audit evidence, or did not act upon evidence found, related to the 1)Mistaken valuation of shares or share rights transferred to SPEs 2)Side deals between Enron and banks removing the banks ri sk from transactions such as the a) Chewco SPE Rhythms hedge. ) Numerous prepay deals for energy futures, even though AA made a presentations to Enron on the GAAP and AA requirements that preclude such arrangements. Questions 3 What was the prime motivation behind the decision of Arthur Andersens audit partners on the Enron, WorldCom, Waste Management the public interest or? Cite examples that reveal this motivation . The AA was motivated by greed instead of serving the public interest. The amount of money they got from the consulting fee has compromised their auditing works.In 1997, client Waste Management Inc. had the largest earnings restatement to date, wiping out $1. 7 billion in profits that it pulled in through the 1990s. The lead auditor on Waste Management was Robert Allgyer, who was known inside the firm as the Rainmaker for his success in cross-selling extra services to auditing clients. He was clearly successful at selling to Waste Management, which paid $17. 8 million in fees unrelated to the audit between 1991 and 1997, against audit fees of $7. 5 million.But he was also signing off on drastically inaccurate books. Among other things, the fast-growing trash hauler wasnt properly writing off the value of assets such as garbage trucks as they aged, a ruse that pumped up reported profits. The SECs acting commissioner, Laura Unger, concluded that the agency had the smoking gun it was looking for to prove that the lure of consulting fees compromised auditor independence. The SEC filed suit in March 2002, accusing six former Waste Management executives of fraud. It alleges that Mr.Allgyers judgment was skewed by consulting fees, in particular a $3. 7 million strategic overview of Waste Management operations. The project lasted for 11 months, but the client didnt adopt the recommendations. Bellow table shown example AAs involvements in the major financial scandals as the audit firm that failed to discover their mistakes that reveal this motivation CLIE NT PROBLEM MISSED, DATE LOSSES TO SHAREHOLDERS JOB LOSSES AA FINE WorldCom $4. billion overstatement of 4179. 3 Million 17,000 N. A earnings announced on June 25, 2002 Inflation of ncome, asset, etc bankrupt Dec 2, 2001 Enron $66. 4 Billion 6,100 $. 5 Million Overstatement of income by (for shredding) $1. billion, 1992-1996 $7 Million Waste Management 420. 5 Billion 11,000 Question 7 Under what circumstances should audit firm shred or destroy working paper ?According to section 802 of the Sarbanes-Oxley Act of 2002, accountants who audit or review an issuers financial statements are required to retain certain records relevant to that audit or review. These records include workpapers and other documents that form the basis of the audit or review, and memoranda, correspondence, communications, other documents, and records (including electronic records), which are created, sent or received in connection with the audit or review, and c ontain conclusions, opinions, analyses, or financial data related to the audit or review.To coordinate with forthcoming auditing standards concerning the retention of audit documentation, the rule requires that these records be retained for seven years after the auditor concludes the audit or review of the financial statements. Refer to the above question, for example if we as a professional audit firm cant simply shred or destroy working paper. How long to keep a document, when and how to store the document, and how to dispose of the document, will depend on the type of document . As any internal auditor knows, there are numerous types of documents that may be accumulated as part f an audit or review. The final rule here requires the retention of all records relevant to the audit, including working papers and other documents that form the basis of the audited financial statements, as well as certain supporting documents. The guideline for document retention is that they must meet t wo criteria (1) Documents are created, sent, or received in connection with the audit or review, (2) the documents contain conclusions, opinions, analyses, or financial data related to the audit or review.Both Enron and Arthur Andersen are now gone, but this audit work-paper clean-up exercise, no doubt, was a major motivating factor for the Sarbanes-Oxley Act , Section 802 rules outlining penalties for the destruction of documents. The rules require external auditors who audit or review an enterprises financial statements to retain certain records relevant to that work, including work papers and other documents that form the basis of the audit or review.These retention requirements include memoranda, correspondence, communications, other documents, and records, as well as related electronic records that are created, sent, or received in connection with the audit work and contain conclusions, opinions, analyses, or financial data related to the work. These records are to be retained for seven years after the auditor concludes the financial statements review. This rule was nothing new for many internal auditors as many audit functions have followed similar document retention rules based on U.S. tax document retention guidelines. The rules also states that if you know your company is under investigation, or even suspect that it might be, all document destruction and alteration must stop immediately. And, you must create a company records showing that youve ordered a halt to all automatic e-data destruction practices. Question 8 Answer the Lingering Question on page 94 . Enron has clearly done some damage to the U. S. economy, but it will not hold up recovery from the current recession.The fundamental health of the U. S. economy is strong and now getting stronger. I do believe Enron will be the morality play of the new economy. It will teach executives and the American public the most important ethics lessons of this decade. Among these lessons are 1. You make mon ey in the new economy in the same ways you make money in the old economy by providing goods or services that have real value. 2. Financial cleverness is no substitute for a good corporate strategy. . The arrogance of corporate executives who claim they are the best and the brightest, the most innovative, and who present themselves as superstars should be a red flag for investors, directors and the public. 4. Executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites. 5. Government regulations and rules need to be updated for the new economy, not relaxed and eliminated.Due to the downfall of Arthur Anderson, it lost nearly all of its business ,employees, and clients. It lost not millions but billions of dollars due to this intense investigation. Although it is still in business and operating under Omega Management and has not as of yet declared bankruptcy, the firm will never reach its past leg acy. We believe accounting regulations should be altered to prohibit ownership of both auditing and consulting services by the same accounting firm.Accounting firms are already moving to sever their consulting businesses. The SEC should probably adopt additional disclosure requirements. Various regulators should tighten requirements for directors to be alert and provide protections for whistleblowers who bring improper behaviour to public attention. But, in the final analysis, the solution to an Enron-type scandal lies in the attentiveness of directors and in the truthfulness and integrity of executives. Clever individuals will always find ways to conceal information or to engage in fraud.