Jeremy Dupagan

Auditing Theory

1.

Whos to blame? I believe the main actors responsible for the Enron crisis all
comes down to:
a. Kenneth Lay known as the emperor without clothes, Lay quickly adopted the
aggressive growth strategy that had long dominated the management policies of
InterNorth and its predecessor. He gambled company assets in extremely risky
investments in order to turn high profits.
As a result of this gamble, company reserves began to hurt and this ignited Lay to hire
Skilling
b. Jeffrey Skilling Skilling was the guy with spikes who, subject to his working for
Enron, wanted the corporation to adopt a new form of accounting called mark to
market system This proposal was then approved by Andersen and the SEC. This
system was described as very subjective where it was susceptible to manipulation.
By adopting this system, Enron gave out bonuses and cash outflow basing on a
profit that never even existed. This led to Enron window dressing their financial
statements and it became a momentum that couldnt be stopped.
c. Andrew Fastow Fastow plays the part of a sorcerers apprentice. He is
responsible for making rabbits come out of hats. Fastow began layering liabilitys
in order to post gains for Enron. While this is normally common business practice,
the layers that Fastow was creating were in fact shadow companies used to draw
off Enrons debt. In this way the liabilities of the shadow companies grew
exponentially while Enron was able to continually post gains quarter after quarter.

Although these people were the key actors in this scandal, auditors, bankers and
attorneys were also to blame. They were supposed to say no but they didnt say no
just so they could receive what Enron feeds them.
2. Financial Information Systems Design and Implementation. This poses a threat to
an audit firms independence as it gives the auditor the responsibility to design and at
the same time implement the system. It makes the engagement open to manipulation
and fabrication. Not only will it contribute to the firms independence, it adds to selfreview threat as they would have to assess the system that they had created
Management Functions. Consistent with current SEC rules, an auditor's
independence would be impaired when the accountant acts, temporarily or
permanently, as a director, officer, or employee of an audit client, or performs any
decision-making, supervisory, or ongoing monitoring function for the audit client.
Legal services and expert services unrelated to the audit. An audit firm that
provided some type of expert service unrelated to the audit could find itself in a
dicey situation if the given service proved to be less than expert quality.
3. Independence. By becoming too involved in Enrons decisions for important
accounting and financial reporting treatments, the Arthur Andersen auditors may have
forfeited some degree of objectivity when they reviewed those decisions during the
course of subsequent audits.
Due professional care. Any violation of one of the other nine GAAS effectively
results in a violation of the catchall due professional care standard.
Internal control evaluation. One could argue that given the critical and seemingly
apparent defects in Enrons internal controls, Andersen auditors failed to gain a
sufficient understanding of the clients internal control system.

Reporting. If Andersen did not maintain its independence and objectivity while
auditing Enron, the audit firm should have issued a disclaimer of opinion on the
companys periodic financial statements.
4. The auditor must prepare audit documentation in connection with each engagement
in sufficient detail to provide a clear understanding of the work performed, the audit
evidence obtained and its source, and the conclusions reached. The auditor should
adopt reasonable procedures to retain and access audit documentation for a period of
time sufficient to meet the needs of his or her practice and to satisfy any applicable
legal or regulatory requirements for records retention. - should not be shorter than
five years from the report release date.
The working papers are the property of the audit firm. The only thing that the client
holds from the auditor is his opinion on the financial statements.
5. The following recommendations were implemented under the Sarbanes-Oxley Act of
2002 and all of which I agree with:
A. Establish an independent audit agency the independent agency should be left to
the government as such it would be easier to establish independence.
B. Require that audit clients periodically rotate or change their independent audit
firms Although this may seem to be a burden to audit firms as they would be
working for different clients, it would be a factor to maintaining its independence.
And, it would force audit firms to maintain an excellent public figure and by doing so,
will benefit the firm in the long run.
C. Require independent auditors to work more closely with clients audit committee
This would involve the audit committee into participating and understanding what the
auditor does and in turn requires the auditor to exchange information with the clients
audit committee.
D. Establish more explicit statutory requirements that prohibit client executives from
interfering with the work of their independent auditors This recommendation would
prevent executives to fraudulently influence, coerce, manipulate, or mislead their
companys independent auditors

E. Permit audit firms to provide only audit reviews, compilations, and other pure
attestation services to their clients, that is prohibit the provisions of non-audit services
to audit clients. This would contribute to the auditors independence as their work
would be limited to what auditors really do perform audits.
6. Yes, I do believe that throughout the years, the concept of professionalism when it
comes

to public accounting has evolved from the ideal public service to a mere

business approach kind. A related factor that allegedly contributed to the move away
from the public service ideal was the growing tendency for large audit firms to
consider strong marketing skills, as opposed to strong technical skills, as the key
criterion in determining which individuals would be promoted to partner. At most, I
think it was greed and lack of ethical values that made the final spark in this
evolution. It was for the wrong motivation and for the wrong reason that audit firms
did their jobs and thus crumbled the credibility and professionalism of accounting.
7. It is the auditors responsibility to review the companys quarterly financial statements

but are not required to audit them. The audit of quarterly financial statements is based
upon the benefit that the client may get from the audit. It would certainly benefit the
company if the quarterly reports were audited as it would allow the auditor to find any
fraud or misstatements sooner rather than later. However, audits are expensive and
most companies would not derive enough benefit from the extra audits to justify the
additional cost. Thus, the decision to whether to audit or not is based upon the
relationship of benefit over cost.