Case Scenario: Enron Corporation and Andersen, LLP
Analyzing the Fall of Two Giants
Learning Objectives: After completing and discussing this case you should be able to
[A] Understand the events leading to Enron's bankruptcy and Andersen's downfall.
[B] Appreciate the importance of understanding an audit client's core business strategies.
[C] Recognize potential conflicts arising from auditor relationships with their clients.
[D] Understand how accounting standards may have contributed to the Enron debacle and describe how some in the accounting profession are seeking to change the fundamental nature of those standards.
[E] Understand the difference between "rule-based" and "principle-based" accounting standards to better appreciate some of the issues involved in the movement toward international financial reporting standards (IFRS).
[F] Consider challenges facing the accounting profession and evaluate alternative courses of action for overcoming these obstacles.
Complete the following required questions related to this case, 1-5, in approximately 75 to 90 words.
1. Research the difference between American Depositary Shares and American Depositary Receipts. Then, visit the SEC's website (www.sec.gov) to locate the final SEC rule Release No. 33-8879 issued on December 21, 2007 and research whether foreign issuers must file with the SEC financial statements in conformity with generally accepted accounting principles (GAAP).
2. Research auditing standards and other guidance on effective internal control to answer the following questions:
i. What are IT general controls and what type(s) of IT general controls were compromised in the Satyam fraud?
ii. What is meant by the term management override and how was that revealed in the Satyam fraud?
3. Research PCAOB auditing standards (which can be found on the PCAOB's website - www.pcaob.org) related to the use of confirmations and document the specific requirements related to maintaining control of the confirmation process.
a. Based on what you learn, provide an assessment of deficiencies in the confirmation approach Satyam's auditors took related to cash and accounts receivable.
b. Do auditing standards require the use of confirmations in the audits of cash balances and accounts receivable balances?
4. The Satyam auditors attempted to confirm both cash and accounts receivable balances with external parties. Which of the audit assertions for cash and accounts receivable would confirmations be most relevant?
5. Research the PCAOB's website to learn about the PCAOB's inspection process. How often are firms inspected by the PCAOB and to what extent are the inspection findings available to the investing public?
6. Research PCAOB auditing standards (which can be found on the PCAOB's website) related to the use of audit documentation and identify specific requirements related to deadlines for including audit documentation in the engagement workpapers, such as the documentation completion date. Also, identify requirements related to what must be documented on the workpaper, including the date of preparation of audit documentation and the identification of the preparers of the documentation. Based on your findings, provide your assessment of how PW Bangalore violated these requirements.
7. Research the AICPA's Code of Professional Conduct (which is available on the AICPA's website) to research what it means to be in a "network" of firms. How might the actions of one of the accounting firms in the network impact other members of the network?
8. Locate the PCAOB's Settled Disciplinary Order against the auditors of the Satyam financial statements, which can be found on the PCAOB's website under the link for "Enforcement" (see PCAOB Release No. 105-2011-002 dated April 5, 2011), and review the sanctions imposed on the audit firms within the PW India network. You will see that the PCAOB censured all five firms in the PW India network, even though three of those firms did not participate in the audit of Satyam's financial statements. Discuss why the PCAOB charged all five firms rather than only charge PW Bangalore and Lovelock & Lewes?
Professional Judgment Questions - It is recommended that you read the Professional Judgment Introduction found at the beginning of this book prior to responding to the following questions.
9. One of the judgment shortcuts that can lead to bias in professional judgments is the "confirmation tendency." Briefly describe what is meant by confirmation tendency and where was that evident in the auditor's judgment process in the Satyam case?
Attachment:- Case Scenario-Enron Corporation and Andersen.rar