Auditing: Reviewing the Collapse of Enron and Lehman Bros

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

1AUDITING
Table of Contents
Introduction..........................................................................................................................2
Reviewing the collapse of Enron.........................................................................................2
Reviewing the collapse of Lehman Bros.............................................................................3
Rationale for fee dependency impairs claims for independence.........................................4
Importance of auditor’s independence.................................................................................4
Preparation of true and fair statements recognized with the responsibilities of the
directors of companies.....................................................................................................................5
Conclusion...........................................................................................................................6
Reference.............................................................................................................................7

2AUDITING
Introduction
The different considerations of the study have focused on review of two companies
namely Lehman Bros. and Enron. It has been further able to identify the various concerns
associated to understanding the financial crisis which has resulted in the collapse of the
companies. Additionally, the auditing firms are considered as the capitalist enterprises who are
dependent on the businesses and income of the directors. The overall rationale of the study has
focused on the opinion on the fee dependency impairs claims. Some of the other sections have
provided the issue asserted with the issue of the auditors and discussed about the independence
of the auditors. The final assertions of the report have expressed a true and fair financial
statements as one of the main responsibility of the directors of the company as per ASA 200. As
per the auditing standards ASA 700, the responsibility of the auditors may be considered with
forming a relevant audit opinion and also provide differences among the two regulations.
Reviewing the collapse of Enron
The scandal of Enron in October 2001 eventually led to bankruptcy of American based
energy entity Enron Corporation. After formation of the company in 1985, Jeffrey Keith Skilling
was appointed as the CEO of Enron. His procedures followed for staff management led to
several loopholes in the company including improper valuation of the SPV. The poor financial
reporting was also seen to be responsible for hiding large sum of money as a debt from failed
projects and deals. In the latter stages it was identified by the Board of Directors and Audit
Committee for specifying the high-risk accounting practices (Haswell & Evans, 2018).
The auditor firm of Enron, Arthur Andersen was imposed with accusations for applying
irresponsible standards on auditing which led to conflict of interest pertaining to the significant
fees related to consulting. In 2000, Arthur Andersen earned $ 25m as audit fees and $ 27m
towards consulting. The auditor’s systems were questioned in terms of the significant nature of
the faults which were associated with receiving the annual fees and lack of expertise showed
recklessness in the revenue recognition of Enron’s revenue, accounting practices, SPVs and
derivatives. Enron was identified to hire several “Certified Public Accountants (CPAs)” who
worked for developing the accounting rules as per FASB. The accountants searched for
procedures for capitalizing the loopholes evident with GAAP, as it was the accounting standard
at that time. Moreover, the auditors were pressured by the management of Enron’s management