Audit, Assurance, and Compliance: Enron Case Study and Analysis Report

This report provides an in-depth analysis of the Enron scandal, examining the audit, assurance, and compliance failures that led to the company's downfall. It begins with an executive summary and an overview of the case, detailing the factual issues, including the use of mark-to-market accounting and off-the-books transactions. The report identifies the responsible parties, including Arthur Andersen, and discusses the damages imposed. It investigates the relevant issues in auditing and accounting, such as pension issues, corporate governance failures, and securities analyst conflicts. The root causes of the issues are explored, focusing on the company's response to problems and overconfidence. The report also addresses misrepresentations made by the defendants. Finally, it offers recommendations for improvements in audit practices to mitigate the risk of future scandals and ensure auditor professionalism. The report emphasizes the auditor's responsibility to detect fraudulent misstatements and adhere to accounting and auditing regulations.

Running Head: AUDIT, ASSURANCE AND COMPLAINCE
AUDIT, ASSURANCE AND COMPLAINCE
Name of the Student
Name of the University
Author Note

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Executive Summary
The aim of this assignment is to analyze the importance of the auditor’s professional
liability as well as the negative publicity that creates for the professions as a whole. For this,
analysis will be done on the scandal of Enron that was known by all in the year 2001.
Houston based company, Enron was American energy firm. Hence, under this analysis,
discussion will be based on the brief description as well as the factual issues behind the case.
Further, discussion will be based on the responsible parties and damages imposed on them.
Moreover, relevant issues in the auditing and accounting raised by the case will be discussed.
In addition, root causes of the issues and the problems and misrepresentations by the
defendant will be discussed. Lastly, recommendation as well as possible improvements will
be provided to the auditor. Therefore, it can be said that, the auditor is responsible for
maintaining their professionalism by detecting any fraudulentmisstatements of the corporate
business by adhering to the accounting and auditing rules and regulations and formulations of
the effective audit strategy, program and other effective measures.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Brief Overview and Factual Issues of Case...........................................................................3
Responsible Parties................................................................................................................5
Investigation and Explanation of the relevant Issues in Auditing and Accounting...............6
Root-Causes of the Issues......................................................................................................8
Misrepresentation made by Defendants.................................................................................9
Recommendations and Possible Improvements...................................................................10
Conclusion................................................................................................................................11
Reference..................................................................................................................................13

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Introduction
The aim of this assignment is the analysis on the audit, assurances and compliance.
This assignment will discuss importance of the professional liability to the auditors as well as
the negative publicity that creates for the professionals as a whole. The recent case of Enron
scandal will be discussed, where the audit firm was sued for the professional negligence.
Enron Corporation which was company based in Houston have their services in commodities,
services and American energy. Enron was founded in year 1985 by the merger of Inter North
as well as Houston natural gas that was two regional small companies (Cumming,
Dannhauser and Johan 2015). Therefore, under this assignment discussion will be based on
the brief overview of the case and factual issues that was behind the case. In addition,
discussion will be done on parties who are responsible for the occurrence of the scandal,
damages imposed as well as their appropriateness. Further, discussion will be done on the
investigation and the explanation of the relevant issues in the auditing and accounting raised
by the case. Moreover, root-causes of the issues will be discussed. In addition, problems and
misrepresentations made by the defendants that have contributed to the adverse judgements
and awarding of the damages will be discussed. Lastly, recommendations as well as
possibility of improvements in relation to the case will be discussed (Markham 2015).
Discussion
Brief Overview and Factual Issues of Case
Case Overview
Enron Corporation has gained the success very fast and it has faced downfall with the
same speed of the success. The downfall of the company has affected thousands of people
and the employees of the company. The share was at the worth of $90.75 at the peak of the
Enron, but it was at $0.26 at the time when it was declared bankrupt (Kumar and Aldous

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2015). This has created the buzz around the world that how one of the world’s largest
company was disintegrated almost over the night. It was also difficult to the fathom because
questions have been aroused for their leadership management for fooling the regulators for
such a long time with having the fake holdings as well as accounting off the books (Pai and
Tolleson2015)
Factual Issues behind the case
Enron has started for crumbling under their own weight. Financial losses of
company’s operations and business trading were intentionally hidden by the company’s CEO
Jeffrey Skilling with the accounting method of mark-to-market. This technique is used for
measuring the securities value, which is based on the current market value rather than their
book value. For business of securities trading, this method works well but for actual business,
this would be disastrous (Dibra2016).
In case of Enron, the company builds the asset, for example power plant and even
though they have only made small amount of money, they immediately claimed for the
projected profit on their books. If in the case the company has suffered losses from power
plant than what it was actually projected, then it that case company transferred the assets to
corporation of off the books in which losses was not reported. The company intentionally
engaged in writing off the unprofitable business activities without doing the bottom line
changes (Roy 2015).
The practice of mark-to-market has led to scheme, which was specifically designed
for making the company for appearing more profitable that in actual reality it was. The
company’s CFO, Andrew Fastow has deliberately made plan for doing the fraudulent
activities. This plan was made for showing the company was in the sound financial positions,

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despite of the fact that the subsidiaries of the company were losing the money (Martinetteet
al. 2014).
Responsible Parties
The auditor of the company Arthur Andersen was responsible for the damages of the
company. There was great amount ofhis negligence for not noticing the issues. Following are
the instances of the negligence on the part of Arthur Andersen:
 There was involvement of the company as well as Arthur Andersen for breaching the
standards for the presentation of the financial statements, which is unfair as well as it
was not in accordance with the ASB and ACA requirements. The failure of the
company was also due to the structure of the company. The executive of the company
was involved in the showing the profit as well as the profit, even at the period of
losses.
 Material misstatements, overstated price of stock and manipulations of the fact has
indicated that the Arthur Anderson did not perform the substantive tests. The auditor
has also failed for detecting the lack of internal control.
 Arthur Anderson was not having directly involvement for assisting for the
manipulation of the accounts of Enron; however, their negligence has resulted into
loosening of the reputations for being one of the most reputed auditor firm around the
world.
 The failure to detect fraud by Arthur Anderson has resulted into bankruptcy of their
auditing and accounting firm. They have not followed the accounting ethics principles
for presenting unbiased as well as true and fair auditing of the financial reports.
 Several independence threat has occurred in between the Arthur Anderson and the
Enron. Both engage themselves in making profits with the help of hiding of the facts

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as well as non-compliance with the standards(Hoffman, Frederick and Schwartz
2014).
 Fraud of Enron in the preparation of financial statements and unreasonable assurances
by the Arthur Anderson has caused the inevitable collapse of the Enron.
Damages Imposed
The damage that has incurred to the auditor was loss of their reputations around the
world, which was known for their best services to their client. Moreover, they have to be
indulged in the legal proceedings for the charges of negligence. Further, during the year
2002, the auditing firm has voluntarily surrendered their licenses to the practice as the
Certified Public Accountant in United States, which was after the firm was found guilty of
the criminal charges in relations to auditing firm of Enron (Samsonova-Taddei and
Humphrey 2015). In addition, during the year 2005, the Supreme Court of United States have
reversed the conviction of Arthur Andersen because of the serious errors in trial of
instructions of judges to the jury who was convicted the firm.Arthur Andersen has fired their
partners who were chargedfor auditing Enron Corporation. The consideration of imposing
penalties on the imposition of damages was appropriate (Dodo 2017).
Investigation and Explanation of the relevant Issues in Auditing and Accounting
The requirement of the federal securities law is certification of accounting standard of
the publically traded corporations by the independent directors.The auditor of Enron, Arthur
Anderson have turned their eye blind for improper practices of accounting as well as was
involved in devising the complex financial structures and the transactions that has facilitated
the deception. The relevant issues in the auditing and accounting are as follows:
 Pension Issues: Enron has provided the scheme of retirement plan to their employees
for contributing the part of their salary on tax deferral basis. 62% of the total assets of

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the company as on Dec. 31, 2000, were held in the retirement plan that consisted
Enron’s Stock. However, majority of the employees of the company has holded
greater percentage of company’s stock of retirement plan. The company’s shares were
traded at $80 in January 2001 as compare to less than 70% in January 2001. Hence,
these losses suffered by retirement plan participants have raised the questions in the
minds of (Broberget al. 2018).
 Issues of Corporate Governance: In case of Enron scandal, the board of directors of
the company was subject to the major critical scrutiny. The chief duty of board is to
represent the duty of shareholders interest, has failed for detecting and preventing the
management fraud. There were several provisions that were designed by the
Sarbanes-Oxley for boosting the power of the independent directors as well as the
audit committee of board for exercising effective oversight of the management and
the process of accounting (Broberget al. 2018).
 Securities Analyst Issues: Securities analyst are responsible for the providing
suggestion regarding making investments, holding shares or selling the securities.
These suggestions are circulated to the interested parties as well and they rely also on
the suggestions. However, in case of Enron, analyst played vital role in giving
suggestion regarding constantly infusing funds from the financial market. At the time
when shares of the company fall after it has been degraded by rating agencies, only
two have rated their stock for sell from the analyst of 11 major companies. The
Sarbanes-Oxley Act directed the SEC for establishing the rules for addressing the
conflicts of interest of the analysts (Broberget al. 2018).
 Banking Issues: The fallout from the demise of the Enron involves the relationship
with the banks. The prominent banking companies especiallyJP Morgan Chase and
Citigroup was involved in the commercial banking and investment banking with the

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Enron. However, during the year 2003, SEC filled $120 and $135 millionto these two
banks for their role in the accounting frauds of Enron (Ziaee2014).
 Energy Derivatives Issues: The part of the core energy business of Enron has
involved in dealing with the prices of gas, oil, electricity and the other variables such
as Enron use to sell long-term contracts for buying and selling energy at the fixed
prices. These type of contracts have allowed the buyer for avoiding, hedging the risk,
which increases or drop the prices of energy that was imposed to their businesses
(Kayeet al. 2014). Enron usually have traded in the unregulated market in which
reporting was required, there was only some information of company’s profitability
was available. Derivatives trading are considered as highly risky activity, hence, there
is no evidence has been emerged that collapse of Enron includes the factor of
speculative losses. However, even though trading of derivatives was not the major
cause, failure of Enron has raised the supervision issue of unregulated derivatives
markets (Guttmann 2016).
Root-Causes of the Issues
The root cause that has turned the Enron into the major financial scandal and their
issues was the response of the company to its problems. The deregulations of the traders of
the energy have led for overconfidence in the investments made by Enron because they
thought that they were in control. The arrogance of the company has caused them more risk
than what could be afford by them and when market did not have ended up as it was thought,
it has collapsed.Therefore, the firm has ignored the solid business practices that have resulted
into the disaster (Usikalu, Ogunleye and Effiong2015).
At the time of joining of Skilling to the company, there was minimum requirement of
regulatory to the company. It was the time when there was full swing of dot-com bubble and

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hitting of NASDAQ by 5,000 at the year-end of 1990s. The valuation of internet stocks was
revolutionary (Nguyen 2014).
The company has falsified their accounts rather than disclosing the true and fair
conditions to the public investors as required by the law. They have assigned loses of the
business as well as near-worthless assets for consolidating partnership as well as “special
purpose entities” (Edel Lemus 2014). The public accounting statements of company has
presented that the loses was not occurring to the Enron but it was occurring to the so called
Raptor organization, that was ostensibly independently independent firm which have agreed
for absorbing the losses of Enron, but the creation and controlling of accounting contrivances
was done by the management of Enron. Moreover, Enron has appeared to have the disguised
bank loans as the trading of energy derivatives for concealing the extent of indebtedness
(Eckhaus and Sheaffer2018).
Misrepresentation made by Defendants
The problems, mistakes or the misrepresentation that was made by the defendantsthat
has contributed to the adverse judgements and awarding of the damages are as follows:
Mark-to-Market
At Enron, Skilling was early contributor of accounting transition from traditional
accounting to the mark-to-market method; this was approved in year 1992 by SEC official.
This method helps in measuring accounts at fair value that changes over time as assets and
the liabilities (Hidayat and Al-Hadrami2015). It provides real appraisal of company’s
financial position. This is widely used and recognized techniques. However, some business
organization misuses it by manipulating it. Therefore, this method has helped the company
for logging estimated profits as actual profits (Kabiru and Rufai2014)
Blockbuster Accidental Role

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In the scandal of Enron, Blockbuster has also played the important role as unwitting
players. For entering in the market of VOD in the year 2000, Block buster as well as Enron
Broadband has made the agreement for partnership. The market of VOD was the sensible
pick, but Enron started doing manipulation by logging expected earnings based on expected
growth rate of VOD market. This has resulted into highly inflated figures. At mid of year
2000, $350 billions trades was executed by EOL. Enron has taken the decision of building of
high speed broadband of the telecom network (Beattie, Fearnley and Hines 2014). On this
project, there was the spending of hundreds of the millions of dollar on the project. However,
the organization has ended up by realizing no return. When recession has hit the economy of
the country, then the company was exposure in part of the volatile market. Although, trusted
creditors as well as the company’s investors have loosed their trust because of vanishing of
the market cap (Mahama2015).
Recommendations and Possible Improvements
The recommendations that can be given in relation to audit strategy are for setting the
direction, the timing as well as the scope of the audit. This strategy serves as the guidelines
while developing the plan of audit. Therefore, in order to reduce the negligence on the part of
auditor, they must set out their strategy by making the objective, scope and directions of the
scope. This will be helpful in making key decisions. If the organization follows the
procedures laid in the audit strategy then it can easily assigns the audit priorities by using the
determinations for allocating resources to internal and external auditing (He, Pittman and
Rui2016).
The recommendations of the audit programis that, the auditor must set out the
programs which mentions that important and unimportant areas of audit. This will help the
auditor for allocating the work among their team members that is based on the competencies
as well as the skills (Samsonova-Taddei and Siddiqui 2016).

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The recommendations that would be given to the auditor for other effective measures
that will be helpful in preventing any recurrences of same litigation in the future as well as
maintaining the professional reputations of the auditors is to adhere to the legal requirements
of accounting standards. They must comply with the rules and regulations prescribed. They
should also act as independent body for the public business entities as well as private
business entities. Lastly, they should aim for improving the efficiencies and effectiveness of
their audit worksso that there should not be any negligence and they would detect any
corporate scandal or fraud in the financial statements of their client (Lessambo2016).
If Andrew Anderson had adopted proper audit strategy, audit program and other
effective measures then, Enron Scandal would not come into existence.
Conclusion
Hence, it can be concluded that the sudden as well as the unexpected collapse of the
Enron Corporation was first in the series of the major organization’s accounting scandal,
which has shaken the confidence in the stock market as well as the corporate market. Enron
was among one of the most fast growing, innovative as well as best managed business in
United States. However, because of swift collapse, shareholders as well as Enron’s workers,
who held retirement accounts with the company, have lost billions of dollars. Therefore, it is
find that the factual issues relating to the scandal of the Enron was manipulations of the
financial statements.The most responsible parties in this scandal apart from the board of
directors of the company were auditor Andrew Anderson who suffered their reputations as
well as surrendering of the CPA licenses. It has been find, that the relevant issues in the
auditing and accounting of the Enron scandal was pension, corporate governance, securities
analyst, banking, energy derivatives issues. Moreover, the root causes of the fraud was hiding
the losses and showing a good picture of the organization with the help of doing
misstatements to major extent. Further,the misrepresentation made by the defendant forthe