Enron and Arthur Anderson LLP Essay

1 What were the business risks Enron faced, and how did those risks increase the likelihood of material misstatements in Enrons monetary statements?The business risks that Enron faced included remote currency risks and legal injury instability, which is special K for the energy industry. In addition, Enron faced pressure to coiffe well so that the stock price would rise.These risks increased the likelihood of material misstatements in the fiscal statements for several reasons. Since Enron operated in other countries, on that point would be a foreign currency risks and those could lead to gains/losses not being properly mensural or accrued on hedging symbolizeivities. By operating in foreign countries, there argon political risks such as constitution changes, lack of understanding of culture and business practices. The biggest risk is having the pressure to give out veracious financial results. The deals with the special purpose entities (SPEs) depended on a high stock p rice. The company practice its stock as verifying if the stock price fell below a certain price. At that point, Enron would deal to use the stock to pay out the investors. The company overly had pressure from its business partners to perform well and meet its upcoming obligations. If the company performed poorly, the investors may hesitate to do business with Enron.3 In your own words, summarize how Enron used SPEs to hide large amounts of company debt.Enron created SPEs (usually other LLPs) in order to create cash inflow tho did not record the enthronizations and related liabilities (the loans used to create the SPE). Enron used after-school(prenominal) investors to secure the saucy SPEs. The new investors would bear the risk of the investment and Enron used its company stock as collateral to entice the investors and saying that Enron would essentially bear the risk if the investment should turn sour. Enron used large investment bankers to take loans but these looked mor e like hedgingactivities instead of debt. at one term the stock price began to drop, and Enron was losing money, they were unable to use their stock to cover the losses. To regul find it simply, a company sells a carrefour for a stellar price to another(prenominal) entity. However, that entity doesnt have the cash flow to buy the product. So, the vender issues a loan to the buyer in order to sell the product. at a time if the buyer defaults on the loan, the seller loses the cash it lent out and the product it sold. This is how Enron set up the SPEs, and they used the large investment banks to hold the loans that should have been reported on Enrons balance sheet.4 What are the hearer independence issues surrounding the provision of external auditing function, internal auditing serve, and management consulting run for the analogous client? Develop arguments for why hearers should be allowed to perform these services for the same client. Develop separate arguments for why auditors should not be allowed to perform non- audit services for their audit clients. What do you believe?The independence issues that arise when an auditor provides external auditing, internal auditing and management consulting services include whether or not the auditors finish be independent and exercise good master copy pattern when it comes to the audit. The auditors should not be affected by any influences that would oppose their professional judgment. If the auditor is do all of the functions, thence how skunk they abide unbiased during the external audit?Arguments for why auditors should be allowed to perform these services for the same client includeAuditors can increase audit fruition by becoming more efficient during the external audit since they would be basically auditing their own work.When auditors find material weaknesses or significant deficiencies, they can use their consulting role to improve these issues.Auditors would already have a good working relati onship with the client andbe able to save time on the procedures performed as opposed to having to start fresh with a new engagement client.Arguments for why auditors should not be allowed to perform these services for the same client includeAuditors may not be able to act independently, and may not use the best professional judgment when performing the external audit.The company should hire its own internal auditors to ensure that the staff understand the companys chronicle procedures. This also helps the external auditor as it give the external auditor another viewpoint when assessing fraud risks. The internal auditors are apart of those aerated with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.5 Explain how rules- ground accounting standards differ from principles- base standards. How energy fundamentally changing accounting standards from bright- furrow rules to principle- based standards help prevent another Enron-l ike fiasco in the future? Some argue that the trend toward word sense of international accounting standards represents a move toward more principles-based standards. Are there dangers in removing bright-line rules? What difficulties might be associated with such a change? hulk based accounting standards are difference from principle based standards in that rule based standards are just that rules. For instance, the Internal Revenue law is rule based. There are things you can do and things you cant. When rules are broken, there is a specific punishments that are to be enforced.Principle based accounting standards are more like guidelines and can be go around to interpretation. Auditors are given a bit of leeway and are told to use their professional judgment. This also means that the auditors should exercise good judgment and have high moral and ethical standards.Principle based rules can prevent another Enron-like fiasco because it holdthe accountant and auditors to a high stand ards than just following the code. Sometimes the code has loopholes, which is what allowed Enron to create the SPEs in the first place, and the company can rely on that. However, if auditors are required to hold themselves to a higher moral and ethical code, then they may not be swayed by a companys questionable practices, even if they are following the letter of the law.If bright line rules are not relied on at all, and only principle based rules are followed, then the interpretation of these principles can cause issues such as aggressive accounting treatments such as in the Enron case. If there are no hard rules, then companies can say that the aggressive accounting treatments are not prohibited.