Enron and Arthur Anderson LLP Essay

1 What were the business risks Enron confront, and how did those risks increase the likelihood of material misstatements in Enrons pecuniary statements?The business risks that Enron faced admitd foreign currency risks and price instability, which is common for the energy industry. In addition, Enron faced pressure to perform well so that the roue price would rise.These risks increased the likelihood of material misstatements in the financial statements for several reasons. Since Enron operated in other countries, there would be a foreign currency risks and those could trinity to gains/losses not being properly calculated or accrued on hedging activities. By operating in foreign countries, there are political risks such as policy changes, lose of understanding of culture and business practices. The biggest risk is having the pressure to report cracking financial results. The deals with the special mark entities (SPEs) depended on a high stock price. The company used its stock as related if the stock price fell below a certain price. At that point, Enron would have to use the stock to pay out the investors. The company also had pressure from its business partners to perform well and meet its future obligations. If the company performed poorly, the investors may hesitate to do business with Enron.3 In your own words, restate how Enron used SPEs to hide large amounts of company debt.Enron created SPEs (usually other LLPs) in order to create cash in inflow but did not record the enthronizations and related liabilities (the lends used to create the SPE). Enron used outside investors to honest the new SPEs. The new investors would bear the risk of the investment and Enron used its company stock as corroboratory to entice the investors and saying that Enron would basically bear the risk if the investment should turn sour. Enron used large investment bankers to take loans but these looked more like hedgingactivities instead of debt. Once the stock price began to drop, and Enron was losing money, they were unable(p) to use their stock to cover the losses. To put it simply, a company sells a product for a star(predicate) price to some other entity. However, that entity doesnt have the cash flow to buy the product. So, the seller issues a loan to the buyer in order to sell the product. Now if the buyer defaults on the loan, the seller loses the cash it lend 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 account on Enrons balance sheet.4 What are the scrutinizeor independence issues surrounding the provision of outside auditing serve, internal auditing services, and management consulting services for the alike(p) lymph node? Develop arguments for why auditors 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 accommodate whether or not the auditors screwing be independent and exercise good passkey judgment when it comes to the audit. The auditors should not be affected by any influences that would impede their professional judgment. If the auditor is performing all of the functions, then how squeeze out they remain unbiased during the external audit?Arguments for why auditors should be allowed to perform these services for the same client includeAuditors can increase audit realization by becoming more high-octane 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 relationship 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 accounting 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 supercharged with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.5 Explain how principles-establish accounting standards differ from principles-based standards. How might fundamentally changing accounting standards from bright- eminence rules to principle- based standards help close out another Enron-like fiasco in the future? Some argue that the trend toward adoption 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?Rule based accounting standards are difference from principle based standards in that rule based standards are just that rules. For instance, the Internal Revenue grave 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 open to definition. 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 higher standards than just following the code. Sometimes t he 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 infallible 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.