Group K

Company
(3)
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Enron Corporation and Andersen, LLP

Case 4.1
 Group Members

225767 Nik Ahmad Hafizuddin

225907 Thivia Jyothi

227109 Lee Zi Cong

227159 Khalimatul Saadiah

227198 Nur Hazwani

 Question 1

What were the business risks Enron faced, and

how did those risks increase the likelihood of
material misstatements in Enron’s financial
statements?
 Question 1
Q1
BUSINESS RISK
- Business risk is the probability of
loss inherent in an organization’s
operations and environment
- Implies uncertainty in profits or
danger of loss and the events that
could pose a risk due to some
unforeseen events in future, which
causes business to fail.
- Probability that a company will
have lower than anticipated
profits, or that it will experience a
loss rather than profit
ENRON
- Borrowed funds with high
stock prices and operating the
borrowed funds as revenue, and
never reporting as liabilities
- Faced by any energy
company, including price
instability and foreign currency
risks
- This will affect the company to
much additional risk, which
created pressure to adopt
aggressive financial reporting
practice.
 Question 2 (A)

What are responsibilities of a company’s board

of directors?
 Question 2 (B)

Could the board of directors at Enron-especially

the audit committee-have prevented the fall of
Enron?
 Question 2 (C)

Should they have known about the risks and

apparent lack of independence with Enron’s
SPEs? What should they have done about it?
 Question 3

In your own words, summarize how Enron used

SPEs to hide large amounts of company debt.
 Have been
controversial in
Recognize the sale corporate
of assets to America
the SPE and
thereby
remove the assets
and any related
debts from its
balance sheets

To accomplish
specific company How Enron
objectives and
help company “Special Purpose used SPEs
sell off assets
Entity” (SPE).
What is it ?
 Question 4

What are the auditor independence issues surrounding the provision of

external auditing services, internal auditing services, and management
consulting services for the same client? Develop arguments for why
auditors should be allowed to perform these services for the same for
client. Develop separate arguments for why auditors should not be allowed
to perform non-audit services for their audit clients. What do you believe?
Auditor are allowed to perform non audit
services for their audit client as long as there
are not conflict with auditor independence
and professionals’ standard

Why the auditors should not be

allowed to perform non audit Add Your
services for their clients? Title
Auditors also will have benefits in
providing these services but they
have to maintain their integrity and
objectivity in performing audit
 Question 5

Explain how “rules-based” accounting standards differ from

“principles-based” standards. How might fundamentally changing
accounting standards from “bright-line” rules to principle-based
standards help prevent another Enron-like fiasco in the future? Are
there dangers in removing “bright-line” rules? What difficulties
might be associated with such a change?
 Principles-
Rules-Based
Based
 Rules- Check-
Detailed box
rules. Based mentality

Very
specific yet “What
complicated. to do?”
 Principles-Based

General guidelines
General principles guide judgments.
Communication link
Guide practitioners to decide
 Advantages of Principles-Based

More flexible
Minimize compliance costs
Industry specific governance structures
Interpretive and implementation guidance
Laying objectives, provide guidance
Guides directing to principle (unavoidable
rules)
 Advantages of Rules-Based

Clarity in application
Risk reduction (Rules obey)
Comparability among companies
Disadvantages of Principle-Based

Inconsistence measurement
Decrease comparability
Account information less consistent
Complex, expensive and time-consuming
Require expert accountant
Judges lack of financial experience in
enforcement cases
 Customers
withdraw
cash

Run On
In fractional- The Bank
reserve banking
system

Firm might
become
insolvent
 Enron

Largely unregulated financial business:

energy trading
Ran on credit, signed contract, take
depositors’ money, future pay
Rumors: Enron in trouble
No federal deposit insurance to reassure
customers
Achilles’ hill
Financial health beyond doubt
 Anderson

Kapnick: > ½ income from non-audit services

Consulting services securing its dominance
In-house ethics watchdog dimmed
Enron collapse, Anderson losing over 400
publicly trade clients by June 2002
Lost business, selling business
Court: cover the liability to retired employees
- greed- irresponsible decisions and
personal gain through money  -gambling
- Did not applies integrity –commit illegal
acts  -This activity could be
- Integrity important- client and extrapolated to one’s
employee/employer relationship personality- against the
- Placed trust- ethical and moral standards moral of integrity
- High standards and not engage in illegal
activities -wont cause someone question
integrity

Question
7
- honestly
-what risk of integrity or -Judgement must be
moral standards applied true and fair
-may lose trust -high ethical and moral
-decide to work with standards
someone else --backup
documentation
 Question 8

 do not oppose the client’s accounting

choice even if they are not up the
accounting standards • public interest first
 Feel pressure to avoid taking tough • Produce true and fair view
stands.
 May run the risk of losing clients tp other
accounting firms
 Client perceive auditor as threat- doing
their jobs and highlighting material
misstatements.
 Their income and bonuses depends on
annual revenues.
 Question 9

What has been done, and what more can be

done to restore the public trust in the auditing
profession and in the nation’s financial reporting
system?
Company
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