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 Enrons financial
statements?

Question 1

Q1

BUSINESS RISK

ENRON

- Business risk is the probability of

- Borrowed funds with high

loss inherent in an organizations

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

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 companys 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 Enrons
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.

Recognize the sale

of assets to
the SPE and
thereby
remove the assets
and any related
debts from its
balance sheets

Have been
controversial in
corporate
America

To accomplish
specific company
objectives and
help company
sell off assets

Special Purpose
Entity (SPE).
What is it ?

How Enron
used SPEs

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
services for their clients?
Auditors also will have benefits in
providing these services but they
have to maintain their integrity and
objectivity in performing audit

Add Your
Title

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?

Rules-Based

PrinciplesBased

Checkbox
mentality

RulesBased

Detailed
rules.

Very
specific yet
complicated.

What
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

In fractionalreserve banking
system

Run On
The Bank

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: > 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
Did not applies integrity commit illegal
acts
Integrity important- client and
employee/employer relationship
Placed trust- ethical and moral standards
High standards and not engage in illegal
activities -wont cause someone question
integrity

-gambling
-This activity could be
extrapolated to ones
personality- against the
moral of integrity

Question
7
-what risk of integrity or
moral standards applied
-may lose trust
-decide to work with
someone else

- honestly
-Judgement must be
true and fair
-high ethical and moral
standards
--backup
documentation

Question 8

do not oppose the clients accounting

choice even if they are not up the
accounting standards
Feel pressure to avoid taking tough
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.

public interest first

Produce true and fair view

Question 9

What has been done, and what more can be

done to restore the public trust in the auditing
profession and in the nations financial reporting
system?

Company

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