Question

1. What determines the extent to which financial projections will correspond to actual future results?

2. Identify and discuss why Arthur Andersen as Enron’s auditor was forced out of accounting business.

Answer 1

1.The extent to which financial projections correspond to actual financial results is determined by the accuracy of the assumptions made. Effort should be made to make assumptions as realistic as possible. Assumptions form the logic behind the forecasts. It should include how much the market will expand or contract, changes in the number of competitors and the effect of market conditions. Assumptions are derived from historical financial data and external analysis. Considerable research must be done in making the assumptions.

2.Arthur Andersen was forced out of the business because of the following reasons:

1.Enron was found to have reported $100 billion in revenue through accounting fraud. As Enron’s auditor, Arthur Andersen had failed in their professional responsibility with regard to the audit of Enron’s financial statements. Enron’s audit reports were false and misleading.

2.They were found guilty of obstruction of justice as they shredded documents related to its audits of Enron.

3. Arthur Anderson took an active part in Enron’s auditing and consulting practices. This was a conflict of interest as this questions Andersen’s independence.

4.They were required to assess management’s risk of fraud. But they had overlooked this. They failed in their duty because of the amount of revenue that Enron was providing them.

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