Question

In Enron scandal in 2002, The question is for Powers report on Enron:

1. Description of the related party transactions reported on by Arthur Andersen & Co.

2. Description and evaluation of the flaw in the accounting firm's logic.

3. Proposed checklist for special projects performed by external auditors to limit errors and risks.

4. Proposed rules or laws to prevent similar occurrences in the future.

Answer 1

1. Description of the related party transactions reported on by Arthur Andersen & Co.

Anderson was manipulating the financials accounts of firms that they were auditing. Arthur Andersen was Enron’s auditor and was holding the responsibility for accuracy of financial statements and internal bookkeeping of Enron, however he concealed the losses and not provide accurate financial picture to the investors. Some of the fundamental accounting and auditing practices that eventually contributed to the fraud performed by Enron were the fact that Andersen’s auditor over looked the companies that were created by Enron that produced equity all while allowing to borrowing to occur without acquiring any debt. It enabled a chance to Enron to look at their balance sheet and release its newly restated financial results. In these report it was clear that the total revenue from the past four year was sufficiently lower than the prior four years

?

2. Description and evaluation of the flaw in the accounting firm's logic.

The flaws in the accounting firm's logic that allowed the Enron accounting fraud to occur are as follows:

-- Poor Management Accountability: Weak management was virtually not accountable to anyone as long as the company showed dramatic stock increases that were justified by the growth in the earnings.

--Accounting Rules: The accounting activities became more complex and rule-oriented. Accounting permitted practitioners to take obscure pronouncements, such as dealing with Special Purpose Entities that were mainly designed for transactions of leasing, and apply the pronouncement to certain entities for which these accounting was never intended.

-- Weak Corporate Governance: Although the board seemed to be independent, but majority of the board members had close ties to company managers through philanthropic organizations.

--Enthusiastic Financial Analyst Community: The analysts that were riding the bubble of the financial dot-com economy made a conclusion that they did not have proper tools for the valuation of the emerging companies.

--Biased Banking and Investment Banking: Numeous big financial institutions were willing participants in the process as they were promoted with large underwriting fees for other Enron work.

?

3. Proposed checklist for special projects performed by external auditors to limit errors and risks.

To limit errors and risks when auditing special projects, external auditors must ensure that the company gives detailed disclosures of the financial transactions occured in the special projects along with detailed substantial communication, that provides proper detailed description on the relevancy of the financial interest involved. Moreover should be strict adherence to proper corporate governance principles. It will help senior leadership to act in the interest of the shareholders of the company instead of self interest

?

4. Proposed rules or laws to prevent similar occurrences in the future.

Most of the companies reported fraudulent financial reporting activity causing great financial burdens like Enron. That was the reason that SOX was created to create more guidelines and rules for companies to follow. To avoid such conflict government regulations and rules are required to be updated for the new economy, not relaxed and eliminated. The company must advocate is strict adherence to proper corporate governance principles; and encourage their employees to act in the best interest for the company. A proper implemented and formulated structured control procedure also helps in minimizing the risks