Question

QUESTION

Enron was an American energy company based in Houston, Texas. Enron scandal which was revealed in 2001 has resulted in the dissolution of the Arthur Andersen. Arthur Andersen was one of the Big 5 audit firm at that time. Enron was seen as the biggest audit failure.

World.com was an American telecommunications company. It was the second largest long distance phone company in the US. In 2002 WorldCom submitted the largest bankruptcy filing in the US history. The WorldCom scandal cost 30 000 employees their jobs and cost investors $180 billion. Arthur Andersen was WorldCom's auditor during the five financial quarters in question.

Required:

a)Provide detail explanation of the factors that have affected the incidence of lawsuits against CPA in recent years .                                                                                                                                                                          

b) The Enron and WorldCom bankruptcy was due to accounting fraud. Provide a background research on these two companies and describe the nature of accounting fraud that was committed by the two companies.                     

c) What are the business risks faced by these two companies, and how did those risks increase the likelihood of material misstatements in their financial statements?                                                    

d) A perceived lack of integrity caused irreparable damage to Arthur Andersen. How can you apply the principles learned in this case personally? How are CPA firms different from other professionals?                                                                                                                                                                                                                    

Answer 1

a). Some factors are-

1. Society's increasing acceptance of lawsuits.

2.  The willingness of many CPA firms to settle their legal problems out of court.

3. The difficulty courts have in understanding and interpreting technical accounting and auditing matters.

c).  Enron faced most of the risks generally faced by any energy company, including price instability and foreign currency risks. However, the speculative nature of Enron’s business model exposed the company to many additional risks. Enron was a major player in hedging and contracting for supplies of electricity, an extremely competitive business subject to price wars and environmental concerns.As several of Enron’s business risks were realized, the company’s management experienced real pressure to report healthy financial results. These pressures were particularly intense at Enron.

Many of Enron’s deals depended heavily on a high and rising stock price. This pressure existed because the company had guaranteed its obligations with stock and had contractually agreed that those obligations would become immediately due and payable if the stock price fell below certain levels.

d)

Integrity being straightforward and honest in professional and businessrelationships# fair dealing and truthfulness# not being associated with informationthat contains materially false or misleading statements or information furnished recklessly.

perceived, or even likely more detrimental to one's career, a proven lack of integrity, can cause damage to a career in many ways. Integrity e!uates to placing trust in an individual that he or she will conductthemselves with ethical and moral standards.