Question

In POWERS REPORT for ENRON Scandal in 2002: 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.

Answer: The report paper under study on core transactions of Enron’s was a report that laid emphasis more on the fundamental aspects of the accounting techniques of the company, Corporate Governance, Management principles and public disclosure was presented to Board of Directors of Enron by its Special Investigative Committee. The Powers Report Investigation of Enron Corporation by the Special Investigative Committee of the Board of Directors emphasizes the critical transactions which were not properly accounted and disclosed to their stakeholders and, consequently lead Enron to bankruptcy. Andersen and Co., reporting on its client, Enron was a information source that was gathered from third parties through a series of documents and interviews. The related party transactions reported by the report were doubtful transactions with LJM and Chewco Investment L.P. Companies

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2. 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: As per the Powers report, there were numerous flaws in the accounting of Enron and consulting services provided by Arthur Anderson. Such flaws definitely distorted the perception of the value of the company. For several years, until 2001, when significant transactions came up to public and culminated with restating five years of financial statements and ultimately the bankruptcy of Enron. Anderson’s actions, or lack thereof, were malicious and negligent towards the interest of public. Anderson’s accountants had many opportunities to inform the Board of Directors of the unprofessional and improper accounting techniques used by the senior management of Enron on reporting for SPE’s. Anderson also should have notified the Board about the going concern concerns as soon as its auditors discovered the inconsistencies with debt restructuring and earnings. But since Anderson had no incentive to apply professional scepticism on Enron’s transactions thus charged over $5.7 million above and beyond normal audit Fees specifically for consulting charges specifically on the accounting treatment For SPE’s. Consequently, Anderson’s self-interest and negligence helped Enron with misrepresenting Special Purpose Entities for financial reporting

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

Answer: To limit errors and risks when auditing special projects, external auditors must ensure that the company gives detailed disclosures of the financial transactions occurred 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

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

Answer: 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