Accounting management assignment essay writing help on: Auditing failures

Introduction of auditing failuresAuditing Failures

It can be seen that Enron’s financial statements did not mention clearly its finance and operations with financial analysts and shareholders. It has been analyzed that difficult model of the business and non ethical practices made the company to implement limitations of accounting such as misrepresent incomes and earnings and transform the balance sheet to show a favorable description of its efficiency and performance. The scandal of Enron came out with a constant collection of behavior, values and events which started years before &lastly come out of power. The main motivations behind the financial and accounting transactions were reported income, inflated values of the assets, reported up cash flows & shown under value of the liabilities. The executives of the Enron found new and innovative ways to conceal its debt. The executives at the company formed vehicles of off balance sheet and difficult structures of financing. The scandal of Enron involves various accounting issues. One concern was related to the rules & regulations governing and whether the statements of finance of SPE’s started by the Company must be related with the company statements of the finance for convinced SPE agreements at issue, consolidation was not necessary if other things like independent party spends as few as 3% of the financing capital. The second type of issue concerned about the implementation of derivatives to influence results of the accounting. The third type of issue concerned about the calls for enhanced disclosure, either in financial statements & management discussion for arrangements of the financial inclusive of contingent liabilities. It can be seen that Anderson executive work for the Enron Company might have compromised its judgment and independence for determining the timing, nature and degree of audit procedures and revisions have to be made for the preparation of financial statements that was the accountability of the management of the Enron. The primary reason for the failure of the Enron firm was declaration of profit and financial restatements on Oct 2001. It can be seen that this happened due to change in the nature of the Company Enron’s business activities from producer & transporter of power to an international marketer and dealer of energy with trading of energy, energy financial and monetary derivatives products & other products of derivative trading. Even, the Enron, developed new and innovative products, credit enhancement and made financial contracts which could make payment and based upon results of weather and alteration in the credit allocation of the business. It can be seen that various issues of auditing & accounting and increased usage of partnership of off balance sheets & financing activities were accountable for the failure occurred. The impacts of corporate, political and economic environment were also the contributing factors for the failure of the Enron Firm.

 Business Risks

It can be seen that Risks to the Company Enron, from the corporate strategy would comprise predictability of funds required to fund the innovative activities, the changeability of profits caused by the factors of new market & difficulty of usage of accounting systems to control the new business and products. The company Enron needed sources of new capital through which the company can invest in new direction. It can be seen that Banks, financial Institution and bond holders would be offering loans with fixed principal & interest obligations made by legal contractors, with defined risks & penalties if repayments were not made. It can be seen that equity investors purchased newly shares of Enron stock and made decisions on the basis of estimated profits & risk & uncertainty distinct from that of transport Company &energy production. It is very clear that expected returns to buyers of new Enron Shares would be rely on the achievement of the new and innovative corporate strategic savings &investments.

It is observed that Enron’s company involved in business risks like fraud, the company failure happened when it entered into conservative transactions. The problem faced by the company on the accounting practices and procedures because the company treated loans as the revenues and did not treat them as current liabilities such as accounts payable. The risk faced by the company that it did not show creditors as liabilities and mislead customers and investors. Apart from this other risk faced by the company is that it losing all its customers and investors because the company continued to convert the customers and investors cash into its shares. At last because of this company had lost its reputation among the society and faced a situation of a liquidity crisis.Fiduciary Obligations of Boards of Directors

It can be seen that in the U.S, the Managing and Board of Directors sits at the top of the company leading structure. The duties of the Board’s include analyzing the company entire business strategy, compensating & selecting the senior executives of the Company, analyzing the company’s external auditor, viewing the company’s statements of finance and controlling entire performance of the Company. According to the Roundtable of the business, the responsibility of the Board is to secure the interest of the shareholders of the Company. It can be seen that the Board of Directors who work under laws of state that compel duties on shareholders to proceed in good belief with logical care and in the excellent interest of the Company and its creditors and shareholders. Three wide duties arise from the status of company’s directors generally such as the duty of respect, due care and loyalty. The responsibility of obedience needs the director to avert committing actions beyond the range of the authority of the Company as explained by the rules & regulation of the condition of incorporation. The responsibility of loyalty explains that the directors should act in well manner and should not permit their interest to succeed through the benefit of the Company. The responsibility of care offers the director to be hardworking and prudent in coordinating the affairs of the Company. It can be seen that according to the Commission the audit committee should assess the independence of the auditor of the Company and converse about the judgments of the auditor about the excellence if not the acceptance of the accounting principles of the Company in its financial reporting, determination of the financial statements of the Company in accordance with accounting principles and discussion with auditor for relevant accounting policies and accounting estimates with management.

 Role of Board of Directors in Enron’s bankruptcy and collapse

It is observed that Board of Directors at Enron was not able to protect the Shareholders of Enron& contributed to the destruction of the major public Company in the region of  U.S by permitting Enron to indulge in great risk accounting, non appropriate dispute of interest events, extensive non disclosed book activities and excess compensation. The Board of Directors viewed various indications of practices by management of Enron throughout several years, but ignored them to loss of shareholders, business associates and employees of Enron. It is observed that Board of Directors at Enron knowingly permitted Enron to indulge in greater risk of practices of accounting. It can be seen that after knowing the apparent conflicts of activity, the Board of Directors at Enron allowed an unexceptional collection permitting Financial Officer to operate and start with equity funds of LJM that operated business with the Company and profited at the expense of the Enron. The Board of Directors exercised insufficient oversight with transactions of LJM and unsuccessful to safeguard shareholders of Enron from inequitable dealings. The Audit Committee and the Board of Directors at Enron permitted the Company to invest million & billion of dollars in activities of off book to show its financial situation better as compared to unsuccessful to ensure sufficient revelation of material off book liabilities and contributed to the collapse of the Enron. The Board of Directors at Enron allowed unnecessary compensation for the executives of the Company and became unsuccessful to control the increasing cash drain made by the Enron. The Board of Directors at Enron was settled by monetary agreement among the Members of the Board and the Company. Due to this, the Board of Directors at Enron became unsuccessful to make sure the independence of the auditor of the Company and allowed firm Anderson to offer consulting and internal audit services. At last, it can be analyzed that Board of Directors and Audit Committee have known the risk prevailed at Enron but after that they have allowed the Company to indulge in greater risk practices of accounting, allowed inadequate oversight with proceedings of LJM and allowed LJM to make profit at the expense of the Enron and allowed the Company to invest billion of funds with off book activities to hide the poor condition of the Company (Akerlof, 1970)

Role of SPE’s in Enron

It can be seen that Enron produced transactions of off balance sheet by utilization of two business structures such as SPE’s and Joint Ventures. The Special Purpose Entities were approved by the Board of Directors and Audit Committee of the Enron. The SPE is defined as business interest made exclusively to attain definite purpose of the business. In general, business can use SPE’s for purposes of accounting, but these types of transactions should stick to some regulations.

In general, the company may become as SPE if following conditions are met such as first, an owner of the Company should create an equity savings of minimum 3% on the assets of SPE’s and 3% should stay at uncertainty and risk over the transaction and second one is the self governing owner should exercise manage of the Special Purpose Entities. It can be seen that with the help of SPE’s the company can note loss and gain with them, though the liability and asset of the Special Purpose Entities are not incorporated in the balance sheet of the Company. The executives at Enron prepared the transaction in such a way so that loss could not view as earning loss and reductions in equity of shareholders had no consequence on the statements of earnings & income. Due to this the Company was able to maintain more than 700 billion of dollars out its balance sheet. It is observed that there were various structures implemented by the Enron for the practices of Accounting. One of the Structures was SPE’s to sold monetary assets such as equity and debt owned by the Company at the termination of an accounting period to improve its financial condition and ratios. The secret agreements among the SPE’s and the Enron gave right to the Enron to purchase common stock shares of the Special Purpose Entities. It is observed that the Special Purpose Entities were controlled by Enron executives and received approximately 30 dollars in back. The officials at Anderson said that they were not told about the arrival of such agreements. According to the perception of the IAS, practices of Enron with the Special Purpose Entities must have been integrated with accounts of Enron’s. It can be seen that another way of using SPE’s by the Company Enron was to hedge the transactions. The purpose of the hedging of the transactions was to make a contract with an outside party to capture the financial risk of the investment. It was clearly mentioned in the contract if the market prices of investments go down then entire loss would be bear by the outside party. Despite this, the Company Enron funded transactions of Insurance with its private shares, which allowed the company to evade recognizing loss. It can be seen that mixture of different monetary & financial practices & misappropriation in the financial statements done by the executives at Enron during the year 1997 & 2000. It has been analyzed that executives of the Company Enron not only hid the loss, but also inflate the ratios, financial statements for increasing the stock prices of the Company. It is very clear that the Company Enron applied a number of off balance sheet activities which hugely understated the debts and substantially overstated the incomes & net worth of the Company. The declaration of the Earnings & set of restatements, required the re evaluation of grade debt of Enron’s as rated by various rating agencies. It is observed that re evaluation of rating of debt and loss of reliability in the market formed a crisis of liquidity and fall in the stock prices of the Enron (Healy, &Krishna, 2003) Issues of Auditor Independence

It can be seen that Independence is a necessary standard for the various number of auditors to keep that they must forever be aware of when they perform new functions. The issues of Independence are observed, throughout the Auditing standards of Government in the U.S and remarked by auditors where Companies have performed non conventional roles in relation to performance measurement such as measurement of performance, encourage management and help citizens (Robert, 2003). It can be seen that concern is not whether the auditor can perform these functions, but how the auditor play particular practices when performing these functions to make sure they maintain an elevated standard of the auditor independence, generally when the auditor indulge in. The Auditor independence assists to make sure quality of the audits & contributed to users of financial statement, dependence on the process of financial reporting and thus enhancing the efficiency of Capital Market (Barth, 1991). The auditor independence is considered as foundation of the profession of the auditing. It can be seen that the destruction of Enron had a negative effect on the experience of the auditor independence. These all findings have proved that the auditors should be allowed to perform these services for same client (Dechow, Patricia & Meulbroek, 2001)

There are some instances of non audit services according to the Yellow Book are as follows the auditor performed such assistant and support practices that can escape impairment of its independence whether it is apparent that the auditor  offers assistance, presentations, training, speeches and not made the decision for the Company that the auditor audit. It can be analyzed that services of non audit can fall in the second group and not the independence of impair if additional safeguards are used. Safeguards are inclusive of an understanding among the audited entity regarding the scope and objectives of the management accountability and non audit service which includes the matter of services of non audit, the results of the operation and making decisions which indulge functions of the management in relation to the service of non audit. According to the suggestion of auditors they believe that service of non audit & other issue which threaten the independence of the auditor and destructively affect the perception of the public of self governance to a larger extent than they badly affect the actual independence. These all examples have proved that auditors should not be allowed to perform non-audit services for their audit client (Easterbrook, Frank & Daniel, 1984)

The consequences of non audit service on the independence of the auditor was more depressing after the insolvency of Enron, as compared to such type of non audit services on independence of the auditor before the insolvency of the Enron. It can be seen that adding excellence by the audit is something that people want but it’s not forever simple to be coordinated properly to make sure that the external type of audit provides extra value must be rewarded & recognized. It can be seen that auditors and their users must agree on some principles and agree the method to specific work where objectives of audit & non –audit shall be achieved through the similar kind of work. At last, many people had concluded that Enron had a very negative impression on the view of the independence of the auditor (Patricia, Hutton & Sloan 2000)

Unethical & Illegal Activities 

The researcher had analyzed that illegal activities took place in the accounting department when the accountant of the company understate the financial performance of the company in high growth period and overstate the financial performance of the company in low growth period. Issuing of debt in distressed firms may also effects the decisions in accounting choice. It has been observed by the researcher that CEO of the company wants to show his income less when the company records bad financial management. The management of the company has also done illegal activities when they face with large accruals at the time of dividend reduction. The researcher had analyzed that companies who are facing financial distress they can make the decision which can affect the society and jobs of employees. In Enron scandal the management of the company hid a large portion of debt and treated it as revenue. When scandal came in front of everyone then it resulted in loss of jobs of employees. It is observed that unethical behavior destroys companies and careers. This can be seen in the case of Arthur Anderson because of Enron scandal other companies were not interested to continue business with Arthur Anderson and because of that the company had to shut its business. It is analyzed by the researchers that if top executives accept the unethical behavior then it affects the performance of other departments and creates non healthy corporate culture. Nowadays accountants take unethical decision because of their benefits and therefore it results in scandal and destroys the careers of other employees. The researchers think that nobody wants to have a relationship with unethical individuals. Ethics plays a very crucial role in accounting because it provides information to clients and investors for the preparation of financial statements such as Income statement, Cash Flow Statement and Balance sheet (Lin & Nichols, 1998)It is observed that the Enron Company had done illegal activities by hiding a great amount of Company liabilities. The company was treating liabilities as revenue and did not show them in the balance sheet. The company had taken the help of others in hiding a large amount of company debt. With the help of LJM2 Enron company had deconsolidate its unproductive assets which generated annually 30 percent revenue to the company. The company has entered into partnerships with various enterprises for hiding a large portion of debt .It is also observed that with the help of Whitewing Enron was able to sell its assets of energy production. The company had made an announcement to the guaranteed investors of the Whitewing if they sell their assets to Enron at a low price then they would be compensated with common stocks of Enron. At last all the partnerships and help from others were basically done by the company to hide a large amount of debt and to show that the company was in profit (James, 1995)

It is observed by researchers that unethical decision in accounting choice had taken place in Enron Company. According to researchers the company was responsible in hiding the claim of mischief Mr. Ken Lay. In general all other accounting firms had blamed accountants of Enron and the company for the scandal in hiding the claim of the mischief.  The scandal took place in Enron made other accounting firms to disrupt the lives of investors and employees. This example can show that if the company does not use ethics in accounting decisions then it would result in scandal and disruption of life of investors and employees. It becomes essential for companies to follow proper financial reporting in order to avoid scandals.

Consequences of Illegal Activities

The illegal decisions took place in Enron cannot be morally wrong and socially unacceptable because it effected the employment of itself only not effected the employment situation of other companies in industry. It is concluded that if illegal activities occurs in accounting decisions then it would affect the functioning of companies in industry and make the investor adamant to do any kind of investment in companies. As in the case of Enron, the administration of the company had done illegal activities by escaping the large portion of debt. It can be analyzed that misappropriation of financial statements in Enron resulted in condition of unemployment for employees (Healy & Krishna, 2003). It is desirable for companies not to do any type of illegal activities in financial statements because it affects the functioning of the company and reputation among the investor. It is concluded that if unethical activities took place in accounting decisions then it would affect the performance of companies in industry and make the investor rigid to do any kind of investment in companies. It is advisable for companies not to do any kind of unethical activities because it affects the image and performance of companies among the investor.

Financial Reporting System

It can be seen that the Congress currently implemented the Oxley Bill which made it illegal for the auditor to play consultancy services, external & internal audit at the similar time. This bill introduced other procedures which effort to rebuild confidence in the capital market of the country. For example, the bill regulated the formation of new Company accounting board which is below the authority of the SEC, basically terminating the long standing custom of self regulation. It can be seen that NASDAQ & NYSE are recently bearing various reform to registered requirements to reinforce the board of director above senior management. Companies should constantly reveal their dedication to exactly disclose operating & financial information and a constant process should be formed to increase and build the excellence of information offered to creditors, investors and suppliers.There are some recommendations to restore the public trust in the auditing profession and in the nation’s financial reporting system.                

For increasing the effectiveness, the governing bodies at the organization must control executive heads to view the staffing of the audit & the budget organized through the internal audit taking into thought the perception of the committees and must recommend to the heads of the executive the sufficient path of action to make sure that the function of the audit is sufficiently resourced to use the plan of the audit (Bethany, 2001)

For increasing the transparency, the legislative bodies concerned must need the annual reports to refer the usage of the plan of the audit, major risks, and the position of the internal audited entities as well as taking into consideration of other issues that negatively impact on the activities of the audit.Conclusion

It has been analyzed that the Directors at Enron resist that they were not responsible for any misconduct which was hide from them. It can be seen that the main reasons of the failure of the Enron were risky practices of accounting, off balance sheet activity and excessive compensation to executives. The board of Directors at Enron became unsuccessful to offer the wise oversight and checks at the time of collapse of the Enron. In last it has been analyzed that the Board of Directors and the management were unable to control the Company collapse and accepts a part of the accountability for it.

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