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    Section 4 Accounting Fraud and Auditor Legal Liability - 1

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    Section 4 Accounting Fraud and Auditor Legal Liability - 1

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    Cornelius
    346 views3 pages
    Fraud

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    Section 4 Accounting Fraud and Auditor Legal Liability -1

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    Fraud

    Copyright:

    © All Rights Reserved
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    Download as docx, pdf, or txt
    346 views3 pages

    Section 4 Accounting Fraud and Auditor Legal Liability - 1

    Uploaded by

    Cornelius
    Fraud

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Enron grew rapidly through aggressive accounting and eventually collapsed in one of the largest bankruptcies. Andersen's reputation eroded through a series of audit failures including Enron and it was eventually convicted of obstruction of justice in the Enron case. Financial accounting standards allowed some of Enron's strategies despite violating the intent of GAAP.

    Enron engaged in very aggressive accounting approaches such as establishing special purpose entities (SPEs) to move debt off its balance sheet and enhance profits. It also morphed into a speculative energy and commodity trading company acting as a 'market-maker' in electricity and other markets.

    Andersen initially achieved success by taking tough stands against aggressive client reporting but its reputation was damaged by a string of audit failures including Enron, leading to its conviction and downfall.

    accounting fraud

    and auditor legal liability

    ca S e S included in thi S Section

    4.1 Enron Corporation and Andersen, LLP....89


    Analyzing the Fall of Two Giants

    4.2 Comptronix Corporation ....................................99


    Identifying Inherent Risk and Control Risk Factors

    4.3 Cendant Corporation ..........................................111


    Assessing the Control Environment and
    Evaluating Risk of Financial Statement
    Fraud

    4.4 Waste Management, Inc..................................119


    Manipulating Accounting Estimates

    4.5 Xerox Corporation................................................127


    Evaluating Risk of Financial Statement Fraud

    4.6 Phar-Mor, Inc............................................................137


    Accounting Fraud, Litigation, and Auditor Liability

    instructor resource Manual do not coPy or redistribute

    instructor resource Manual do not coPy or


    redistribute

    4.1

    c as e

    enron corporation and andersen, llP


    analyzing the fall of two giants

    Mark S. Beasley Frank A. Buckless Steven M. Glover Douglas F. Prawitt

    in S tructional objective S
    [1]

    [2]

    [3]

    To help students understand what happened at


    Enron Corporation and how Andersens involvement with Enron led to the accounting firms
    downfall.
    To enhance students appreciation of the importance of understanding an audit clients
    core business strategies.
    To develop students understanding of the
    role of confidence, reputation, and trust both
    in the corporate and auditing professions.

    To provide a venue for exploring


    professional issues relating to auditor
    independence and the provision of non-audit
    services for clients.
    [5] To introduce students to the current debate on
    rules- versus principles-based accounting standards and related implications for the
    auditing profession.
    [6] To actively involve students in considering the
    challenges facing the accounting profession and
    in evaluating alternative courses of action for
    overcoming these obstacles.
    [4]

    KEY FACTS

    Enron entered the year 2001 as the seventh largest public company in the U.S., only to exit
    the year as the largest company to ever declare bankruptcy in U.S. history (until
    WorldComs bankruptcy in 2002 later claimed the record).
    Enron engaged in very aggressive accounting approaches, including the establishment of
    special purpose entities (SPEs), the intent of which appears to have been simply to move
    debt off the companys balance sheet and enhance profits.
    Enron began as a natural gas pipeline company, when Houston Natural Gas and InterNorth
    of Omaha, Nebraska merged in 1985. The company eventually morphed into a speculative
    energy and commodity trading company, often acting as a market-maker in electricity
    and other markets.
    A Northwestern University professor established Arthur Andersen, LLP in 1913. The
    company rapidly achieved a reputation for taking tough stands against clients wishing to adopt
    aggressive reporting strategies. This reputation was key to the early success of the firm.
    Andersens failure was a result of the firms loss of reputation as a result of a long string of
    audit failures (including Waste Management, Global Crossing, Sunbeam, Qwest
    Communications, Enron, and eventually WorldCom) and of the firms conviction on
    federal charges of obstruction of justice.
    Financial accounting standards played a role in that some of Enrons questionable
    accounting strategies were in technical compliance with generally accepted accounting
    principles (GAAP), despite clearly violating the intent of those standards. This ties directly
    to the current debate on rules-based versus principles-based accounting standards.

    The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and
    Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective
    handling of an administrative situation.

    copyright 2009 by Pearson education, inc., upper saddle river, nJ 07458

    89

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