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Discovering The Causes and Reasons that LED to Anderson-enron Situation

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Accounting practitioners, auditing regulators, and auditing professionals agree that auditor independence is crucial for enhancing auditor credibility. Independence forms an undergirding principle in the auditing profession that in turn, leads to high-quality audits (Tepalagul, and Ling 102). The second general standard of GAAS states that auditors are expected to maintain independence in mental attitude while conducting all matters relating to auditing assignments. Failure to practice independence renders all financial statements unaudited for practical purposes. The SEC will request a re-audit to be conducted if it finds out that an auditor was not independent while undertaking auditing activities. Disciplinary actions or litigations are likely to occur in such situations. GAAS’s second standard shows that the auditing profession relies on value independence. An auditor and the audited company ought to exercise separate personal and business relations to ensure independence, impartiality, and lack of bias in the auditing process.

Consider Andersen’s role in the Enron’s Scandal

In 1993, Andersen hired a sizeable number of personnel from Enron including senior auditing executives to undertake auditing actions on behalf of Andersen. Interestingly, the same executives were supposedly the same clients being audited. Evidence presented in this scenario shows that the relationship between the auditor and the client lacked independence and was subject to impartiality and biases. Auditor independence can be impaired in different forms. This includes but not limited to the creation of close relationships, development of financial bonds (such as Andersen’s fee dependence on Enron), offering managerial functions, and offering non-audit services such as consultancy services.

Auditor independence grants auditors a social recognition if the auditor does not display managerial or financial relationship with its client. This form of independence is called independence in appearance (IIA) (Ping 115). The presence of Andersen’s management within Enron headquarters is a clear violation of IIA. The relationship and proximity of Andersen to Enron provide a possibility of impaired evidence in financial statements. Violation of IIA as stipulated by SEC regulations occur when non-audit services are provided to clients being audited (Ping 115). The case shows that a large portion of compensation for audit partners was obtained from the sale of non-audit services. The lead Andersen partner on the Enron (David Duncan) deal was earning close to 1 million dollars annually. Enron’s CAO Richard Causey and David Duncan enjoyed close relationships that included going for vacations together, skiing together, and dining together. Duncan even admitted in a promotional video that Andersen’s close relationship with Enron goes deeper than just being businesspersons. The act of spending holiday vacations and paying each other’s drinks does not relate to the provision of auditing services and amounts to a violation of IIA.

On the other hand, Enron paid Andersen audit fees that amounted to millions for services not specified nor rendered by Andersen. Failure to provide circumstances or facts to explain why Enron was paying Andersen millions of dollars amounted to a violation of the Independence, in Fact, principle. Indeed, Andersen’s failure to disclose the reasons for receiving weekly payments from Enron was not consistent with auditing policies that required disclosure of all data to support the payments made. The business relationship between Enron and Andersen was complicated in the sense that the client was capable of firing the audit firm. As such, it was quite difficult for the Andersen to maintain auditor independence in its auditing activities.

Another role that Andersen played in contributing to the Enron Scandal had an office floor to themselves within the Enron building. Sharing business space and exchange of employees between the auditor and the client was reason enough to provide impairment to the auditing process. Employees enjoyed personal friendships, and some top-level executives were supposedly scrutinizing their audit accounts. To the public, such relationships were supposed to enhance the ability of the auditor to provide effective and efficient auditing services. However, strengthened relationships were likely to affect audit independence concerning IIF (Ping 115).

By being one of Andersen’s largest clients, Enron might have played a crucial role in shaping Andersen’s operational and organizational culture. Having senior Enron employees to work in its audit department might have had a serious effect on the auditing services provided. Enron’s senior executives were able to manipulate Andersen’s auditing principles to ensure that Enron remains attractive to the public. These executives were able to manipulate the public’s viewpoint of Enron by attesting to the existence of fairness in Enron’s audited records. Manipulating Enron’s records were undertaken in such a way that it was possible to maintain an independence attitude in their business relationship.

Before the implementation of the Sarbanes-Oxley Act, auditing firms, and their clients were able to maintain relationships for more than five years. The Act further states that the audited client should not have employed CFOs, CEOs, Chief Accounting Officers, or Controllers of an audit company before it starts auditing relationship. David Duncan’s relationship with Richard Causey shows a situation whereby the lead auditor was not able to challenge the management of Enron.

Changing Andersen’s Corporate Culture

To become among the Big Five auditing firms in the world, Anderson must have implemented frameworks aligned to the company’s organizational structure, operational practices, and strategy. It was one of the most influential, highly respected, profitable, and ethical accounting firms around the globe. Adhering to diverse and complex rules and regulations enabled it to become a distinguished organization. Practicing innovative and proven processes in auditing enabled it to land contracts with Fortune 500 companies such as Enron. However, theshift towards consulting led it to change its attitudes towards people, change, and flexibility changed its corporate culture significantly. Its reluctance to focus on auditing services and concentration in the provision of non-auditing services marked the decline in the quality of its audit services (Tepalagul, and Ling 103). Threats to auditing quality began with assigning more importance to particular clients, entering into long auditor tenures, and developing close relationships with its clients. Engaging in these activities shifted Anderson’s focus to other issues such as client importance and fee dependence. The creation of incentives altered the perceptions of Andersen based on the economic benefits obtained from their worthy clients. This act was a violation of ethical accounting standards and failure to adhere to standards and ethical guidelines. Before the collapse of Enron, Anderson was no longer able to deliver audited financial statements that were devoid of objective opinions.

The declining role of corporate culture at Anderson can be attributed to the ineffective nature of its corporate governance. Anderson was unable to maintain good governance in its operations leading to failure of the firm to detect financial misappropriations on the part of the client. Enron was able to induce commercial pressure on Anderson’s activities through infiltration of its internal control system. By acquiring a permanent office space at Enron, Anderson jeopardized its internal control system because Enron’s employees were capable of accessing its system or manipulating financial reporting procedures. Maintaining close relationships with its client affected its ability to exercise auditor independence. The management of Andersen, through its lead partner, were even willing to help Enron to lie to the chairperson of SEC. This act shows that Andersen’s corporate culture had been completely diluted, and it lacked the ability to offer independent judgment.

Contributing factors to Andersen’s failure

Most corporate failures have occurred in situations where clients received non-audit services from their auditors. In the case of Andersen, a substantial portion of their income was generated from non-audit services. Andersen was dependent on Enron regarding audit fees it received for consultation and other non-audit services. Some areas can be pointed out regarding the Andersen-Enron Scandal. First, Andersen accepted both audit and non-audit services thereby causing jeopardy to its independence and reputation. Andersen’s heavy reliance on fees paid by Enron forced it to provide objective views and make animpartialjudgmentfor Enron to avoid its revenue from being cut-off. Diluted ability to remain independent is directly attributable to the significant fee levels it received from Enron. Second, the existence of a close relationship between Andersen and Enron provided conditions for the existence the auditor’s inability to exercise its independence. It is highly likely that Andersen found itself unable to question any doubtful financial misstatements by Enron.Finally yet important, the long business relationship between Enron and Andersen might have assisted Enron to understand the Andersen’s business environment and internal control system. On their part, Andersen overlooked their deficiencies or conflicting activities related to its internal control system.

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Discovering the Causes and Reasons that Led to Anderson-Enron Situation. (2019, January 03). GradesFixer. Retrieved January 26, 2022, from https://gradesfixer.com/free-essay-examples/discovering-the-causes-and-reasons-that-led-to-anderson-enron-situation/
“Discovering the Causes and Reasons that Led to Anderson-Enron Situation.” GradesFixer, 03 Jan. 2019, gradesfixer.com/free-essay-examples/discovering-the-causes-and-reasons-that-led-to-anderson-enron-situation/
Discovering the Causes and Reasons that Led to Anderson-Enron Situation. [online]. Available at: <https://gradesfixer.com/free-essay-examples/discovering-the-causes-and-reasons-that-led-to-anderson-enron-situation/> [Accessed 26 Jan. 2022].
Discovering the Causes and Reasons that Led to Anderson-Enron Situation [Internet]. GradesFixer. 2019 Jan 03 [cited 2022 Jan 26]. Available from: https://gradesfixer.com/free-essay-examples/discovering-the-causes-and-reasons-that-led-to-anderson-enron-situation/
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