Frank Bruno
Auditing
1:00-2:15
Enron Case 2
Due: 04/28/05
1. Please explain why an accounting and auditing research function (like
Andersen's PSG) is important in the operations of a CPA firm. What role
does the function play in completing the audit?
Due to new regulations, NYSE listed companies are required to have internal audit
departments. The purpose and importance of an internal audit team are very obvious.
The internal audit team is responsible for determining the scope of the work and having
the personnel and budget to complete it. This internal entity is very important ever since
such accounting scandals as Enron and WorldCom. They are required to provide
management and the audit committee with ongoing assessments of the company's risk
management processes and system of internal control. In terms of these groups in
association with CPA firms it is also important to have. As seen in the Enron case, the
PSG group voiced its nonapproval to the companies formation of a new entity. These
groups usually have the companies general goal in mind during the decision making
process. In the case of Enron, it did not see any benefit in the creation of a new group. A
member of the group cited several reasons including conflict of interests by having the
CFO manage the venture equity group. Internal auditing functions play large role in the
scope and budget of an audit.
2. Please consult Section 103 of SOX. Do you believe that the Engagement
Leader of an Audit (like David Duncan on the Enron audit) should have the
authority to overrule the opinions and recommendations of the accounting
and auditing research function (like the PSG)? Why or why not? Do you
think that a PCAOB inspector would approve?
The actions of David Duncan in the Enron case should never have transpired. According
to Sarbanes-Oxley Section 103, Mr. Duncan should “provide a concurring or second
partner review and approval of such audit report.” In reality he did concur with Benjamin
Newuhausen as to what he thought of Enron’s CFO thought to create a new special
purpose entity. However, he later misrepresented the conversation that transpired by
assuring Mr. Fastow that Andersen would sign off on the transaction. Now although
David Duncan is the Engagement leader of the Audit, he should and must according to
regulation consult with other members of the audit committee before reaching a decision
which is passed along to the client. The PCAOB inspector would not approve with the
actions taken by Mr. Duncan. He misleads the client by assuring him the committee fully
approved of the actions that were being taken.
3. After Carl Bass was removed from the Enron account, he indicated to his
boss that he did not believe that Enron should have known about internal
discussions regarding accounting and auditing treatments. Do you agree
with Bass's position? Why or why not?
An audit client in no shape or way should have an insight as to what the auditor is
saying behind closed doors. This violates many standards most importantly it is a
violation of independence. For lower level Enron employees to know Carl Bass’
name is absolutely ridiculous. Not only is a violation of privacy for Mr. Bass, it is
clearly a violation of business etiquette. By the client knowing what is said and done
behind closed doors, the auditor looses all independence because a fear of loosing the
client and job arises if they are not kept happy. Decisions by the auditor must be
made unbiased and unknowing to the audited.
4. Please consult Section 203 of SOX. Do you believe that this provision of the
law goes far enough? That is, do you believe that the audit firm itself (not
just the partner) should have to rotate off an audit engagement every five
years? Why or why not?
I believe that rotating the lead audit partner and reviewing partner are provision
enough. Many firms are not staffed for large scale audits therefore rotating the entire
audit of certain companies can become very difficult. By assuring the lead partner
and reviewing partner rotate off the audit every five years assures the client and the
public that a level of independence has been maintained. In addition this prevents
business and personal relationships from taking center stage during an audit. So long
as there is an internal audit team as well as a rotation of the lead and reviewing
partner of an auditor, independence issue should never take center stage during proper
financial reporting.