Enron

Q.1

Crisis of confidence happens after the Enron scandal occurred. I think several parties should responsible for this crisis, that include independent auditor, clientÐŽ¦s key executive officers, clientÐŽ¦s internal auditors, SEC, FASB, bank and financial analysts.

The most important statutory duty of the independent auditor is to ensure the financial reports are intended to give a ÐŽ§true and fair viewЎЁ. If the financial statement contains fraud and irregularities, independent auditor should discover and report it to the proper authority. For the Enron case, Anderson breaches the duty to warn, as they know there is fraud and major error in the financial statements, which is the overstatement of the profits. As if they have warn the clients, even Enron had done nothing, Anderson should report to the proper authority, however, they did not report this. Even worse, Anderson issues an unqualified report. Besides, Anderson was unknown one- half of the SPE which showed Anderson was lack of competence.

Auditor independence helps to ensure quality audits and contributes to financial statement usersÐŽ¦ reliance on the financial reporting process, however, if the investors find out that the financial statement contain major problems, therefore, the creditability of independence auditor would be challenged. Thus, investors tend to unbelieve professionalism.

For the key executives of the client, they should familiar with the whole company situation. If there are any material problems they should point out immediately. The intention of the EnronÐŽ¦s executives which make the financial statement totally failed. This failure triggers the disappointment of the public of professionalism. Moreover, if the client have no intention to deceive the public, internal auditor also need to responsible for the misstatement. Failure of the client executivesÐŽ¦ duties would reduce the confidence of the accounting profession.

SEC and FASB should responsible for the crisis of the confidence. It is because the stated rule which required all companies followed, has a big problem. The 3 percent rule is completely unreasonable. Only 3% capital of the SPE is from the owner and the other 97% can lend form outsiders. Moreover, the rule permits Enron create a large numbers of SPE in order to manipulate the unrealized gain in the consolidated financial statement. Indeed, the financial statement is ridiculous, as most of the transactions are created by company itself, I think SEC and PACB should responsible for this major problem.

For the lender, I think every lender should aware of the borrowerÐŽ¦s financial situation. They must assess the whole company situation and understand the principle of the borrowing money before lending to them. If the banks know the purpose of the borrowing money is unreasonable they should stop the transaction to protect the public interest. In this case, it is unreasonable for those banks who lend to Enron for the huge numbers of SPE. This lead to Enron can maintain the enormous unrealized gain in the balance sheet.

Speech of the financial analysts would strongly affect the decision of the public investors. Therefore, their statement must only contain facts and without any fraud and irregularities. If their statements contain any uncertainty issues, and ultimately turn out that it is untrue, this would not only affect the financial analysts himself but also other parties who are related to his statements. For example, the financial analystsÐŽ¦ statement reveals the stock price of a company would increase, and he stated that his prediction was according to the financial statement of the company. Eventually, the stock price reduce, the public not only blame the financial analysts but also the accountants who was responsible for the financial statements. This situation would lead to crisis of confidence in the accounting profession.

Q.2

Management consulting services means the rendering of professional services in the course of assisting or advising clients in any aspects of business management. Indeed, when auditor provides management consulting services, compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Therefore, the professional responsibilities of the auditor may be affected.

The possible threats are:

Ñ"Ь Self- interest threats

Ñ"Ь Self- review threats

Ñ"Ь Advocacy threats

Ñ"Ь Familiarity threats

Ñ"Ь Intimidation threats

The professional responsibilities are:

Ñ"Ь Integrity

Ñ"Ь Objectivity

Ñ"Ь Professional Independence

Ñ"Ь Professional Competence and Due Care

Ñ"Ь Confidentiality

Ñ"Ь Professional Behaviour

Following the Title II- ÐŽ§Auditor IndependenceЎЁ (S.201) of the SOX , there are nine categories of prohibited non-audit services. I am going to discuss three of them in details below.

Provide advisory services on:

• Designing, installation or implementing financial information system

• Improvement of existing system

• Assisting management in human resource

Actually, perform management consultation services to the client, would place them as a management role which would impair the auditorÐŽ¦s independence. In addition, for the first two services, these would result in the auditor auditing his or her own work. The effectiveness of the existing system would be challenged. For example, if an auditor give advice to design or install the above system that generates the financial records, and that system generates incorrect data, the accountant is placed in a position of having to report on his or her firms' own work. Obviously, there is a self- review threats. If there are any mistakes find in the system they would not report to the client. Thus, intimidation threats and self-interest threats arise, since the auditor may concern about the possibility of losing the client.

In addition, investors may perceive

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