1. What were the business risks Enron faced, and how did those risks increase the likelihood of material misstatements in Enron’s financial statements?
2. What are the responsibilities of a company’s board of directors? Could the board of directors at Enron-especially the audit committee-have prevented the fall of Enron? Should they have known about the risks and apparent lack of independence with SPE’s? What should they have done about it?
3. In your own words, summarize how Enron used SPE’s to hide large amounts of company debt.
4. What are the auditor independence issues surrounding the provision of external auditing services, internal auditing services, and management consulting services for the same client? Develop arguments for why auditors should be allowed to perform these services for the same client. Develop separate arguments for why auditors should not be allowed to perform non-audit services for their audit clients.
5. Explain how “rules-based” accounting standards differ from “principles-based” standards. How might fundamentally changing accounting standards from “bright-line” rules to principle-based standards help prevent another Enron-like fiasco in the future? Are there dangers in removing “bright- line” rules? What difficulties might be associated with such a change?
6. Enron and Andersen suffered severe consequences because of their perceived lack of integrity and damaged reputations. In fact, some people believe the fall of Enron occurred because of a “run on the bank.” Some argue that Andersen experienced a similar “run on the bank” as many top clients quickly fired the firm in the wake of Enron’s collapse. Is the “run on the bank” analogy valid for both firms? Why or why not?
7. A perceived lack of integrity caused irreparable damage to both Andersen and Enron. How can you apply the principles learned in this case personally? Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might adversely affect your career. What are the possible consequences when others question your integrity? What can you do to preserve your reputation throughout your career?
8. Why do audit partners struggle with making tough accounting decisions that may be contrary to their client’s position on the issue? What changes should the profession make to eliminate these obstacles?
9. What has been done, and what more can be done to restore the public trust in the auditing profession and in the nation’s financial reporting system?
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