Enron Corporation and Andersen, LLP
"Analyzing the fall of two giants"
Case Study Solution
This case study solution answers the following questions.

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 SPEs?  
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 argument 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

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 lace 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 experience 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.  Why did so many companies terminate their relationships with Andersen, given that Andersen’s Houston office had no part in
servicing those engagements?

8.  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 questions your integrity?  What can
you do to preserve your reputation throughout your career?

9.  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?

10.  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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