AUDIT

A RT H U R A N D E R S E N A N D E N R O N
WHAT IS AUDIT?
INDEPENDENCE FIRST OF ALL
INDEPENDENCE FOR ENRON AND
ANDERSEN
 STANDARDS

• GAAP
• Generally Accepted Accounting Principles
 
• GAAS
• Generally Accepted Auditing Standards
• It tells auditors what tests they should do, and to what extent this testing is to
be done, and what level is acceptable in the audit (Imhoff)
•  Auditors, according to GAAS, are to remain independent in both fact and
appearance

• SAS
• Statements on Auditing Standards
 HOW AUDIT WARKS

Checks are performed to make sure that a business is following GAAP consistently.

YES NO

Business must show why they are not, and present rationale to demonstrate that what they are doing is both ethical and
appropriate in their specific situation
YES NO

Make some legal actions or drop the audit immediately

 HOW ARTHUR ANDERSEN ACTED

Checked that a business was following GAAP consistently.

NO

Business must show why they are not, and present rationale to demonstrate that what they are doing is both ethical and
appropriate in their specific situation
NO

Began to collaborate and make illegal money together with client

 WHAT DID IT GET

• In 2000, Enron paid Andersen $52 million, including $27

million for consulting services. This amount was enough to
make Enron Andersen’s second largest account in 2000. 

• Bankruptcy
 HISTORY OF MISTAKES

• 2 major audit failures in Andersen’s history:

• Waste Management’s audit reports from Andersen were materially false
and misleading resulting in an inflation of income by over $1 billion
dollars between 1992 and 1996
• Waste Management selling out to another company
• In 1997 Sunbeam was found by the SEC to be using accounting tricks
to create false sales and profits, Andersen signed off on these financial
statements even after a partner flagged them.
•  Sunbeam would later file for bankruptcy 
AICPA 
 CHANGES-REACTIONS

• Big four companies decided to break all ties with Andersen

• Double check of Andersen’s clients in past years. 

• The GAO (Government Accounting Office), held several meetings revolving

around this scandal and the resulting fallout

• Sarbanes-Oxley Act-"Public Company Accounting Reform and Investor

Protection Act“ or  "Corporate and Auditing Accountability and Responsibility
Act"
• requires companies to reevaluate it’s internal audit procedures and make sure that everything
is running up to or exceeding the expectations of the auditors.  It also requires CEO and
CFO to affirm the fact that they don’t know of any fraud being committed by the company. 
CHANGES-REACTIONS

The government reacted

aggressively when they became
aware of the Enron scandal, and
a flurry of legislation and
proposals emanated from
Congress and the SEC about
how best to deal with this
situation.  President Bush even
announced one post-Enron
plan.  This plan was to make
disclosures in financial
statements more informative
and in the management’s letter
of representation.  This plan
would also include higher levels
of financial responsibility for
CEOs and accountants.  Bush’s
goal was to be tough, but not to
put an undue burden upon the
honest accountants in the
industry