1.0 INTRODUCTION

1.1 Relationship between Androids, Enronaa and Solid Waste

Android is an audit firms which provide audit service and consulting to their client.

Android has close relationship with Enronaa and Solid Waste in conducting and providing

auditing and consulting to them. It means that, Enronaa and Solid Waste is Android’s clients.

1.2 Main Character in Case Study

1.2.1 Character in Android’s Firm

There are three main characters in this case study, who is David Lawrence, Nancy and

Ken Bailey. The characters of these three people in Android are as follow:-

1) David Lawrence

David Lawrence is the main character in this case study, who is 43 years old and he

joined the auditing firm of Androids in 20 years ago. David earned salary of USD 700, 000 per

annum when he works in Android. David Lawrence is Android’s partner and auditor, who are

responsible in charge of auditing in Enronaa’s account since 1987.

2) Nancy

Nancy also one of the important characters in Android’s case and Android’s auditing

firm. Actually, Nancy is a lawyer at Android’s Chicago Headquarters. She also one of the person

who are advised David Lawrence about Android’s policies regarding retention of documents

from client engagement. Besides, she also play key role in the conviction of Android on charges

of Obstruction of Justice when she give email to Android’s employees on the policy of routine

document shredding.

3) Ken Bailey

Ken Bailey is a junior partner in Android and he also one of the auditor in Android’s

firm.

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1.2.2 Character in Enroona’s Company

In Enroona’s company, there are three main characters, who are Tom Fitzgerald, Chewco

& Chewbacca and Casey. Thus, the following will explain the characteristic of each person:-

1) Tom Fitzgerald

Tom is co-partner of the Enroonaa job and David learn from him that come of the many

off-the-book partnerships, like Chewco & Chewbacca, had not been properly accounted for and

were not independent entities.

2) Chewco & Chewbacca

Chewco & Chewbacca is a limited partnership assoiciated with Enron scandal, which

resulted in the bankruptcy on Enron.

3) Casey

Casey is an Android’s alumnus. He had been a manager on the Enroona account, part of

the team of auditors working with client, before he took a job at Enroona. In Enroona, Casey is a

Chief Accounting Officer (CAO). In addition, Casey also was a friend with David and they have

close relationship in term of friend. This relationship showed when they often vacation together,

leading a group of Enroona and Android colleagues on an annual golf outing to elite around the

country.

1.3 Organizations Involved in the Case Study

i. Android & Co

Android & Co started in 1913 when Arthur and Clarence, both from the audit firm of

Price bought out a small audit firm in Illinois to form Arthur, Clarence & Co, which became

Androids & Co in 1918. Android headed the firm of Androids & Co until his death in 1945.

Besides, Android who is founder of Androids & Co was a zealous supporter of high standards in

the accounting industry. In 1945, Leonardo Sparky, who succeeded Android at the founder’s

death, continued this emphasis on honesty. For many years, the Android’s motto was “Think

Straight, Talk Straight”.

ii. Enroona

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Enroona is a client of Android for past 16 years.

iii. Solid Waste

Solid Waste also one of the organization that involved in this case, where Solid Waste is

also one of the Android’s clients in 1971 before Solid Waste become a public company. For

Android, Solid Waste is a “crown jewel” client. Until 1997, every Chief Financial Officer (CFO)

and Chief Accounting Officer (CAO) in Solid Waste had previously worked as an auditor in

Android’s firm.

2.0 Issue of the Case Study

2.1 Issues in Enroona

David is one of the Android’s partners, who are responsible to check Enroona’s account

and to ensure they are fairly representing the state of the business. The issues arise when David

conducts the audit in Enroona and there are evidence suggesting Android assisted to “puff up”

reported returns of off Balance Sheet activities.

In addition, the second issues that arise in Enroona are, many off-book partnerships not

properly accounted for and were not independent entities. From this issue, David suggested that

the millions in debt and losses had to reflect in Enroona’s books. David also confessed that

Android has used accounting practices that allow Enroona to hide their debts, but it’s all are

within the context of the fair value accounting.

2.2 Issues in Solid Waste

There are two major scandals that broke at Android around the year 1988 and 1996. This

forbade Android from further wrong-doings. Solid Waste restate its earnings to shown

overestimated of $1.43 billion of its pre-tax earnings and understated certain elements of its

expenses by $178 million. This was the largest restatement in Securities and Exchange

Commission (SEC) history. Android’s audit engagement team has discovered several accounting

practices of Solid Waste that violates Generally Accepted Accounting Practices (GAAP). Those

are:-

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In 1988:-

Solid Waste repeated final year adjustments to reduce depreciation expenses on its

property, plants and equipment cumulatively from the beginning of the year.

Solid Waste adopted a non-GAAP method of capitalizing interest on landfill

development costs.

Its failure to accrue tax and self-insurance expenses.

Improper use of purchase accounting to increase its environmental remediation reserve.

Improper charges of operating expenses to the environmental remediation reserve (ERR).

Refusal to write-off permitting and/or project costs on impaired or abandoned landfills.

In 1996:-

Solid Waste use netting and lack of disclosure, even though Android disagree with it.

Offsets current period expenses and prior period misstatements against a portion of the

gain realized from the sale of two discontinued operation, amounting up to USD $85.1

million.

Inflated income by making change to salvage value.

Improperly accounting for insurance recoveries.

Incorrectly applying purchase acquisition accounting principles to its environmental

remediation reserve (ERR).

2.3 Additional Issues

There are two other issues that possibly affect Android either direct or indirectly. Those

are Androids' document shredding policy and also the possible relationships between Casey and

David Lawrence.

The first issue is about the Android's policy of documents shredding. In that policy, the

auditors are required to retain only the latest five years of softcopy and hardcopies of their

client's documentations. Beyond that, they were required to shred and delete all the information.

This can be seen when Android's lawyer Nancy, constantly reminds the employees to follow

those policies.

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The second issues that can be identified are the relationships between Casey and David

Lawrence. David Lawrence's involvement in Enronaa as an auditor is not a coincidence. Casey,

the current chief accounting officer of Enronaa, previously worked in Androids. So both David

Lawrence and Casey were friends. This issue is further complicated with the fact that both

Androids and Enronaa's employees vacationed together annually, such as annual golf outings.

2.4 Summary of the Issues

As in the case study was mentioned, in part of Solid Waste, both Solid Waste and

Androids paid fines of total of USD 229 million to settle class-action suit for misleading and

false accounting practices. This amount is thus far the most expensive suits ever recorded in

history of accounting. However, Android managed to escape without any official recognition. In

effect of this, Androids were put under injunction that forbade Androids from future

wrongdoings with the SEC. So, severe actions will be taken if Androids got caught again in

another scandal.

3.0 Problem Statement

3.1 Audit Issues

There are three main audit issues that have been identified. Those are independence,

integrity, and self-interest threat.

3.1.1 Independence

In independence issues, there are two topics involved. It is mainly about Enronna as well

as Casey. An auditor's independence refers to a party who has a financial interest in the business

or client that there are auditing. This concept actually requires the auditors to do their works

freely without any restriction or pressures. It also means that the auditor is independence from

the parties that have an interest in the results published in financial statements of the clients.

From this, we can see that Androids are afraid that they will lose awarding future audit

engagements if Androids couldn't do what the managements of Enronaa asked them to do. This

is because; Enronna is Androids' single biggest client, reaching audit fees of up to $100 million

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per annum. A disengagement with Enronaa would mean a tremendous lose of profits for

Androids.

Another issue that affects the independence of the audit team of Androids are the

relationships between Enronaa's CAO Casey, with their auditors David Lawrence. There are a

clear conflict of interest which would hinder an auditor's independence and their ability to

perform audit independently

3.1.2 Integrity

One of the responsibilities of auditors is to be integrity in performing an audit for their

clients. Integrity is known to be straightforward and honest in all professional and business

relationships. There should be no bias in doing their work.

In this case, we can see that Android's integrity is being challenged when Androids

assisted their client, Enronaa and Solid Waste to issue a false audit report for their financial

statements. Androids also didn't apply the auditors' integrity responsibility when they shredding

their client’s documents as in destroying the previous year's evidences of the work they did on

their clients.

3.1.3 Self-Interest Threat

The third audit issue that arises in this case is about self-interest threats. It is about a

threat that a financial or other interest will inappropriately influence the professional accountant

judgment or behaviors. For self-interest threats to arise, some of the circumstances founded in

this case are a financial interest in their clients and also undue dependence on fee from client to

auditors' company.

This threat arises as Enronaa’s is the one of the biggest clients for Androids. Android

doesn’t want to lose Enronaa as a client as they are a large source of income generating client. If

David Lawrence exposes their previous wrongdoings in Enronaa, and Enronaa happens to

collapse; then Androids will lose most of their incomes and will be in deep trouble.

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3.2 Accounting Issues

3.2.1 Creative Accounting

Other than auditing issues, there are also accounting issues which arise from the conduct

of the organization involved in the cases. In this cases, one of the issues arise is creative

accounting. Creative accounting define as the accounting process consisting of dealing with

many matters of judgment and of resolving conflicts between competing approaches to the

presentation of the results of financial events and transactions. One of the issues related to

creative accounting is when Androids used accounting practiced that allowed Enronaa to hide its

debts, which allowed Enronaa have a good financial statements.

Other than that, in the case of solid waste, Androids audit engagement team recognized

that Solid Waste employed“Aggressive” accounting practices to enhance its earnings and some

were practically violating GAAP. Some creative accounting method used by solid waste was

repeated final year adjustments to reduce depreciation expenses on its property plant and

equipment cumulatively from the beginning of the year.

Solid Waste also adoption of a non-GAAP method of capitalizing interest of landfill

development cost, improper use of purchase accounting to increase its environmental

remediation, improper charges of operating expenses to the environmental remediation reserves,

and its refusal to write-off permitting and project cost on impaired or abandoned landfills. Those

accounting practices are to increase reported operating income by understating operation

expenses. And in the same time, it shows both clients of Androids are get involved in using

improper creative accounting practices to enhance their reported income.

4.0 Solution of the Case Study

There is two situation that arise in this case, which is David agree the advice from Nancy

to shred the document of Enronaa or the other situation were David decide not to shred the

document of Enronaa. Other than that, David should also issued an adverse opinion report to

Enronaa, and admit the previous misstatements and false issuance of reports to SEC since the

financial reports consist of a lot of fraud and mistake for the past 16 years.

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First situation, while David choose to shred the document mean he doesn’t admit the guilt

as an auditor for Enronaa, therefore SEC will immediately start investigations towards Androids.

Thus, it is impossible for Androids to destroy all the evidence of wrongdoing, since document is

not the only evidence, when comes into inspection to the auditors, the truth will be review and

finally SEC will discovered all the fraud that had been done by Androids and Enronaa. At the

end, the penalty and loss will be horrible than to admit the guilty. Because the company might

not have the chance to retain their reputation and other customer, at last, Androids might go into

bankruptcy.

The other situation will be David choose not to shred the documents, in the same time,

mean David admit the guilty between them and Enronaa. However, the consequences that arise

from it will be not only the penalty but also SEC will start to investigate towards other clients of

Androids, since people believe that while one clients have the problem, other clients as well

might have the same problems too. However, since they admit the fraud that had been done, they

will immediately take action to retain their reputation and improve their performance to maintain

their market. For example, they might find out and terminate the responsibility engagement team.

And they might also need to restructure their organization in all perspective as well. Also, by

admitting Androids' mistakes, they are actually splitting the trouble with clients as well. So even

though Androids have to pay the penalties; theirs clients also need to do the same. On the other

hand, if the SEC found out themselves, the penalties will be much more severe.

Based on the situation above, our group advice David not to shred the document and

admit the guilty. In the same time, the audit report for the year should be issues as adverse

opinion report.

5.0 Reason of solution

5.1 Kantian theory

We strongly recommend David not to shred the document. It is not only due to the

consequences stated in above but also support by Kantian theory. Kantian argues that a person

is good or bad depending on the motivation/ intention of their actions and not on the goodness of

the consequences of those actions. Other than that, it is sometimes described as “duty” /

“obligation” because philosopher believes that ethical rules “bind you to your duty”. Therefore,

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no matter what are the outcomes of Androids in the future; all we care is the intentions that were

used. Even if Androids will be sued or go into bankruptcy, at least David had done the right thing

by exposing the truth and paid his responsibility to the fraud been done.

5.2 Conflict of Interest

Another reason we advice David to admit the mistake is to show that he still maintain his

professional ethics. Conflict of Interest occurs when an individual or organization is involved in

multiple interests, one of which could possibly corrupt the motivation for an act in the other.

Conflict of Interest is a set of circumstances that creates a risk that professional judgment or

actions regarding primary interest will influenced by a secondary interest.

In conflict of interest, independence is one of the important tips to ensure an auditor able

to act with both independence of mind and appearance. Independence of mind and independence

of appearance is related with this issue. In independence of mind, Android afraid to lose Enronaa

because Enroona is one of the important clients in an Android firm and Android hides the

Enroona debt in maintains the relationship with their client. In independence of appearance, it is

shown the relationship of Casey and David, where they are friend and go vacation together. This

close relationship will affect their firm.

5.3 Integrity

In addition, the reason for this solution is also related with the integrity. The principle of

integrity imposes an obligation on all professional accountants to be straightforward and honest

in all professional and business relationships. Integrity also implies fair dealing and truthfulness.

In integrity, a professional accountant shall not knowingly be associated with reports, returns,

communications or other information where the professional accountant believes that the

information contains a materially false or misleading statement, contains statements or

information furnished recklessly or omits or obscures information required to be included where

such omission or obscurity would be misleading. Thus, when a professional accountant becomes

aware that the accountant has been associated with such information, the accountant shall take

steps to be disassociated from that information.

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5.4 Comply with Principles and Standards

Moreover, some of the evidence in this case shows they are not complies with the

Generally Accepted Accounting Principle (GAAP) and Generally Accepted Auditing Standards

(GAAS). It can be seen in the Solid Waste case. It shows when Androids issues an audit report

on Solid Waste’s financial statement from 1993 to 1996, in which it stated that the company’s

financial statements were presented fairly, in all material aspects, in conformity with GAAP and

GAAS. However, SEC found that Androids not presented fairly in all material aspects, in

conformity with GAAP and Androids also allowed the management of Solid Waste to use

improper accounting practices which violating GAAP.

In Enroona’s case, the Android’s partner, David Lawrence confessed that Android has

used accounting practices that allow Enroona to hide their debts, but it’s all are within the

context of the fair value accounting. In addition, Nancy advised David Lawrence about

Android’s policies regarding retention of documents from client engagement and the policy of

routine document shredding in order to dispose the evidence of Enroona before SEC start to

investigate Android and Enroona mistakes. Therefore, David should admit the misconduct that

has been done by them in the viewpoint of professional ethics..

6.0 Recommendation for prevention

We would like to recommend some methods to prevent the same situation happens in the

future. Firstly, we would recommend legislation to create an independent, self-regulatory

organization (SRO) to oversee accounting firms. In where, auditing firm would remain in the

private sector, but the government would be involved in the same time to restore the confidence

of the stakeholders. The SRO would have rule-making, supervisory and disciplinary powers. So

that, SRO can work together with SEC to watch over the conduct of all audit firm and their

clients.

Other than that, we also recommend all of the auditor and professional bodies to focus

more the independent issues. Since, an auditor not only has to be independence in appearance but

also remain independence in mind. Therefore, audit firm, professional bodies and auditor

themselves need to be clear of the true meaning of independence. Other than that, audit firm and

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professional body might work together to provide some courses and counselling session for

auditor to avoid over pressure. Other than that, audit firm should look more closely at the

relationship between auditors, managers and the company audit committee. In addition, Auditors

should be rotated every few years to prevent long-term, close ties between the management and

audit firm to ensure the independence of an auditor towards their audit opinion.

Lastly, we would like to recommend that all companies need to build a robust ethics

infrastructure and follow it in the daily business. For example, Androids might need to rebuild

their policy such as comply with by-law principles to ensure their auditor professionalism. And

they also need to ensure the policy is strong enough, it is to make sure all auditors will comply

with it. Other than that, audit firm must ensure that one auditor is only available for one

responsibility in a company, mean they are not allowed to work as a consultant, and an auditor

for a company in the same time, both positions must be taking by different people. Thus, the

professionalism will be good enough for the audit firm.

7.0 Conclusion

As a conclusion, the main issues in this case is to determine whether David and his

engagement team should shred or not shredding the document and also admit or not to their

guilty. However, our decision is to advice David to admit their guilty and not shredding the

documents. Documents are just one of the evidence that can be found by SEC, there are a lot of

other sources that enable SEC to get the evidence of guilty.

Therefore, as an auditor, David at least has to comply with his own professional ethics

and paid his responsibility toward the stakeholders. Finally, we also give some recommendation

such as create an independent, self-regulatory organization (SRO), focus on independent, and

companies build up a robust ethics infrastructure to ensure the same problem will not exist

anymore.

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