The Enron Scandal – Timeline

CEO Jeff Skilling Resigns

8-14-01

Whistleblower Sherron

Watkins meets with new CEO

Ken Lay

8-22-01

CEO Ken Lay encourages

employees to buy stock

9-26-01

Enron acknowledges

SEC investigation

10-22-01

Enron says it overstated earnings by $600 million since 1997

Enron files for Chapter 11 bankruptcy protection

11-8-01

12-2-01

Congressional hearings begin on the largest

corporate bankruptcy in U.S. history

12-12-01

The Enron Scandal - Implications Widespread public outcry

regarding role of auditing profession in detecting fraud

Public Oversight Board announces its dissolutionAICPA issues calls for a new “reporting model”

AICPA Board passes a resolution to support a ban on auditors of public companies from providing internal audit and financial systems design and implementation services

Questions: Is there need for a new

reporting model? If so, what would it look like?

Is the AICPA Board’s resolution necessary? Should such services be prohibited? Is such a prohibition designed to address independence in fact or appearance, or both?

Should auditors be allowed to perform consulting services for audit clients?

How can auditors improve fraud detection?

The Enron Scandal – Auditing Enron has underscored the

importance of some basic auditing issues: Assessing management

integrity and its influence on the control environment

Understanding the client’s core business strategy and risks

Scrutinizing related party transactions (RPTs)

Questions: How do auditors assess

integrity? Why do auditors need to

understand a client’s business strategies and objectives?

How can auditors be certain that they know of all RPTs?

The Enron Scandal – Auditing Other basic auditing issues:

Auditing estimates included in the financial statements

Corroborating management representations

Obtaining a management representation letter

Questions: Why is it so important to

carefully evaluate estimates included in the financials?

To what extent must auditors corroborate management’s representations?

What is the value of the management representation letter?

Dissolution of the POB Created as an autonomous

body to oversee and report on the self-regulatory programs of the SEC Practice Section

Voted to terminate its existence no later than March 31, 2002

The SEC has proposed an oversight body dominated by public members who are not affiliated with the profession

Questions: Who will fulfill the POB’s

function? What implications will the

Board’s dissolution likely have for the profession’s self-regulating status?

Who should have oversight authority over the profession?

The Global Credential Vote The CPA Vision project was

the impetus behind the credential

The credential had ardent supporters and pundits

40 percent of the AICPA membership voted 62.7 percent against 37.3 percent for

Questions: Why do you think that only

40 percent of the members voted?

What are the pros and cons of a global credential open to non-CPAs such as the one proposed by the AICPA?

New Statements on Auditing Standards The ASB has recently

issued two new standards: SAS No. 95, Generally

Accepted Auditing Standards

SAS No. 96, Audit Documentation

SAS No. 95 – establishes authoritative standing of various publications

SAS No. 96 – replaces the term “working papers” with “audit documentation” and provides further guidance on necessary audit documentation

“On the Horizon” Fraud Task Force

The ASB recently voted to issue the task force’s draft of a revision of SAS No. 82 as an exposure draft

The proposed SAS provides more guidance related to the detection of material misstatements due to fraud

The ED is slated for release in March, 2002

Risk Assessment Task Force The task force is continuing

to refine a draft of a revised audit risk model that increases the focus on understanding business risk

More emphasis will be placed on understanding the client and its business environment

A draft of the new standard is expected soon!