Enron Scandal and Lessons Learned

In general, reckless audit procedures states that there may be not assertion made as per the assurance of the significant stakeholders are susceptible to the risk considerations which are similar to the auditors. The present standings of the report will be able to include a relevant analysis of the stakeholders listed in ASX pertaining to which Orica Limited is taken into consideration. The company has been depicted to manufacture and selling of products such as commercial explosives and blasting systems explosives to the mining firms functioning in Australia. As the stakeholder analysis is completed, the effect of the material misstatements can be considered with identified group which would be analysed in case they are not disclosed in an appropriate manner. Secondly, it will aim at the main concepts which are associated to whistleblowing and auditor’s independence for the auditors and the link may be observed among the requirement of public interest as per APES 110. The main focus on the next section will highlight on the lessons associated to the auditors which relate to the scandal of Enron and specifically Arthur Andersen’s behaviour. Lastly, the report would also include the relevant discussions on the audit quality and steps taken by the auditor in adopting the statement put forward by Greg Medcraft (Chernov and Sornette 2016).

Orica Limited is seen to observe the opinion of the stakeholder groups in case there is any instance of material misstatement by the organizations. The total number of ways by which an organization may be affected are stated as follows:

Suppliers:

Orica has focused on ensuring that the long-term results of the company are depicted to be beneficial for effective negotiations which shall be able to ensure sustainability among both the parities. In any instance, the financial conditions are declined by the company then the organization may be on the verge of incurring loss for failure to settlement due obligations. Therefore, the overall effect on the material misstatement risk may be inferred with the categorisation of the non-current liabilities or assets. The valuation will raise serval questions on valuation of the assets and supplier concern (Haswell and Evans 2018).

Government:

It needs to be further discerned that Orica Limited coordinates with federal and state governments in 2018 for issues of business operations. The adequate resource contributing to the inquiries of the state and federal government are important in case an organization faces any problem in responding to such a problem. If the material misstatements are rightly observed then the tax computation in the financial information of Orica Limited may pose considerable error and threat (Bhasin 2016).

Material Misstatement Risks and Stakeholders Analysis for Orica Limited

Customers and staffs:

The customers of the company may be contacting the organization via websites, letters and phone calls. The customer service department considers feedback in a serious manner as and when they are received. In addition to this, Orica Limited has 11,500 staffs and all are allowed to engage in the undertaking decisions as per personal communications, whistle-blowers and surveys. In case material misstatement leads to overstatement, there may be certain items in the financial statement where the decision making may be largely impacted.  As stated in appendix 1, the stakeholder consideration is considered with competitive remuneration which is aligned with the long-term success of executives at Orica. Furthermore, appendix 2 and appendix 3 states about the importance of material sustainability which is aimed at addressing the key values such as workplace safety, respect for all values, climate change and incorporating ethical business practice along with good governance (Orica.com 2019).

Shareholders and investors:

For the purposed of effectively communicating with the shareholders, Orica Limited conducted the general meetings annually. In addition to this, the special team was also responsible for managing the share register. In addition to this, the investors briefings are held during each year for a discussion on a half yearly basis. The prime interests of the shareholders of Orica Limited includes gaining a certain knowledge based on the competition prevalent in the mining sector in Australia. The capital apportions in also evident with the merger and acquisitions. In case an auditor of Orica Limited is not able to disclose the financial information on material misstatement, the shareholders may be misguided and assert inaccurate decisions which may lead to decrease in the return of the investment.  The appendix 4, shows that the company reveals the earnings of executives in fair manner. This will draw more investors for the company in the future (Orica.com 2019).

It needs to be understood that Audit independence is that which lies in the hands of external auditors. This approach relates to the principle of integrity and objectivity characterised in the independence report. Additionally, the auditors are needed to perform the various obligations without considering any interreference pertaining to the principle of objectivity. The independence of both the auditors is seen to be depicted with the misstatement and violations pertaining to the misstatement in the financial statement. This is critical for stating the professional and ethical obligations denoted with promise of independence (Bhasin 2015).

Additionally, the independence commitment is having a favourable effect on the independence commitment as per the whistleblowing intentions related to the external auditors. The reason for this can be seen due to degree of the independence commitment which is possessed by the auditors and brought into effect by the auditors. It is important to note that whistleblowing process permits the staff for reporting incidences of unethical practices which they find to be similar in nature. In general, a whistle-blower may report any incidence which is illicit and wrong irrespective of the nature of the company. This aids in the process of creating a sense of commitment and loyalty for the company along with description for the job (Bounfour 2015).

Whistleblowing and Auditor Independence

The adoption of “APES 110 Code of Ethics for Professional Accountants” can be seen to be relevant in this nature which is issues by APESB. As per “Section 210.11.1 of APES 110”, it needs to be further determined that the nominated auditor may take the concern of the client pertaining to the various types of the reporting objectives which are associated to the previous auditor. In case the client is not willing to provide any reliable consent, the auditor may cancel the nomination immediately pertaining to the auditor. In contrary to this, in case the auditor had the chance of asking previous auditor related to the necessary information undertaken with the nomination decision. This will be able to help the auditors in providing protection to the whistle-blowers associated with the government and disclosing any misconduct associated to the agency. Additionally, the freedom of speech will ensure the staff and contractors about variety of situations (Hosseini and Mahesh 2016). Furthermore, the whistle-blowers are free to file complaints which may have been breached by collecting sufficient evidence based on “Section 100.1 of APES 110”, this includes the following considerations such as:

• Gross wastage pertaining to fund
• Rule of law regulation
• Authority Exploitation
• Gross misconduct
• Substantial or particular threat of public safety  

The significant nature of the corporate failures may be considered with the reductions as per global perspective in case of collapse of Enron. The auditor will be further able to gain a considerable experience pertaining to certain lessons which will allow the companies to avoid any incidents which may take place in the future.

Manipulation of the accounting books:

A relevant capital market will allow the capital market to demand to make changes in the correctly in the books of accounts and along with the relevant operations which takes place in the organization. The auditor of Enron Arthur Andersen declined Enron as a representative of the entire profession. Precisely, the auditor is thought with the primary reason for the failure of Enron. This has been further able to showcase improper documents required for the investigations. This form of audit failure is due to the reason of the business relationships which have aggravated further owing to the perverse incentives as per conflict of interest. As per the theoretical perspective the shareholders are seen to   recruit the auditors and it is the responsibility of the auditors to take the responsibility of reporting perspective to the shareholders. The leaders of the organization primarily choose the auditors and auditors needs to work as per their opinions. The firms frequently sell the consulting services to the audit clients in specific occasions. Moreover, the external auditors are offered with the specific job in the top managerial position and internal auditors.  Due to this, the organizations have faced several issues associated to the capitalising the distress of the audit partner. As the latter fears loss of profitable audit task. In case of such a situation, it is evident that there would be a compromise in audit quality (Hamilton and Micklethwait 2016).

Audit Quality and Steps to Ensure It

In order to address this concern, the auditor’s responsibility needs to be provided among the government agencies pertaining to private audit firms. Despite of this, the changes are also important to be implemented. If there is a likelihood of inherent risk then it may not be ensured that the government agencies would not be able to make any errors pertaining to the private audit entities. During the short-term, the auditors may not be appointed by the leaders in the business. It is the responsibility of the government agencies to make this decision as per the list of auditors provided by the organizations and they need to also ensure settlement of the audit fees.

The statutory regulations pertaining to the audit profession is needed to be particularly strong. This should be further considered with disciplinary powers. The auditors have been able to successfully manage the fiction of self-regulation with assistance of professional associations and also peer review incorporated by them. The private auditors need to be restricted of the consulting fees and other service pertaining to consultation. Another significant step taken by the suitors can be also seen on a rotational basis of four years, so that the auditors does not become committed towards their clients. Another review by the auditors needs to be seen with companies entering in the accounting books of the predecessor. Therefore, ASIC decisions have imposed restrictions on the recruiting managers and internal auditors pertaining to external auditors (Bhasin 2016).

Exploration of improved standards:

 The accounting role is inferred for having a negative impact in the scandal of Enron. The firm’s behaviour has assured that there are several numbers of areas pertaining to the dealing of off-balance sheet items. Moreover, the accounting standards in USA was seen to lack in terms of uniformity which were subjective based on the evaluations. The regulatory authority was seen to enforce a rigorous standard and at the time ensuring implementation of effective principle with subjective guideline (Adu-Gyamfi 2016).

The collapse of the company has been seen to be emphasizing on poor CG and big multinational firm. During the initial years, the balances needed to be formed as per leaders serving the functions of agents for the shareholders who are actually seen to carry put the same. Despite of this, power was seen in the hands of CEO, it helps the management in maintain highest possible options for shares.

The system is needed to be realigned for functioning with best interests of the shareholders. The entities require to look for competent non-executive directors and assuring relevant payment with devoting of essential attention to the job, audit committees and fair independent remuneration along with an effective division for chairman and chief executive. It is seen as duty of both firms and the auditors for ensuring a sound governance and audit procedure to assets in smooth flow of operations (Friedman and Gerstein 2016).

Behaviour of Arthur Andersen:

During the conduction of audit for Enron, Arthur Andersen ranked second as per seniority. The liability to ensure a correct financial statement for the organizations needs to be taken into consideration as per internal bookkeeping. The audit report of Arthur Andersen for Enron has considered the investment decisions as there were no report consisting of error in accounting and material misstatement. Arthur Andersen was identified as the business partner for Enron in that period which was evident as the executives were appointed for Enron. Based on this, Arthur Andersen did not take the decision of very fine the partnership agreement. The auditor was also found guilty of destructing certain documents of Enron in March 2002. This clearly shows the unprofessional and unethical behaviour from Arthur Andersen as it took a large sum of money from Enron in form of consultation fees and auditing fees (Goltz and Mayo 2017).

The need for recognition of audit quality as per international perspective is yet to be recognised. In order to make sure that external audit services are rigourous consisting of professional scepticism to be performed the compliance is based on prevailing standards. Despite of this, the specific elements can be noted in form of:

• Background knowledge of industry
• essential insights of the industry
• Observations of coordinating services from different international locations and audit procedure

Greg Medcraft in his statements declared that Enron might take place in Australia in the coming years, unless there is a strong improving initiative taken by the top four auditing firms in the country. Therefore, the corporate firms are required to adhere appropriate auditing standard so that any incident in the next financial crisis may be avoided (Roy 2017).

In case auditing work is not performed up to the mark, there may be an increased possibility of events like Enron. Make sure appropriate auditing work is conducted, the auditors need to discharge their jobs by gaining assurance of any absence of material misstatement in the financial information published by the clients. “Section 2 of APES 110” ensures assurance of auditors through disclosing financial information which consists of who and fair values for declaring materiality. As depicted by Greg Medcraft, failure of Enron eventually triggered financial crisis. Therefore, the auditors can be held accountable for providing the precise financial statement to the stakeholders and ensure they are performing their duties in a diligent manner (Kayes 2015).

As per the sessions from the news article it can be further seen that ASIC has obtained the number of audit samples in the last 18 months until December 2016. This was provided by the top audit forms namely Delloite, honest and young, PwC and KPMG. As per the samples collected evidence of material misstatement has been detected in more than 23% of the samples they are the auditors have failed to disclose any information of material impact on the financial reports of the organisation. Therefore, professional scepticism is depicted to be missing among the audit forms at the time they encountered difficult challenges. This is not identified as a favourable indication as the situation degraded in the future (Mangan, Kelemen and Moffat 2016).

It needs to be further observed that the primary reason for the accounting fraud pertaining to Enron in 2002 has also led to in the decline of Arthur Andersen as they aided Enron in committing the fraud in its financial statements. Seven W. media and Nine Entertainment Company based in Australia have also written down their asset values for which ASIC has later reported this concern in the valuation pertaining to the financial statements published in 2016.

As per the statement given by Medcraft, it can be inferred that ASIC has been involved in performing several inspections, imposing ban on firms, conducting surveillance and imprisoning more than 80 people as they fetched $ 1.3 billion to the investors in the last six years. Additionally, Medcraft had also provided a complete itinerary of unfinished business propositions to the federal government. It can be clearly seen that enforcing criminal charges instead of civil charges is essential to the company. Investigation of the financial control procedure and government have identified the appropriate recommendation. Addressing of Independence threat and audit quality needs to be maintained by devising an appropriate audit activity (Blanco 2018).

As stated in “Section 290.155 of APES 110”, in case an organisation has a handful employee, then it is required to carry out the responsibilities associated with audit partner and moreover, they are rotation cannot be considered. In case the exemption is often then the independent regulator many remain as a key audit partner for a time span of more than seven years. In this case independent external review acts as an alternate safeguard (Asic.gov.au 2019).

As understood in “Section 100.1 of APES 110”, is the responsibility of the auditor to perform in the best interest of the stakeholder in matters associated to disclosure of Finance evidence. Henceforth, the members need to be held accountable for meeting the needs of the client and employer and at the same time adhering to the guidelines which are in the best interest of the stakeholders. Furthermore, “Section 100.2(c) of APES 110”, have the order to exclude any threats and apply safeguard procedure in an immediate basis (Apesb.org 2019). More precisely, the members are accountable for adhering to the needs of the employer and clients thereby complying with the guideline for fulfilling necessary interest of the stakeholders. Based on “Section 100.2(c) of APES 110”, for the purpose of eliminating threat, it is essential to apply safeguarding procedure. This application is implemented when the threats exceed the need level at the same time ensuring there is no compromise pertaining to the audit principles (Nguyen 2016).

It has been for the declared by Gred Medcraft that the audit governing bodies in Australia need to be more competent and professional thereby avoiding any incidents such as Enron in Australia. In order to ensure this, they are having the adequate experience, skills and knowledge for providing a reasonable assurance of the financial information pertaining to the business entities. Lastly, the auditors are needed to maintain a confidential information for the clients by ensuring they do not reveal any such information to the third parties without prior approval of the clients. This is directly in relevance with “Section 100.5 (d) of APES 110” (Masys 2016).  

Conclusion:

The overall depiction made from the study shows that Orica Limited bears a separate group of stakeholders and any instance of material misstatement may have a negative effect in the decision-making process. Additionally, whistleblowing and independence of the auditor are inferred as the two main constraints of fair practice across global businesses. In addition to this, the breakdown of Enron shows auditors need to take a lesson for providing judicious assurance of the various types of applications. This is seen to be essential for implementation of safeguarding practices and check whether the important auditing principles and ethical norms are maintained as per APES 110.

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