ACCT 622 Week 2 Discussion Board Forum 1 Reply/Critique Example

A Critique of a Classmate's Enron Case Study: Strong on the Auditors, Thin on the Board and Overstated on Fees

The Thesis and Its Strength

Daniel, your case study argues that Arthur Andersen's loss of independence caused Enron's collapse and that the Sarbanes-Oxley Act's restrictions on non-audit services would have prevented it. Your strongest contribution is the timeline in your second section, which shows clearly how the engagement team's decisions on the special purpose entities accumulated over four years, and your account of the self-review threat created by Andersen's outsourced internal audit work is accurate and well documented. Three of your claims, however, go further than the evidence allows, and the paper would be stronger if it qualified them.

Claim One: Andersen Alone Caused the Failure

Your paper treats Andersen as the decisive actor. The record suggests a wider failure of the people who were supposed to watch Enron's management. The special committee that Enron's board appointed found that the board had approved the arrangements allowing the chief financial officer to manage partnerships that did business with Enron, waiving the company's code of conduct to do so, and then failed to monitor the controls it had required (Powers et al., 2002). Healy and Palepu (2003) describe the collapse as a breakdown of a whole system of gatekeepers, including directors, analysts, credit agencies and lawyers, each with incentives that discouraged scrutiny. None of this excuses Andersen; an auditor cannot rely on a board that has stopped doing its job. But a case study that assigns all the blame to the auditor misses the course's larger lesson, that audit quality depends on the governance around it.

Claim Two: Consulting Fees Prove Independence Was Lost

Your third section states that Andersen's $27 million of non-audit fees "proves" that the firm had lost its independence. The research does not support that strong a claim. Frankel et al. (2002) do support part of your view: in their sample, clients that bought more non-audit services from their auditors tended to hit earnings benchmarks and showed bigger discretionary accruals. But DeFond et al. (2002) found that heavy non-audit fees did not make auditors shy away from going-concern opinions for clients in distress, which is the moment when independence matters most. A fee can create a temptation without proving that anyone yielded to it. I would revise the claim to say that the fees created a serious self-interest threat that, combined with other evidence of client pressure, made impaired judgment likely. That is a claim the evidence can carry.

Claim Three: Sarbanes-Oxley Would Have Prevented the Failure

Your conclusion argues that, had the Sarbanes-Oxley Act been in force, Enron would not have happened. The Act did remove several of the threats your paper identified: it bars audit firms from running a client's internal audit or selling it most kinds of consulting, requires partner rotation and created the PCAOB to inspect audit firms (Sarbanes-Oxley Act of 2002, 2002). But the accounting failure at the center of Enron, accepting the form of the special purpose entities over their substance, was a failure of skepticism, not of fee structure. No prohibited-services list would have made the engagement team ask who really bore the risk in those partnerships. The reforms raise the cost of losing independence; they do not supply the judgment to use it. Your conclusion would be more persuasive if it acknowledged that audit failures have continued since 2002, at firms subject to every Sarbanes-Oxley restriction, which suggests that the Act addressed the conditions that made Enron easier without removing the human failure at its center. That is not an argument against the reforms. It is an argument for describing them accurately, as one layer of protection among several.

The Worldview Section

Your section on the Christian worldview quotes First Timothy on the love of money and concludes that greed explains Andersen's conduct. Greed is part of the story, but the section would be stronger if it evaluated specific decisions rather than motives we cannot see. The course's second outcome asks students to assess the effect of the auditors' adherence to or divergence from a Christian worldview, based on their work. That points to the work itself: the choice to accept the partnerships' accounting when the outside equity was doubtful, the decision to remove an internal critic from the engagement after the client complained, and the destruction of documents once the SEC began asking questions. Each of those was a moment when faithfulness to the truth would have cost the firm something, and each is a better place to apply Scripture than a general verse about money. Framing the section that way would also connect it to your independence analysis, since the worldview question and the independence question turn out to be the same question asked in two vocabularies.

Recommended Revisions

First, add a short section on governance using the special committee's report, so readers see the board's role. Second, rewrite the fee claim as a threat supported by mixed evidence, citing both studies. Third, qualify the conclusion to say what the reforms changed and what they could not. Fourth, rework the worldview section around the three decisions named above. Finally, consider adding the market evidence that Andersen's other clients lost value when the firm admitted destroying documents, which supports your point that independence has a real economic value (Chaney & Philipich, 2002).

A Note on Charity in Criticism

Paul tells the Ephesians to speak the truth in love (English Standard Version Bible, 2001/2016, Ephesians 4:15). That is a good rule for critiquing a colleague's work as well as for auditing a client's. Your paper is careful and readable, and these comments are offered to make a good argument better.

References

Chaney, P. K., & Philipich, K. L. (2002). Shredded reputation: The cost of audit failure. Journal of Accounting Research, 40(4), 1221-1245. https://doi.org/10.1111/1475-679X.00087

DeFond, M. L., Raghunandan, K., & Subramanyam, K. R. (2002). Do non-audit service fees impair auditor independence? Evidence from going concern audit opinions. Journal of Accounting Research, 40(4), 1247-1274. https://doi.org/10.1111/1475-679X.00088

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Frankel, R. M., Johnson, M. F., & Nelson, K. K. (2002). The relation between auditors' fees for nonaudit services and earnings management. The Accounting Review, 77(s-1), 71-105. https://doi.org/10.2308/accr.2002.77.s-1.71

Healy, P. M., & Palepu, K. G. (2003). The fall of Enron. Journal of Economic Perspectives, 17(2), 3-26. https://doi.org/10.1257/089533003765888403

Powers, W. C., Jr., Troubh, R. S., & Winokur, H. S., Jr. (2002). Report of investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. Enron Corp.

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).