Case 2.4 Enron: Quality Assurance Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Enron Case Relevant Technical Knowledge PCAOB QC #20 - Paragraph #3 “A firm has a responsibility to ensure that its personnel comply with the professional standards applicable to its accounting and auditing practice. A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm's standards of quality.”

Enron Case Relevant Technical Knowledge SARBOX Section 103 The PCAOB shall: 1) register public accounting firms; 2) establish, or adopt, by rule, auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers; 3) conduct inspections of accounting firms; 4) conduct investigations and disciplinary proceedings, and impose appropriate sanctions; 5) perform such other duties or functions as necessary or appropriate; 6) enforce compliance with the Act, the rules of the Board, professional standards, and the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto; 7) set the budget and manage the operations of the Board and the staff of the Board.

Enron Case Relevant Technical Knowledge SARBOX Section 203 the lead audit or coordinating partner and the reviewing partner must rotate off of the audit every 5 years SARBOX Section 206 requires a “one year cooling off period” before an audit firm employee accept a position as CEO, CFO, Controller, or Chief Accounting Officer of a former client

Psychology Literature - How to Best Acquire Knowledge Feature Repeated Case Experiences with Feedback; and Teach Technical Concepts within Real-Life Contexts Consider the following additional cases: The Fund of Funds: Independence Sunbeam: Due Care WorldCom: Professional Responsibility

Epilogue - Enron Cliff Baxter, Vice Chairman, committed suicide due to fraud Arthur Andersen indicted for obstruction of justice due to destroying evidence and barred from auditing public companies for five years Former CEO Jeffrey Skilling sentenced to 24 years in prison

Epilogue - Enron Founder Kenneth Lay dies from a heart attack before his sentencing Many top Enron executives were sentenced to multi-year prison terms. Eligible shareholders will receive $7.2 billion in settlements for their investment losses