: 2018SP-081-ACCT Case 4.1.pdf e ouse.com/pluginfile php/62069/mod-resource/cont

Question

: 2018SP-081-ACCT Case 4.1.pdf e ouse.com/pluginfile php/62069/mod-resource/content/1/Case%204.1.pdf ing purposes, such as hiding debt. "Bala G. Dharan and Willam R. Bufkins, "Red Rlags in Enron's Reporting of Revenues and Key Rnancial Mesures, March 2003, prepublication draft (ww.nuf.rice.edu/-bala/fles/dharan-bufkins enron_red_flags 041003.pd), pp. 7-11 Case Questions 1. Consult Paragraphs 65-69 of PCAOB Auditing Standard No. 12. Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (the fraud triangle)? Based on the infor- mation provided in the case, which of these three conditions appears to have been the most prevalent at Enron, and why?

Explanation / Answer

According to the Auditing Standard 12, Fraud triangle theory, a fraud is likely to occur when 3 conditions are present in an organisation, which are as follows:

1. Pressure: financial or emotional force pushing towards fraud.

2. Opportunity: ability to do fraud without bring caught.

3. Rationalization: personal attitude towards dishonest actions.

Enron had the 1st condition of financial pressure among employees as they were granted a lot of stock options so there was incentive to manipulate the financials so that the price of shares would go up.

It was a case of agency conflicts and non alignment of interests.

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