Exhibit 3 Page 5: In virtually all of the [SPE] transactions Enron?s accounting treatment was determined with the extensive participation and structuring advice from Andersen, which reported to the Board. Page 17: Various disclosures [regarding Enron?s SPE transactions] were approved by one or more of Enron?s outside [Andersen] auditors and its inside and outside counsel. However, these disclosures were obtuse, did not communicate the essence of the transactions completely or clearly, and failed to convey the substance of what was going on between Enron and the partnerships. Page 24: The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron?s financial statements, or its obligation to bring to the attention of Enron?s Board (or the Audit and Compliance Committee) concerns about Enron?s internal controls over the related-party [SPE] transactions. Page 24: Andersen participated in the structuring and accounting treatment of the Raptor transactions, and charged over $1 million for its services, yet it apparently failed to provide the objective accounting judgment that should have prevented these transactions from going forward. Page 25: According to recent public disclosures, Andersen also failed to bring to the attention of Enron?s Audit and Compliance Committee serious reservations Andersen partners voiced internally about the related-party transactions. Page 25: The Board appears to have reasonably relied upon the professional judgment of Andersen concerning Enron?s financial statements and the adequacy of controls for the related-party transactions. Our review indicates that Andersen failed to meet its responsibilities in both respects. Page 100: Accountants from Andersen were closely involved in structuring the Raptors [SPE transactions]. . . . Enron?s records show that Andersen billed Enron approximately $335,000 in connection with its work on the creation of the Raptors in the first several months of 2000. Page 107: Causey [Enron?s chief accounting officer] informed the Finance Committee that Andersen ?had spent considerable time analyzing the Talon structure and the governance structure of LJM2 and was comfortable with the proposed [SPE] transaction.? Page 126: At the time [September 2001], Enron accounting personnel and Andersen concluded (using qualitative analysis) that the error [in a prior SPE transaction] was not material and a restatement was not necessary. Page 129: Proper financial accounting does not permit this result [questionable accounting treatment for certain of Enron?s SPE transactions]. To reach it, the accountants at Enron and Andersen?including the local engagement team and, apparently, Andersen?s national office experts in Chicago?had to surmount numerous obstacles presented by pertinent accounting rules. Page 132: It is particularly surprising that the accountants at Andersen, who should have brought a measure of objectivity and perspective to these transactions, did not do so. Based on the recollections of those involved in the transactions and a large collection of documentary evidence, there is no question that Andersen accountants were in a position to understand all the critical features of the Raptors and offer advice on the appropriate accounting treatment. Andersen?s total bill for Raptor-related work came to approximately $1.3 million. Indeed, there is abundant evidence that Andersen in fact offered Enron advice at every step, from inception through restructuring and ultimately to terminating the Raptors. Enron followed that advice. Page 202: While we have not had the benefit of Andersen?s position on a number of these issues, the evidence we have seen suggests Andersen accountants did not function as an effective check on the disclosure approach taken by the company. Andersen was copied on drafts of the financial statement footnotes and the proxy statements, and we were told that it routinely provided comments on the related-party transaction disclosures in response. We also understand that the Andersen auditors closest to Enron Global Finance were involved in drafting of at least some of the disclosures. An internal Andersen e-mail from February 2001 released in connection with recent Congressional hearings suggests that Andersen may have had concerns about the disclosures of the related-party transactions in the financial statement footnotes. Andersen did not express such concerns to the Board. On the contrary, Andersen?s engagement partner told the Audit and Compliance Committee just a week after the internal e-mail that, with respect to related-party transactions, ??[r] required disclosure [had been] reviewed for adequacy,? and that Andersen would issue an unqualified audit opinion on the financial statements.? Question - For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen?s involvement in Enron?s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen?s involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.
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