Zimbelman’s (1997) analysis of the effects of requiring auditors to assess explicitly fraud risk indicated by specific red flag cues in their audit plans, found that those who assess fraud risk separately spend more time reading fraud cues and more likely developed time budgets that responded to changes in fraud risk than auditors who made holistic risk assessments。 Apostolou et al。’s (2001) study of fraud cues found that forensic experts rated cues that could be classified as management characteristics 58% more important than operating and financial stability characteristics, which, in turn, was rated 14% more important than industry risk factors。

Many studies confirm SAS No。 82’s (1997) requirement that auditors consider financial and non-financial cues when testing for potential financial fraud。 For example, Apostolou et al。 (2001) found that two important management characteristics were (1) significant compensation tied to aggressive accounting practices, and (2) management’s displaying inappropriate attitudes about internal control。 These two cues were both clearly present at Enron。 Andersen officials admit that Enron management often “pressured” them to accept their “aggressive” accounting practices and to search for “lines of acceptability” (Beltran et al。, 2002; Raghavan, 2002)。

The Enron debacle emphasizes the importance of professional skepticism when evaluat- ing financial statements。 Auditors and analysts carefully performing analytical procedures

Selected stock price and earnings information for Enron corporation

NYSE stock price 2000 1999 1998 1997 1996

Panel A: stock price information (rounded to the nearest $)

High 91 45 29 23 24

Low 41 29 19 17 17

“High” percentage change (%) 100 55 26 (4) na

First quarter Second quarter Third quarter Fourth quarter Year-end

Panel B: quarterly earnings trends (in millions $) 1998

EBITa 471 345 405 361 1582

Net income 214 145 168 176 703

1999

EBITa 533 469 520 473 1995

Net income 214 145 168 176 893

2000

EBITa 624 609 666 583