Auditing & Ethics

The AICPA published the generally accepted auditing standards (GAAS). GAAS are those guidelines which auditors must follow while conducting an audit of a company's financial statements. It must also be stated in the audit report that the audit was conducted following GAAS.

This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.

In October 2001, Enron Corporation which was one of the world major energy, commodities and service companies with claimed revenues of nearly 111 billion dollars during 2000 collapsed under the weight of massive fraud in that it has become largest bankruptcy recognition in the US economy. Enron’s earning report was extremely skewed that losses were not represented in their entirety, prompting more and more wishing to participate in what seemed like a profitable company. After collapse of Enron, Auditor independence has become a social issue that weather auditor has to be independent or not. In addition, while auditing must consider matters objectively with dispassion, there were still doubts whether it implemented well. Further, there has been much speculation about the need for the mandatory rotation of auditors or audit firm rotation to warn false accounting between audit firm and client. By examining Enron case, this essay will discuss about advantages and drawbacks of the mandatory rotation of

Despite the known ethical and legal obligations, all Big Five auditors (Arthur Andersen, Ernst & Young, PriceWaterhouseCoopers, KPMG, and Deloitte & Touche) were implicated in corporate accounting scandals in 2002: Enron, WorldCom, Global Crossing, Adelphia, Cendant, AOL Time Warner, IM Clone, and Bristol Myers were just a few of the publicly traded behemoths that were involved in some type of financial misstatement. To disband such a pervasive and troubled

Independence is considered to be one of the most discussed in accounting literature and is considered to be comprised of two parts (Humphrey, 2008). The first is organizational independence which refers to the auditors willingness to comply with professional standards (Guenin-Parcini, Malsh, Tremblay, 2015). The second aspect

Whether internal or external, auditing need to be truly independent. As global as the US housing market is, when auditors and business don’t play fair the world economy can crumble.

The complete destruction of companies including Arthur Andersen, HealthSouth, and Enron, revealed a significant weakness in the United States audit system. The significant weakness is the failure to deliver true independence between the auditors and their clients. In each of these companies there was deviation from professional rules of conduct resulting from the pressures of clients placed upon their auditors (Goldman, and Barlev 857-859). Over the years, client and auditor relationships were intertwined tightly putting aside the unbiased function of auditors. Auditor careers depended on the success of their client (Kaplan 363-383). Auditors found themselves in situations that put their profession in a questionable time driving them to

Congress should have adhered to SEC’s proposals for auditor independence and stricter rules on separating consulting with audit services. As in the Waste Management Inc’s scandal, we see that Arthur Andersen helped them to cook their books and inflate earnings, due to a discrete arrangement of which the SEC was unaware. This “cozy” relationship led Waste Management to inflate earnings for five years, while Anderson kept issuing clean opinions on misstated financial statements.

According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.

The question for mandatory audit rotation has been a concern to academics, investors, practitioners and the public at large. This paper is designed to determine the relationship between mandatory audit rotations and audit Independence.

Due to economic conditions that many entities face today, the importance of independence audit is stronger than it ever has been. It is the responsibility of the auditor to undertake a professional and thorough audit, while maintaining an unbiased client relationship. Professional scepticism is arguably one of the most important factors of which an auditor must exhibit during an audit.

In this case, it is clear that if I conducted what CEO requested, is would be hard to maintain objectivity, which is to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. When an individual of employment opportunities or other economic benefits auditors may be closely related to the person in charge of the audited entity, the threat would produce.

WorldCom acquired Arthur Andersen as the independent external auditing for the company. As WorldCom grew after the merger with MCI, Andersen began to invoice less than they should have. The charges were defended as an opportunity to prolong business with WorldCom. (Kaplan and Kiron, 2007). This is an immediate red flag for a company. Where were the ethical practices of the independent auditor? If the auditor has no ethics, how can one possibly be assured that the company is performing its intended function appropriately? The board of directors should have immediately been informed of Andersen’s practices and made a decision to confront Andersen’s practices and possibly obtain new independent auditors.

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.

This paper critically analyses the independence of the internal audit function through its relationship with management and the audit committee. Given the growing role of internal auditing in contemporary corporate governance and independence has gained renewed attention.