In the last two decades, accounting scandals have become a truly global phenomenon. These scandals include the 2001 Enron scandal in the United States (Chaney and Philipich, 2002), the 2002 ComROAD scandal in Germany (Weber et al., 2008), the 2005 Kanebo issue in Japan (Skinner and Srinivasan, 2012), and the 2009 Satyam downfall in India (Bandyopadhyay et al., 2014). Moreover, these and other scandals involved the world’s most highly reputable audit firms, such as Arthur Anderson, PwC, and KPMG. Although auditors can be sued for negligence in the United States, such suits are rare or effectively absent in Japan, Germany, and India. With the biggest, most reputable audit firms failing in both high-litigation and low or no-litigation countries, it is appropriate to revisit the “reputation rationale” (DeAngelo, 1981) for audit quality and investigate to what extent reputation concern provides incentives for auditors (especially the large reputable ones), using a formal model of reputation formation.
High-quality auditing is a central component of corporate governance. Yet the factors that promote such auditing remain an open question. The two forms of incentives that induce quality in audits are litigation/insurance and reputation. Litigation incentives work in a straightforward way by making the auditor liable for the opinion issued. Reputation, on the other hand, is an indirect mechanism and begs the question of whether it is sufficiently powerful to motivate high-quality
During my courses, I frequently remind students that most corporate executives, accountants, and auditors are honest and ethical. This case provides a stark and powerful example of one such individual. When I discuss a case such as this in my courses, I try to provide other examples of positive role models among corporate executives. Granted, most of these examples do not involve accounting or auditing matters, but, nevertheless, they help to blunt the impression that students may receive from studying my cases that most corporate executives are “crooks.”
Niedermeyer, and Presha Niedermeyer. They performed surveys using internal auditors of public companies and external auditors from large and small firms. The survey questioned how auditors made ethical decisions, and they also wanted to see how internal auditors answered versus how external auditors answered. The result of the surveys showed that there was no difference in decision- making between internal and external auditors in the aspect of how major the effects unethical decisions on victims would be. The only difference between auditors in this study was how they make decisions on what is right and what is wrong. It appears that auditors that work for the Big Four have a stronger sense to determine what is right or wrong as opposed to the other auditors working in large and small firms. The study suggests that each firm adopts policies and special training to combat these
Are businesses in corporate America making it harder for the American public to trust them with all the recent scandals going on? Corruptions are everywhere and especially in businesses, but are these legal or are they ethical problems corporate America has? Bruce Frohnen, Leo Clarke, and Jeffrey L. Seglin believe it may just be a little bit of both. Frohnen and Clarke represent their belief that the scandals in corporate America are ethical problems. On the other hand, Jeffrey L. Seglin argues that the problems in American businesses are a combination of ethical and legal problems. The ideas of ethical problems in corporate America are illustrated differently in both Frohnen and Clarke’s essay and Seglin’s essay.
Before 2002, shocking scandals in the stock markets generated substantial losses to investors and, for a time, the United States economy was in near chaos. Enough evidence of impropriety, financial statements, market analysts, politicians and company executives, emerged to increase investor skepticism for a long time (Larson, Thompson and Walters, 2004). The primary focus of this problem was the concerns regarding the ethical behavior of business enterprises and the effectiveness of accounting and auditing norms (Larson et al. 2004). The Sarbanes-Oxley Act of 2002 was signed into law by President George W. Bush to enhance the public's confidence in the accounting profession (Larson et al., 2004). This Act, considered one of the most noteworthy
Barlaup, K., Hanne, I. D., & Stuart, I. (2009). Restoring trust in auditing: Ethical discernment and the Adelphia scandal. Managerial auditing journal, 24(2), 183-203. Retrieved from http://dx.doi.org/10.1108/02686900910924572
Still, regardless of the accounts’ expertise, year after year there are cases ranging from small frauds at small business to massive scandals that outrage the financial market and the business world as a whole. The potential costs of unethical behavior are extremely high and can compromise the company’s reputation and even end up in a
The analyst should present one of the popular American corporate accounting scandals. Furthermore, the presentation should point out the issues of the scandal. These problems should include the strategies of manipulating the financial statements, the involved penalties, the new laws, and regulations. Consequently, the financier should reveal the success of the actions; the government agencies responsible for monitoring these actions. Moreover, the manager should point out the powers and limitations of the financial statements, ratio analysis, and financial reporting. Consequently, the financial analyst should present effective tools that the investors should apply against corporate frauds. Corporate scandals should help the financier to resolve
In light of the accounting scandals that the American public companies experienced at the turn of the century, there was a need for an overhaul of audit standards to protect the shareholders and the general public from the fraudulent misstatement of financial statements. SAS No. 99, which supersedes SAS No. 82, became effective December 15, 2002 and is a basis for defining fraud and the auditor’s responsibility to investigate the potential for material misstatements contained within their financial statements and the possible failure of internal controls. Although, there has been some criticism to SAS No. 99 that some of the suggested processes are merely suggestions and not requirements. In my opinion, the overall statement does a solid job of allowing the auditors to gain reasonable assurance that their opinion is being based on a foundation of good substantive procedures.
Audited by Arthur Andersen, WorldCom went under investigation by the SEC for accounting fraud. Not only was cash flows overstated by booking $3.8 billion in operating expenses as capital expenses, $400 million was given to Bernard Ebbers, the CEO, in off-the-book loans. WorldCom stunned Wall Street with additional improperly booked funds total to $3.4 billion bringing a total restatement of $7.2 billion. WorldCom was prosecuted by DOJ, SEC, US Attorney's Office for the Southern District of New York and various congressional committees.
Enron was originally a pipeline company in Houston, Texas in 1985. Enron became a company that was able to profit by providing deliveries of gas to utility companies and businesses. As the deregulation of electric power rose, Enron diversified the business and entered into an energy broker, which traded electricity and other types of commodities.
HealthSouth Corporation is based in Birmingham, Alabama, it is the largest provider of rehabilitative health care services. It operates in 26 states in the United States of America and in Puerto Rico. HealthSouth provides rehabilitation hospitals, long term heightened care hospitals, outpatient rehabilitation satellite clinics and home health agencies.
Cable provider Adelphia was one of the major accounting scandals of the early 2000s that led to the creation of the Sarbanes-Oxley Act. A key provision of the Act was to create a stronger ethical climate in the auditing profession, a consequence of the apparent role that auditors played in some of the scandals. SOX mandated that auditors cannot audit the same companies for which they provide consulting services, as this link was perceived to result in audit teams being pressured to perform lax audits in order to secure more consulting business from the clients. There were other provisions in SOX that increased the regulatory burden on the auditing profession in response to lax auditing practices in scandals like Adelphia (McConnell & Banks, 2003). This paper will address the Adelphia scandal as it relates to the auditors, and the deontological ethics of the situation.
Corporate Finance AIG Accounting Scandal Explained December 8th, 2012 ________________________________________________________________________________ On February 9th, 2006, the SEC and the Justice Department settled with AIG for an amount in excess of $1.6B related to alleged improper accounting, bid rigging (defined by Investopedia as a scheme in which businesses collude so that a competing business can secure a contract for goods or services at a pre-determined price), and practices involving workers compensation funds. Both the CEO and CFO of AIG were replaced amidst the scandal. This closure ended a 5-year period, beginning in 2001, which tarnished the 80-year old institution’s reputation that had become the world’s largest
. The following three Lemmas characterize how reputation is revised following audit reports and observed expected cash flows. The results in turn explain how auditors ' incentives line up with market belief, reputation revision, and choice of effort.
The purpose of this paper is to highlight the role of external auditing in promoting good corporate governance. The role of auditors has been emphasized after the pass of the Sarbanes-Oxley Act as a response to the accounting scandal of Enron. Even though auditors are hired and paid by the company, their role is not to represent or act in favor of the company, but to watch and investigate the company’s financials to protect the public from any material misstatements that can affect their decisions. As part of this role, the auditors assess the level of the company’s adherence to its own code of ethics.