Advantages Of Audit Firm Rotation

Arthur Andersen (AA) contributed to the Enron disaster when it has failed to the management by failing to have Enron establish and enforce its own internal control. There has been flaws to AA‘s internal control. There has been assumption that AA partners were too motivated by revenue recognition thus, overlooking several criteria when providing their services to Enron. Additionally, AA also recognised the retention of audit clients as vital and a loss of any clients would be disadvantaged to an auditor’s career. In AA internal control, the person who is able to make most of the decisions is the person who is most concerned about the revenue or losses of the client’s company.

Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion dollars. They were also accused of bribing foreign governments to win contacts and manipulating both the California and Texas power markets (Patsuris, 2002). Following these allegations, Arthur Andersen was investigated for, allegedly,

WUCHUN CHI, National Chengchi University HUICHI HUANG, Syracuse University YICHUN LIAO, National Taiwan University HONG XIE, University of Kentucky 1. Introduction Mandatory audit partner rotation has existed in the United States since the 1970s, when the American Institute of Certified Public Accountants (AICPA) required that audit partners in charge of Securities and Exchange Commission (SEC) audits be rotated at least once every seven years. The Sarbanes-Oxley Act of 2002 (SOX) further strengthens this requirement by mandating a five-year rotation for the lead and concurring partners. An implicit assumption in a policy of mandatory partner

Following these series of failures, SOX was enacted to restore investor’s confidence which was rattled and to prevent accounting frauds in the future with improved corporate governance and accountability which all public companies must comply. SOX was named after Senator Paul Sarbanes and Representative Michael G. Oxley, who were the main drafters of the Act. It was approved by the House of Representatives and signed into law by the President George W. Bush on July 30, 2003. Lack of ethics and integrity seem to be the key factors that caused accounting fraud. SOX revised the framework for the public accounting and auditing profession, provided guidance for better corporate governance and created regulations to define how public companies are to comply with the law. Although many have questioned whether SOX is actually effective to prevent frauds like Enron and WorldCom in future, it is considered to be the most extensive legislation related to publicly- traded companies and external independent auditors since the 1930s. President Bush called it “the most far reaching reforms of American Business Practices since the time of Franklin Roosevelt” (BUMILLER, 2002). The purpose of this paper is to determine whether or not Sarbanes Oxley’s regulations will be effective in preventing another financial statement fraud like Enron and WorldCom.

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

This event was unprecedented. The seventh largest company in the United States disintegrated from an annually profitable company in business for over sixteen years to a company claiming to be bankrupt over a period of a few months (O’Leary). Ultimately, fraudulent accounting and misstatements of revenues and debt obligations orchestrated by the CEO, CFO, and other senior managers were to blame. These revelations roiled stakeholder trust in public companies' financial reporting, accounting methodology, and overall transparency. In addition to Enron’s admissions, their accountant and auditor, Arthur Andersen LLP, was determined to have conspired to assist in the inflation of stated profits mainly by not disclosing Enron's money-losing partnerships in the financial statements (PBS). Arthur Andersen eventually surrendered the practices’ CPA licenses in the United States after being found guilty of criminal charges relating to the firm's handling of auditing for Enron

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

An auditor’s role in an audit is very important. An auditor must be able to collect enough evidence to supports their finding, and also be on the lookout for fraud. Company’s may or may not know the law, but it is the job to know the law, and be able to educate and report findings properly. Since the Sarbanes-Oxley Act, there have been provisions that have directly affected auditors. This paper will include the details of the Sarbanes-Oxley Act, how ethics and independence have affected auditors, as well implementation of new standards based on the Sarbanes-Oxley Act.

According to Pompper (2014), “incidents of high-profile deception over the past” four decades “have threatened the reputation of the … accounting function” (p. 131). For instance, an investigation was conducted into the financial audit and reporting process after the savings and loan banking crisis in the 1980s (Pompper, 2014). In addition, the criminal convictions of executives and bankruptcies of Fortune 500 companies such as Enron and WorldCom in the turn of the century motivated Congress to pass the Sarbanes-Oxley Act (SOX) in 2002 to strengthen regulations within the accounting profession (Whittington & Pany, 2014). As a result, the SOX introduced provisions that changed the accounting function, such as the establishment of the Public Company Accounting Oversight Board (PCAOB) and other major elements; however, the SOX regulations subsequently resulted in consequences to its compliance.

In the year 2002, the US reached a land mark decision when the Sarbanes Oxley act was finally affected into law which principally changed the way auditing and financial reporting was being conducted. This act was prompted by high level frauds that public companies engaged in with regard to financial reporting and auditing practices. The act therefore recommended the setting up of a Public accounting Oversight board which was mainly to conduct regulatory and supervisory roles in auditing public audit firms and individual auditors. This was done through establishment of proper quality control measures on the work of auditors to minimize the audit risks that firms could face while conducting their work. The Ligand Pharmaceuticals case

Lindberg and Beck (2002) claim that auditor independence is hailed as the “cornerstone” in the accounting profession as it is the core reason as to why the public trusts their professional opinion. However, since 2000, many accounting fraud scandals have negatively impacted public opinion on the legitimacy of the audit profession and, if in fact, its independence is uninfluenced by other parties. One of the scandals being the sudden collapse of Enron, given that a few months prior its bankruptcy its auditors Arthur Andersen, which was one of the five largest audit and accounting firms, claimed that Enron was financially healthy, but in fact they were paid off

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.

For these reasons, corporate financial accounts do not provide accurate or sufficient information to corporate managers, investors, or regulators. This leads us to recommend that the SEC allow each stock exchange to set the accounting standards for all firms listed on that exchange and to promote the development of industry-specific non-financial accounts to complement the financial accounts (After Enron 53). The most important lesson of the Enron collapse is that every link in the audit chain including: the audit committee and the board, the independent public auditor, the bankers and lawyers that aided and abetted the misrepresentation of Enron’s financial condition, the credit-rating agencies, and the Securities and Exchange Commission failed to deter, detect, and correct the conditions that led to that collapse. Although not a part of the formal audit chain, most of the market specialists in Enron stock and the business press were also late in recognizing Enron’s financial weakness (Corporate Aftershocks 12).

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.