Case Against Enron : The Authenticity Of Auditor Independence?

The auditors of Enron did fail in their task of providing a duty of care to all of the parties. The main reason for this is that they failed to correctly audit the assets and financial position of Enron resulting in all stakeholders having no clue about the forthcoming collapse of Enron. This resulted in the stakeholders facing a very critical condition or a phase where in they were not sure if they would be able to recover their investments and debts or not. The auditing process has revealed several issues and findings of problems within the accounting system and the same have been discussed as the primary areas of exposure, areas of possible mishandling of accounts

5. The audit client should be allowed to "follow" its engagement audit partner to another accounting firm because it obviously breach the independence of the auditor after forging a relationship with the clients. SOX specified the "cooling-off" period for the auditor from entering the client management, this serves the same purpose as well.

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.

However, the application of SOX has brought on regulations that public companies must put in place and follow to prohibit these unethical occurrences. One major advantage for associated with SOX is that more thorough audits are being conducted by auditing firms. Audits being conducted more thoroughly will provide accuracy and an increased reliability of financial data. This will affect taxes in a positive way and provide firms with an advantage. Causholli, Chambers, and Payne (2014) suggest that prior to the implementation of SOX in 2002, “an auditor’s opportunity to sell additional non-audit services in the subsequent year, coupled with the client’s willingness to buy services, intensified the economic bond between auditor and client, in turn reducing auditor independence and the quality of financial reporting” (p.681). The regulation of auditor provided non-audit tax services has increased the reliability of tax and financial reporting within companies. Seetharaman, Sun, and Wang (2011) explain that “in a post-Sarbanes-Oxley environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest themselves in higher quality tax-related financial statement management assertions” (p. 677).

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

B) According to SOX external auditors are prohibited from providing certain services to clients: book keeping or other things related to the accounting records or financial statements of the audit client, they are not allowed to design and implement financial information, appraisal or evaluation services, internal audit outsourcing services, investment banking services, legal services and expert services unrelated to the audit.

General Standard #2: The auditor must maintain independence in mental attitude in all matters relating to the audit (AICPA, 2012). Anderson did not practice independence from the company they were auditing. They were too involved in too many of Enron’s activities.

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.

The institutional investor, who has owned significant amount of investment concern with monitoring duties of management, as they gain benefit from it. They require high quality of information and have a power to carry out financial analysis. Their monitoring role become important since there is increase in agency conflict between managers and shareholders. The institutional investor tend to pressure manager in order to protect shareholder interest. Since the institutional investor need to control their investment and assess portfolio choice, they need reliable accounting information. The reliable accounting information came from annual report, as annual report provide assurance on firm health and performance. Therefore, annual report give impact to market reaction, so do the auditors brand name and their reputation. Big 4 audit firm who have good reputation, considered as good in delivering audit quality. Big 4 audit firm consists of Deloitte, PricewaterhouseCoopers, Earnst & Young (EY) and KPMG. Based on research, Big 4 audit firm may help their client to reduce agency conflict and lead to lower agency cost. Besides, Big 4 audit firm give the firm confidence to detect fraudulent financial statements and help to reduce information asymmetry (Azibi, Tounder, & Rajhi, 2010).

Needed for the Houston office of Andersen, an audit partner that understands the role of being a "public watchdog" with "ultimate allegiance to the creditors and shareholders" . Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including the failure to consolidate, failure of Enron to make $51million in proposed adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries . Another example is Lord Wakeham joined Enron as a non-executive director in 1994 and also sat on Enron's audit and compliance committee. In addition, Andersen also provides internal audit service to Enron, which in fact impact

Another threat to the independence of the auditors is a phenomenon which took place around 3 or 4 decades ago. During that time the number of firms which required audits stopped expanding, the codes that prohibited advertising accounting firms were abolished, which enabled all these firms to steal market from each other. Furthermore, a lot of audit bodies engaged into consulting, bookkeeping assistance, investigation and tax advices. This trend resulted in

SUMMARY: The scrutiny auditing has received post-Enron provides compelling evidence that auditing does matter, to answer the rhetorical question posed by the paper’s title. What is unclear, however, is whether auditing was sufficiently “broken” in the first place to warrant the radical reforms and changes effected by the Sarbanes-Oxley Act (SOX). Despite a relatively small number of high profile corporate failures and accounting scandals such as Enron and WorldCom, the number of demonstrated audit failures as evidenced by successful litigation or SEC

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.

Since BBA is a job oriented program, so internship is a mandatory part of this program. Realizing the fact, the department of Business Administration, Daffodil International University, has included a 90 days internship program in the course curriculum after the effective completion of the program. To comply with this requirement, I have joined in ACNABIN (CA Firm) as an internee where I had the opportunity to have the practical knowledge on overall auditing procedure. This opportunity has given me an opportunity to observe and perform real world knowledge about the audit procedure and auditor’s independence, which is followed by the chartered accountancy firms.