Enron Scandal And The Corporate Financial Frauds

1374 Words6 Pages
One of the biggest corporate financial frauds in history was Enron scandal, where the relationship between the company governance and their auditors - Arthur Andersen was one of the factors that helped the company hide its frauds, which eventually led Enron’s bankruptcy. The accounting firm was accused of not acting independently and misstating Enron 's accounts such as keeping huge debts off balance sheets. Some believe that the auditors had gone along with Enron’s questionable accounting practices in order to maintain their work. As a result, the shareholders lost $74 billion further (further depressing the stock market), thousands of employees and investors lost their retirement accounts, and many employees lost their jobs. In addition,…show more content…
These statements can serve as an adequate early warning material for the protection of investors and creditors. Therefore, improving auditors’ independence will increase the reliability of corporations’ published financial statements and give assurance of that reliability to users of those financial statements. Some of the ways to strengthen auditors independent is rotation of audit firms at regular intervals. Currently it is required that the rotation of the lead partner in an audit firm to be conducted every five years. However, this current law of rotating audit firms doesn’t address the real conflict in the auditor/audited relationship. Recent academic studies in both the U.S. and other countries suggest serious disadvantages to mandatory audit firm rotation. Key among them is the loss of the current auditor 's cumulative knowledge of the company 's business, processes, systems, people, and risks (Pwc.com). In the case of mandatory rotation of an audit firm rotation can be very expensive for both the audit firm and their client. Indeed, the expenses of this change could outweigh its benefits. So how can we further strengthen auditors’ independence? I would like to suggest a new policy that would prohibit companies from hiring managers and internal auditors from their external audit firms. Currently, SEC requires a one-year cooling off period before a company
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