Auditing Theory and Practice
Case 1
WorldCom: A Focus on Professional Responsibility
Prepared by: EL Ahmadi Med Reda
Worked With: Ibtihal Slassi
Fall 2013
1- Auditor independence refers to the disinterest from the internal and external parties that could influence the professional judgment of an auditor. In other words, auditor independence is the lack of any interest that may create a threat or a risk of material bias regarding the reliability of the financial statement. Furthermore, the main aim of auditor independence is to improve the consistency and the reliability of information that might be used in decisions making. Another role of the auditor independence is to enhance the cost-effectiveness of
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Andersen provided the WorldCom company with different services in addition to audit’s profession like consulting, litigation support, and tax services. The last element is that Andersen had a mutual interest: Andersen was well paid the WorldCom Company and was considered as “the 20most important engagement”. He was also “the largest client of its Mississippi office for 3 years”.
However, Andersen was showing his independence in fact more than his independence in appearance. He was not a partner of the WorldCom Company even he had experienced a long-term partnership.
3- Referring to paragraph 36 of PCAOB Auditing Standard N°.2,.auditors are required to be independent and to exercise professional skepticism.
Due to the limited access to the information, Andersen did not exercise the professional Skepticism, which is an essential element of the principles of the due professional care. WorldCom Company limited his access to information by allowing him to rely on the printed ledgers rather than the computerized General Ledger. His demand for asking and meeting some employees was not permitted. Indeed, he was not able to collect evidence for the different misstatements made by the company because of the scope limitation. Moreover,
PCAOB describes professional skepticism as a general duty of care that needs to be applied by the auditor throughout the duration of the audit engagement. Professional skepticism involves the auditor having a clear and questioning mind regarding the assertions that are presented by management or other client personnel. The auditor is instructed to not take the words or data presented by management as sufficient and appropriate audit evidence but rather the auditor needs to thoroughly audit the evidence with a questioning mind to achieve reasonable assurance about the persuasiveness of the evidence. Skepticism is composed of three elements; auditor attributes, mindset and actions. The PCAOB
1- Independence: - The internal auditor should have the independence in terms of organizational status and personal objectivity which permits the proper performance of his duties.
Independent audit in turn makes the financial statements more credible and reliable source of information
Legitimacy in accounting practices is ensured by the check and balance of having independent auditors from registered public accountant firms reviewing financial practices. The report features eleven sections and these sections pertain to accounting overview, independence of auditors to reduce interest conflicts, corporate responsibility, financial disclosures, tax returns, criminal fraud and various elements of white collar criminal activity (107th Congress
According to the Public Company Accounting Oversight Board (PCAOB), The primary objective and responsibilities of auditor is to express an opinion on the fairness with which all financial statement including all of its (material aspects, financial position, the result of the company operation and its overall level of cash flows) AU Suction 110. Thus, what this means is that auditor must be fully independent and must be fully able and willing to apply professional judgment as it relates to the audit engagement under consideration.
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.
If the auditors of today followed the same rules they did in Great Britain during the 19th century, then America would be in trouble. With such a competitive and strong capitalistic market, it would be hard to not be tempted to alter the financial statements of publically traded companies if there were no independence standards. Today’s business world obviously holds independence of auditors to be important or else Michael Goodbread would have never been investigated by the SEC.
The goal of the accounting and audit professions is to provide statements and information on behalf of a firm that are reliable and relevant to users. In order to accomplish this goal, the accounting and audit professions have continuously evolved in order to meet the needs of said users. In this new age of accounting, we feel the need for accountants and auditors to further modify their methodology and process. With the focus of accounting and auditing staying the same, we in the profession must be sure to strive to produce valuable information to the end users.
a. A third-party user cares whether the auditor is independent so that the user could evaluate the credibility of the financial statements and determine whether or not to rely on the financial statements to make investment or business decisions. In addition, through assessing the auditor’s independence, the stakeholders could also better evaluate the performance of the management and the value of the audit work.
Chapter 2 2.54 Independence a. Independence in fact relates to the auditors’ “state of mind” and reflects an unbiased and impartial perspective with respect to the financial statements and other information they audit. Independence in appearance relates to others’ (particularly financial statement users’) perceptions of the auditors’ independence. The two general types of relationships that compromise auditors’ independence are financial
Arthur Andersen was once the eighth largest accounting firms in the United States who conducted auditing tax and consulting services to large corporations. Likewise, Arthur Andersen was also responsible for both Enron and Worldcom auditing processes and transactions during the corporate scandals. Prior to the Enron and Worldcom’s scandals, Arthur Andersen was a firm known for its trust, ethics, and integrity (Squires, 2003). In Andersen’s early years, their reputation gave them a competitive advantage in the market which also help them to attract new clients which resulted in continuously high profits. According to Squires (2003), Andersen leaded the way for accounting professions; he believed in putting the interests of the general public
This section outlines specific relationships that impair auditor independence. There is a provision for other considerations that defines the reasonable person test for determining if there is a threat to independence.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).
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.