AUDITING ANDASSURANCE SERVICES BUACC 5935 Submitted to Ms. Susan Thorpe Submitted by Liji ElizabethJoy 30134136 Clint Andrews 30335383 INTRODUCTION:The guidelines about an auditor’s independence are mentioned in areport issued by the ISB known as ‘The Conceptual Framework for AuditorIndependence (CFAI)’ this provides a clear understanding on the auditor’sindependence and their prevailing standards. There are underlying audit risksthat could be a catalyst in affecting the independence of the auditors. Theindependence in an audit of organization money related statements is a key partof the administrative structure which bolsters capital markets. Concerns areregularly communicated by controllers what’s more, different eyewitnesses withreference to whether examiners are adequately free and skillful, especially inthe repercussions of corporate failures or material changes to beforehandendorsed inspected accounts.
The repetition of the Enron accounts and thecrumple of Andersen following the obstacle of justice finding against the firm(SEC 2002) appears the staggering impact of loss of trust in the honesty of areview firmPARTA:Riskand Independence with relation to key audit risks and threats to auditor – AuditRisk -Audit risk could appearif there is a material misstatement or an inappropriate opinion is given by anauditor. It is mainly a result of material misstatement and detection risk.Audit risk is always present when an auditor undertakes the functions as it isimpossible to track each and every transaction of the client firm.
Therevarious analytical procedures that can help auditors identify such faults inthe audit and minimize the audit risks.Threatsto Auditor’s independence -Auditors undergopressure situations from parties involved in a company that challenge theindependence of auditors and impair their objectivity. The major threats thatauditors face are as follows;- Self- interest threat- In such asituation an auditor is deemed to behave against their self-interest motivesfor example, personal, emotional or financial.- Self- review threat- In this scenario,an auditor reviews their own work or of their peer members, auditors should notbe reviewing their own work.
– Advocacy threat- At times auditors couldhave a biased opinion towards an auditee or the firm that they are auditingrather have a neutral viewpoint.- Intimidation threat- Such a threat isopenly or covertly related to the client or other related parties.- Familiarity threat – Such a threat couldarise if the auditor has some close relationship with the client.
Factors that underminethe auditor’s independence are discussed in detail below:The underlying threatsto independence to auditors as discussed above are posing a pressure on theaccounting profession and there are various steps that need to be taken tosafeguard the independence of the auditors. Competition-One of the greaterfactor that is considered to be a catalyst is the prevailing competition in theauditing profession. A growing amount of competition is summing up to theoverall threats and tethering the quality and extent of the audit services. Inan effort to resist the competition the audit firms are undertaking ways to becost effective and another factor could be that the auditor might safeguard itsposition in an effort to secure the client’s trust if they feel anotherauditing firm could be successful in pleasing the client (Beams and Killough,1970, p.17)ManagementAdvisory Services -Another factor would berendering Management Advisory Services to safeguard the independence of theauditors and marinating the relevant power over the client.
The problem ariseswhen the CPAs that provide the consulting services or Management AdvisoryServices become the advocates of the clients and pose a threat to the auditor’sindependence. Otherwise, the audit frimcould develop a stake in the client firm to ensure a position of successfuladviser. In other case the CPAs could form a close relationship with theclient’s management during Management Advisory Services engagement.
Also if theManagement Advisory Services fees to the auditing firm increases then their financialdependence on the client frim will eventually increase (Hartley and Ross, 1972,p.44). PARTB:The failureof Enron, Worldcom and Lehman Bros and what lessons have been learnt by theaccounting profession from these collapses.
Enron-All through the late1990s, the Enron Corporation was positioned in a standout amongst the mostimaginative organizations of the world. In the year 1985, Inter North Inc.furthermore, Houston Natural Gas Company rose and Enron Corporation came in thepresence on securities exchange. Kenneth Lay turned into the principal CEO ofthe new firm.
Enron Corporation used quickly all around the America. In theyear 1995, this organization known as the good example organization for thebusiness. It was the America’s most inventive organization from the year 1995to following six successive years. In any case, Enron’s extortion was unveiledin the year 2001 which turn into the fundamental driver of the chapter 11 ofthe firm. It is on record that in the year 2000, share estimation of the firmwas on the pinnacle point with $90.75 per share, which dove to$0.
26 per sharetill the finish of the year 2001. All other focused organizations were in stunthat in what manner can a the most capable organization end up plainly bankruptovernight (Li, Y. 2010).
The administrative of the market was likewise inponder that how shrewdly an organization can stow away or control with themoney related explanation to influence them to trick and can run this extortionfor such prolonged stretch of time.Enron Corporation wasneglecting to satisfy above criteria on the grounds that a large portion of theEnron’s sponsorships was promoted by the Enron itself. What’s more, theadministration arrangement of these organizations was additionally in the handsof Enron. There were such huge numbers of evidences against Enron that SPEswere not free. Enron workers were the proprietors of the SPEs. For instance,ChewCo was controlled by Kopper and Andy Fastow another representative was thecontroller of the LJM (Li, Y.
2010).Worldcom-WorldCom, Inc. executedthe biggest bookkeeping extortion in U.
S. history. WorldCom,presently calledMCI, rose up out of chapter 11 assurance on April 20, 2004 in the wake of beingfined $750 million. Altogether, WorldCom detailed bookkeeping inconsistenciesof $11 billion. While representatives and speculators search for personculpability, quite a bit of WorldCom’s authoritative structure and cultureconceivably contributed not just to the extortion yet additionally to the periodof time over which it happened.
From various perspectives, oblivious obediencemay help clarify a portion of the issues furthermore, deceitful exercises atWorldCom too as the weights that were set on representatives broadening theperiod over which the extortion happened. This was a clear incident offraudulent practices conducted by the accounting firm to manipulate thefinancial position of the company and deliberate attempt to avoid disclosure oftrue information to the users of the financial statements.LehmanBros -As the credit emergencyejected in August 2007 with the disappointment of two Bear Stearns mutualfunds, Lehman’s stock fell pointedly. Amid that month, the organization killed2,500 home loan related employments and close down its BNC unit. Furthermore,it likewise shut workplaces of Alt-A loan specialist Aurora in three states.Indeed, even as the revision in the U.
S. lodging market picked up energy,Lehman kept on being a noteworthy player in the home loan advertise. In 2007,Lehman guaranteed more home loan upheld securities than some other firm,gathering an $85 billion portfolio, or four times its investors’ value. In thefinal quarter of 2007, Lehman’s stock bounced back, as worldwide value marketsachieved new highs and costs for settled salary resources organized atransitory bounce back. Be that as it may, the firm did not accept the opendoor to trim its monstrous home loan portfolio, which all things considered,would end up being its last shot. Lehman’s crumpleirritated worldwide money related markets for quite a long time, given the spanof the organization and its status as a noteworthy player in the U.
S. also,globally. Numerous scrutinized the U.S.
government’s choice to give Lehman achance to flop, when contrasted with its inferred bolster for Bear Stearns,which was procured by JPMorgan Chase and Co. (JPM) in March 2008. Lehman’schapter 11 prompted more than $46 billion of it’s fairly estimated worth beingwiped out.
Lessonsthat the Accounting profession need to learn from the above collapses –- Making appropriate investment decisionsis very necessary which did not go really well in case of Enron. Their greatestdisadvantage was the way they prepared their financial statements that made thewhole business model complex to understand and lacked the transparency ofoperations for the users of such information. Thus, the accounting firms shouldunderstand from this case that the use of complex methods of accounting orfailure to disclose adequate information to the investors could result in sucha collapse as of Enron’s. – The fraudulent activities conducted byWorldcom backfired proving that fraud or unethical ways always have a negativeimpact. Such accounting frauds and scandals should be traced at an early stageto avoid huge collapses like these for which the accounting professionals needto be abiding the ethical conduct and need to have an attention to the minutedetails. The accounting professionals are considered to be responsible forportraying the real financial condition of a company to its variousstakeholders that will eventually make the investment decisions relying on theinformation generated by the accountants and the auditors. – Maintain a low financial leverage as ahigher level of the same is a high riskstrategy the best of example of this is the case of Lehman Bros whereby theexcessive leverage resulted in the 2001-2006 US housing bubble which eventuallyburst in the 2007.
Therefore, there is always a need to have a reasonable levelof equity backing the investment desires. Conclusion-In conclusion we cansay that the audit risk and threat to independence of an auditor could collidebut there are safeguards that could be set well in advance to avoid any kind offuture failure. The importance of accounting professionals having an ethicaland unbiased conduct is very important for the overall harmony of its client,their stakeholders and the accounting profession as a whole. Apart from thatthe credit rating firms and various other regulatory bodies play an importantrole in avoiding situations of such collapse or failures that disrupt thefunctioning of the whole capital market and spreadsgreat distress. If all theparties involved including the accounting professionals conduct theirresponsibilities appropriate then there would not be another instance of Enronor Worldcom or Lehman Bros which could eventually save the resources that wereexploited otherwise. References –v Shockley, R. A. (1981).
Perceptions of auditors’ independence: Anempirical analysis. Accounting Review, 785-800.v Accaglobal.com. (2018). Cite a Website – Cite This for Me.
online Available at: http://www.accaglobal.com/content/dam/acca/global/pdf/sa_nov09_jones.pdfAccessed 18 Jan. 2018.v Fearnley, S., Beattie, V.
and Brandt, R. (2005). AuditorIndependence and Audit Risk: A Reconceptualization. Journal of InternationalAccounting Research, 4(1), pp.39-71.v Rathi, N. (2015). Factors Affecting the Independence of Auditors.
SSRNElectronic Journal.v Roberts, D. (2018). Accounting for Lehman, or Enron Pt 2 | DanRoberts. online the Guardian. Available at:https://www.theguardian.com/commentisfree/2010/mar/15/lehman-brothers-accounting-enronAccessed 21 Jan.
2018.v Scharff, M. (2005). Understanding WorldCom’s Accounting Fraud: DidGroupthink Play a Role?. Journal of Leadership & Organizational Studies,11(3), pp.109-118.
v Staff, I. (2018). 5 Lessons From The World’s Biggest Bankruptcies.
online Investopedia. Available at:https://www.investopedia.com/articles/economics/09/lessons-worlds-biggest-bankruptcies.aspAccessed 25 Jan. 2018.v Tepalagul, N. and Lin, L.
(2014). Auditor Independence and AuditQuality. Journal of Accounting, Auditing & Finance, 30(1),pp.101-121.v Petty,J.M.
et al., (2012). Financial Management: principles and applications, 6thedition, page 518-576, Sydney: Pearsonv Li,Y. (2010). The case analysis of the scandal of Enron, International Journal ofbusiness and management, 5.10 retrieved from http://www.ccsenet.org/journal/index.
php/ijbm/article/viewFile/7627/5855.&eiv Lucian,C. and Cristina, D.
(2008). Fraud case analysis: Enron Corporation, page 194-198, retrievedv Bamber, E. M., & Iyer, V. M.
(2002). Big 5 auditors’ professionaland organizational identification: Consistency or conflict?. Auditing: AJournal of Practice & Theory, 21(2), 21-38. –