AUDITING understanding on the auditor’s independence and




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Submitted to

                       Ms. Susan Thorpe



Submitted by

                      Liji Elizabeth
Joy   30134136

                      Clint Andrews








The guidelines about an auditor’s independence are mentioned in a
report issued by the ISB known as ‘The Conceptual Framework for Auditor
Independence (CFAI)’ this provides a clear understanding on the auditor’s
independence and their prevailing standards. There are underlying audit risks
that could be a catalyst in affecting the independence of the auditors. The
independence in an audit of organization money related statements is a key part
of the administrative structure which bolsters capital markets. Concerns are
regularly communicated by controllers what’s more, different eyewitnesses with
reference to whether examiners are adequately free and skillful, especially in
the repercussions of corporate failures or material changes to beforehand
endorsed inspected accounts. The repetition of the Enron accounts and the
crumple 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 a
review firm


and Independence with relation to key audit risks and threats to auditor –

Risk –

Audit risk could appear
if there is a material misstatement or an inappropriate opinion is given by an
auditor. It is mainly a result of material misstatement and detection risk.
Audit risk is always present when an auditor undertakes the functions as it is
impossible to track each and every transaction of the client firm. There
various analytical procedures that can help auditors identify such faults in
the audit and minimize the audit risks.

to Auditor’s independence –

Auditors undergo
pressure situations from parties involved in a company that challenge the
independence of auditors and impair their objectivity. The major threats that
auditors face are as follows;

Self- interest threat- In such a
situation an auditor is deemed to behave against their self-interest motives
for example, personal, emotional or financial.

Self- review threat- In this scenario,
an auditor reviews their own work or of their peer members, auditors should not
be reviewing their own work.

Advocacy threat- At times auditors could
have a biased opinion towards an auditee or the firm that they are auditing
rather have a neutral viewpoint.

Intimidation threat- Such a threat is
openly or covertly related to the client or other related parties.

Familiarity threat – Such a threat could
arise if the auditor has some close relationship with the client.

Factors that undermine
the auditor’s independence are discussed in detail below:

The underlying threats
to independence to auditors as discussed above are posing a pressure on the
accounting profession and there are various steps that need to be taken to
safeguard the independence of the auditors.


One of the greater
factor that is considered to be a catalyst is the prevailing competition in the
auditing profession. A growing amount of competition is summing up to the
overall threats and tethering the quality and extent of the audit services. In
an effort to resist the competition the audit firms are undertaking ways to be
cost effective and another factor could be that the auditor might safeguard its
position in an effort to secure the client’s trust if they feel another
auditing firm could be successful in pleasing the client (Beams and Killough,
1970, p.17)

Advisory Services –

Another factor would be
rendering Management Advisory Services to safeguard the independence of the
auditors and marinating the relevant power over the client. The problem arises
when the CPAs that provide the consulting services or Management Advisory
Services become the advocates of the clients and pose a threat to the auditor’s
independence.  Otherwise, the audit frim
could develop a stake in the client firm to ensure a position of successful
adviser. In other case the CPAs could form a close relationship with the
client’s management during Management Advisory Services engagement. Also if the
Management Advisory Services fees to the auditing firm increases then their financial
dependence on the client frim will eventually increase (Hartley and Ross, 1972,



The failure
of Enron, Worldcom and Lehman Bros and what lessons have been learnt by the
accounting profession from these collapses.


All through the late
1990s, the Enron Corporation was positioned in a standout amongst the most
imaginative organizations of the world. In the year 1985, Inter North Inc.
furthermore, Houston Natural Gas Company rose and Enron Corporation came in the
presence on securities exchange. Kenneth Lay turned into the principal CEO of
the new firm. Enron Corporation used quickly all around the America. In the
year 1995, this organization known as the good example organization for the
business. It was the America’s most inventive organization from the year 1995
to following six successive years. In any case, Enron’s extortion was unveiled
in the year 2001 which turn into the fundamental driver of the chapter 11 of
the firm. It is on record that in the year 2000, share estimation of the firm
was on the pinnacle point with $90.75 per share, which dove to$0.26 per share
till the finish of the year 2001. All other focused organizations were in stun
that in what manner can a the most capable organization end up plainly bankrupt
overnight (Li, Y. 2010). The administrative of the market was likewise in
ponder that how shrewdly an organization can stow away or control with the
money related explanation to influence them to trick and can run this extortion
for such prolonged stretch of time.

Enron Corporation was
neglecting to satisfy above criteria on the grounds that a large portion of the
Enron’s sponsorships was promoted by the Enron itself. What’s more, the
administration arrangement of these organizations was additionally in the hands
of Enron. There were such huge numbers of evidences against Enron that SPEs
were not free. Enron workers were the proprietors of the SPEs. For instance,
ChewCo was controlled by Kopper and Andy Fastow another representative was the
controller of the LJM (Li, Y. 2010).


WorldCom, Inc. executed
the biggest bookkeeping extortion in U.S. history. WorldCom,presently called
MCI, rose up out of chapter 11 assurance on April 20, 2004 in the wake of being
fined $750 million. Altogether, WorldCom detailed bookkeeping inconsistencies
of $11 billion. While representatives and speculators search for person
culpability, quite a bit of WorldCom’s authoritative structure and culture
conceivably contributed not just to the extortion yet additionally to the period
of time over which it happened. From various perspectives, oblivious obedience
may help clarify a portion of the issues furthermore, deceitful exercises at
WorldCom too as the weights that were set on representatives broadening the
period over which the extortion happened. This was a clear incident of
fraudulent practices conducted by the accounting firm to manipulate the
financial position of the company and deliberate attempt to avoid disclosure of
true information to the users of the financial statements.

Bros –

As the credit emergency
ejected in August 2007 with the disappointment of two Bear Stearns mutual
funds, Lehman’s stock fell pointedly. Amid that month, the organization killed
2,500 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 the
final quarter of 2007, Lehman’s stock bounced back, as worldwide value markets
achieved new highs and costs for settled salary resources organized a
transitory bounce back. Be that as it may, the firm did not accept the open
door to trim its monstrous home loan portfolio, which all things considered,
would end up being its last shot.

Lehman’s crumple
irritated worldwide money related markets for quite a long time, given the span
of 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 a
chance to flop, when contrasted with its inferred bolster for Bear Stearns,
which was procured by JPMorgan Chase and Co. (JPM) in March 2008. Lehman’s
chapter 11 prompted more than $46 billion of it’s fairly estimated worth being
wiped out.

that the Accounting profession need to learn from the above collapses –

Making appropriate investment decisions
is very necessary which did not go really well in case of Enron. Their greatest
disadvantage was the way they prepared their financial statements that made the
whole business model complex to understand and lacked the transparency of
operations for the users of such information. Thus, the accounting firms should
understand from this case that the use of complex methods of accounting or
failure to disclose adequate information to the investors could result in such
a collapse as of Enron’s.


The fraudulent activities conducted by
Worldcom backfired proving that fraud or unethical ways always have a negative
impact. Such accounting frauds and scandals should be traced at an early stage
to avoid huge collapses like these for which the accounting professionals need
to be abiding the ethical conduct and need to have an attention to the minute
details. The accounting professionals are considered to be responsible for
portraying the real financial condition of a company to its various
stakeholders that will eventually make the investment decisions relying on the
information generated by the accountants and the auditors.


Maintain a low financial leverage as a
higher level of  the same is a high risk
strategy the best of example of this is the case of Lehman Bros whereby the
excessive leverage resulted in the 2001-2006 US housing bubble which eventually
burst in the 2007. Therefore, there is always a need to have a reasonable level
of equity backing the investment desires.



In conclusion we can
say that the audit risk and threat to independence of an auditor could collide
but there are safeguards that could be set well in advance to avoid any kind of
future failure. The importance of accounting professionals having an ethical
and unbiased conduct is very important for the overall harmony of its client,
their stakeholders and the accounting profession as a whole. Apart from that
the credit rating firms and various other regulatory bodies play an important
role in avoiding situations of such collapse or failures that disrupt the
functioning of the whole capital market and spreadsgreat distress. If all the
parties involved including the accounting professionals conduct their
responsibilities appropriate then there would not be another instance of Enron
or Worldcom or Lehman Bros which could eventually save the resources that were
exploited otherwise.


References –

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v  Rathi, N. (2015). Factors Affecting the Independence of Auditors. SSRN
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v  Roberts, D. (2018). Accounting for Lehman, or Enron Pt 2 | Dan
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v  Scharff, M. (2005). Understanding WorldCom’s Accounting Fraud: Did
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