The factor of client relationship that creates a power imbalance in favor of the client is money. When partners in the audit firm are compensated according to their number of client, partners are more likely willing to do almost anything to keep their client happy. The independence of auditor is impairing in front of consulting fees, and interpretations of GAAP will be push to the limit to satisfy client’s need. Due to this power imbalanced in favor of client, lots of company went in to bankrupt, each in companies where financial statement misrepresentation had taken place, billions of investment and retirement dollars were lost, and the perception that auditors were not independent from their clients were formed. Finally in 2002, congress passed the Sarbanes/Oxley Act in response to massive accounting scandals. In particular to the problem of the unbalanced relationship in favor of the client, Sarbanes requires boards of directors be independent of organization and exercise oversight over management and the audit function. Further, the board of directors through its audit committee is the “client” of the public accounting firm. The audit committee must have at least one person who is a financial expert, other members must be knowledgeable in financial accounting and control, and must be comprised of “outside” directors, not members of management or have other relationships with the organization. Meanwhile, they have oversight responsibilities over the internal audit and financial reporting process, be apprised of all significant accounting decisions made by management and changes in accounting systems and system control. On the audit company side, audit engagement partners, as well as other partners and managers with significant roles in the audit, must be rotated off the engagement every five years.
According to the case, the evidence Hope collected that supported USSC’s claim that the cost involved tooling modifications are simply being told by USSC’s officers. “On May 3, 1982, the USSC officials inform Hope that in early 1981, they had instructed More, the Lacey general manager, to make certain tooling changes that would result in improved efficiency in the production of USSC products. The executives then provided an elaborated and confusing explanation as to why the tooling modifications were charged out on a per unit basis.” However, the audit evidence that supported the position that the costs were generic production expenses rater than non-current asset. According to the generally accepted auditing standards, the key evaluative criteria that auditors should consider when assessing audit evidence has 2 standards, general standard and fieldwork standard.
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
The SEC and the former Chairman Arthur Levitt Jr. were extremely concerned that the public accounting firms were violating the auditors independence rules addressed through the Securities Exchange Acts. Auditing firms now had dual citizenship in public companies: (1) they issued opinions on audited financial statements and (2) they participated in various consulting engagements for those same companies. Levitt's solution was to split auditing and consulting. The former Chairman was concerned that the public would lose confidence in the financial markets …… and the whole system would be jeopardized.
According to section 301 of the Sarbanes-Oxley act, all the members of the audit committee will be members of the board of directors of the public company and be required to be otherwise independent (AICPA, 2004). In addition to this, Keinath and Walo (2004) state that one member of this committee will need to be an expert in the field of financial management. These requirements are likely to introduce changes in the composition of the audit committees of some public companies. According to a survey conducted by Keinath and Walo, 10% of companies did not have at least one member with expertise in financial management in their audit committees meaning they would have to alter the composition in order to ensure compliance to the Act. In addition to this, some companies made exceptions when it came to ensuring that members of the audit committees were independent (Keinath a...
Proverbs 10:9 states: “People with integrity walk safely, but those who follow crooked paths will slip and fall” (New Living Translation).” This Scripture suggests that individuals who do not walk in integrity follow “crooked paths.” They walk in ways that are not morally sound, pure, and honest—but in ways that are corrupt. Clients want accountants with integrity. Thus, integrity is critical to the public trust. As a matter of fact, one of the general definitions of integrity provided by the AICPA Code is that it is a quality from which the public trust derives. Also, it is an element of character fundamental to professional recognition, and it requires members to be (among other things) honest and candid within the constraints of confidentiality (Duska, Duska & Ragatz, 2011). Integrity in the accounting profession involves adhering to the rules and principles of the profession. This includes remaining free of conflicts of interest and maintaining client relationships in which the accountant can remain objective in discharging his or her responsibilities. This requires independence in fact and in appearance as mandated under section 1.200.001.01, Independence Rule the AICPA Code. In other words, no one should be able to view the accountant as being biased with respect to a client’s financial reporting due to an improper client relationship. Lack of integrity in accounting practices has been, and continues to be, a key element in the downfall of many institutions which has hurt the public trust in the accounting
Throughout the years, the news covered stories of corporate scandals involving accounting unethical practices. These unethical corporate acts had a tremendous negative impact on these company’s stockholders, investors, employees and the whole U.S. economy. Most of these scandals would have been prevented, if the independent audits of these companies were conducted in an ethical manner. With this in mind, two corporate scandals will be the subjects of further review to understand that an auditor might encounter ethical dilemmas, if independence and objectivity are not part of the audit process.
The United States Congress enacted the Sarbanes-Oxley Act in 2002 after major scandals revealed loopholes in accounting policies. As Arthur Anderson LLP has double duties in Enron scandal, auditors are limited to types of auditing to maintain independence under SOX Sec.201. Sec. 10A of Securities Exchange Act of 1934 is amended by requiring audit partners to rotate after five years of service.
99, Congress took steps in response to big fraud scandals and passed the Sarbanes-Oxley Act (SOX) in 2002 to restore public confidence in accounting profession. The intention of the new legislation is to “improve the audit effectiveness and the credibility of financial reporting” (Ernst & Young 2012). Generally, the Act focus on strengthening corporate governance, enhancing auditor independence and management accountability for financial disclosures and accuracy. Under Sarbanes-Oxley Act, auditors are prohibited to provide non-audit services for audited firms. In addition, Section 404 of the Act requires auditors to evaluate and issue an opinion regarding the effectiveness of the internal control over financial reporting of the audited firm. The act also requires auditors the audit committee, consisted of independent members, to engage and oversee the external auditors. The implementation of these rules has led to great improvements in audit
Even though before this time period a company’s auditors were required to maintain an independent view since they were suppose to act as a protector to all end users it was not always the case. An environment was created with a Utilitarian approach that said company’s can offer package services that offer consulting services why at the same time audit the company’s financial statements. But when issue arose it became difficult to jeopardize the superior revenue that was obtained through consulting
An audit is used to check and assure that the processes and methods used in a clinical laboratory comply with the required standards and to persistently improve the service provided for the service users.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Conflict of interest is a big problem between Enron and its auditing firms. It is believes that Enron’s auditors was hide many information and external auditors never aware or hide the losses in Enron. From audit committees to transparency committees would increase the likelihood that a firm’s key business ricks are transparent to investors (Healy & Palepu 2003, p. 21). Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader.
...pendence, whether pro forma or substantially, the quality of professional assurance service of professional accountants will be doubted by public and that will probably lead to serious results. The factors affecting independence of external auditors are multiple. Market competition among external auditors and the imperfection of laws regulated the external auditing industry are tow of most important factors. In order to maintain and guarantee the independence of external auditors and try to avoid the scandals like Arthur Andersen, some research on how to improve and maintain the independence of external auditors are necessary. It is possible for researchers to put emphasis on how to control the market competition among auditing organizations and enhance the ability of accounting regulators to supervise and manage the professional accounting industry in the future.
No matter auditors work with technology or not, the most important thing in process of auditing is evidence. The basic framework for the auditor understands of evidence and its use to support the auditor's opinion on the financial statement. In reaching an opinion on the financial statements, the evidence gathered from the audit procedure is used to determine the fairness of the financial statements and the type of audit report to be issued. The characters of paper audit evidence are:
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.