SEC Concerned with Changes in the Public Accounting Profession
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.
Public Accounting Revenues vs. Consulting Revenues by 1999
By 1976, audit fees accounted for approximately 70% of total revenue earned by any accounting firm in general. According to the Public Accounting Report, an Atlanta newsletter, the auditing and assurance services revenues dropped to 30% and tax services business accounted for 19% of the total revenues earned in 1999. Mathematically speaking, this means management consulting services accounted for approximately 51% of the total revenue being earned in 1999 by public accounting firms.
Fact: According to The Business Journal's Book of Lists, PwC had $75 million in South Florida billings in 1998 to place third among accounting firms.
SEC Auditors’ Independence Rule
The independence rules require that auditors refrain from investing in companies that they audit, to ensure objective, truthful reporting and opinion. The rule applies to all auditors, their relatives, spouses, dependents, non-dependents, and, in some cases, associates must disclose all holdings.
On the September 25, 2002 issue of BusinessWeekOnline.com, the Accounting Wars Powerful auditor-consultants are the target of Arthur Levitt’s crusade articles defined “Independence to mean, CPAs cannot audit their own or their partners' work….…..clear and honest information is dependent on the CPAs independence……an auditor must not have any financial stake in the health, or even survival, of a client company.”
There are those in the profession that believe this rule is archaic and does not hold any value in today’s financial world. Barry Melancon, President and CEO of the American Institute of Certified Public Accountants stated, “The SEC has a right to expect the profession to adhere to the rules; however, the profession has a right to expect the regulatory environment to remain modern.”
Fact: In 1933, when Congress first required public financial reports, lawmakers debated whether audit fees would taint auditors' independence.
PriceWaterhouseCoopers LLP
PriceWaterhouseCoopers LLP is a public accounting firm formed through a merger between Coopers & Lybrand LLP and Price Waterhouse LLP, which was consummated on or about July 1, 1998.
The principles of the AICPA Code of Conduct should guide the work that Jose and Emily do as auditors. The principles that specifically apply to this situation are Responsibilities, The Public Interest, and Due Care. CPAs have the responsibility to “exercise sensitive professional and moral judgments in all activities.” (Mintz, p. 19)
Consult PCAOB Ethics and Independence Rule 3520. What is the auditor independence, and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact?
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).
Objectivity and independence is most related to the section 5062.2 of CA Accountancy Act because both focus on maintaining objectivity and be free of conflicts of interest in making professional decision. In addition, section 5062.2 shows that a CPA should not accept employment with the Corporation that they audited within last 12 months.
The AICPA Code of Professional Conduct defines independence as consisting of independence of mind and independence in appearance. According to the AICPA Code of Conduct, Section 55 Article IV, An accountant member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. Moreover, a member who practices their accounting work in a public firm should be independent in fact and appearance when providing auditing and other attestation services (aicpa.org). According to the case study What Lies Beneath, I think that Betty did not show her professional skepticism since she built trust on her client, which she could not have as an auditor. As an auditor,
PricewaterhouseCoopers is one of the big four accounting firms who’s services include, audit, assurance, consulting, tax services, and risk assurance services. PwC concentrates on 16 key industries and provides precise services that include human resources, deals, forensics, and consulting services. PwC is a firm that is consistently looking to gain an edge for their clients. With its headquarters based in London PwC boasts 776 locations with over 180,000 employees. The empire that is PwC consistently achieves success, recording nearly $31.5 billion in revenues for the fiscal year 2012.
The responsibility of Ernst & Young is to express an opinion on the financial statements given by Wal-Mart and Target holding both corporations responsible that the statement being audited is accurate and true. The audits have to be in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), which require that the audit must have sufficient evidence that the financial statements do not contain any false material.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
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
Financial and Managerial accounting are used for making sound financial decisions about an organization. They provide information of past quantitative financial activities and are useful in making future economic decisions. (Albrecht, Stice, Stice, & Skousen, 2002) The same financial data is used to derive reports for each accounting process yet they differ in some ways. Financial accounting primarily provides external reports for external users such as stock holders, creditors, regulating authority and others. (Garrison, Noreen, & Brewer, 2010) On the other hand Managerial accounting is concern with providing information that deals with the internal viability of the organization and is tailored to meet the needs of an individual organization. (Albrecht, Stice, Stice, & Skousen, 2002)
Corporate governance changed drastically after the case of Andersen Auditors, Enron’s auditing service showed that they contributed to the scandal. Andersen was originally founded in 1913, and by taking tough stands against clients, quickly gained a national reputation as a reliable keeper of the people’s trust (Beasley, 2003). Andersen provided auditing statements with a ‘clean’ approval stamp from 1997 to 2001, but was found guilty of obstructing justice by shredding evidence relating to the Enron scandal on the 15th June 2002. It agrees to cease auditing public companies by 31 August (BBC News, 2002).
This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such scandals.
PricewaterhouseCoopers (PwC)is the world’s largest accounting firm and ranks as one of the giants in the global professional services arena. PwC employs over 146,000 people with 766 offices in 150 countries. The Firm is led by Samuel A. DiPiazza, CEO, and is headquartered in New York City on Madison Avenue. Its clients include 84 percent of the Fortune Global 500 companies. Price Waterhouse and Coopers & Lybrand merged in 1998, which made the combined firm the top player in public accounting. In the 2007 fiscal year, PwC had gross revenue of over $25 billion. Structured as a limited liability partnership (LLP), the private company would rank in the low 300s on the Fortune 500 companies.
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.
"Accountants and Auditors." U.S. Bureau of Labor Statistics. U.S. Department Of Labor, 18 Dec. 2007. Web. 20 Nov. 2009. .