Auditing and Assurance Services

This article discusses the threats to auditors independence and failures of WorldCom. It explains the factors that affect the independence of an auditor and the categories of risks that auditors are exposed to during their audit work. The article also provides lessons learned from the case of WorldCom.

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Auditing and Assurance Services
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Auditing and Assurance Services
The auditors’ independence is either internal or external and is often affected by the third
parties who have a financial interest in a particular organization being audited. Integrity and
objectivity are one of the key elements which facilitate the independence of an auditor (Louwers
et al., 2015). It is of significance that the auditor is independent of a particular client of an
organization. Such independence allows for the provision of an audit opinion which is
manipulated because of the relationship that could exist between them. As an auditor, audit
opinion which will be given should free of errors and bias thus be based on a truthful,
professional opinion of the financial information provided for audit (Arens, Elder & Beasley,
2014). The independence of the auditors, however, can be affected by certain threats. Such
threats may lead to the provision of an audit opinion which may not truly reflect the fair view of
a particular company.
Threats to Auditors Independence
There are various threats which have been identified by the audit profession that affect
the independence of the auditor. Such threats may include the following;
Self-Review Threat
The self-review threat occurs when an auditor is expected to make a judgment based on
the previous work of the company. Such a work of the firm is to be challenged and re-assessed
by the auditor.
Self Interest Threat
The self-interest threat occurs under the following circumstances as mentioned below;
 When the auditor depends on a particular audit client financially
 When someone close to the auditor has a financial interest in the audit client
 When the auditor entirely depends on the company’s management for re-appointment as
an auditor.
Advocacy Threat
It occurs when a particular auditor promotes and defends the interests of the audit client
that is the auditor is advocating for the rights of the particular client.
Familiarity Threat
The familiarity threat arises when the auditor has become familiar with the client to the
extent that he or she gives advice to the client on various issues. At times, the auditor may be

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involved in the management functions of the company (Quick & Warming‐Rasmussen, 2015). It
is expected that the relationship between the auditor and the client must be a long-standing one.
Intimidation Threat
According to DeFond & Zhang, 2014), the above threat typically results from a variety of
pressures which may be imposed by the client or even another third party on the auditor. The
auditor at times may provide an ineffective opinion on the financial statements due to the huge
pressure which is mounted on him or her by the client.
Trust Threat
The trust threat occurs when the auditor puts too much trust on the management and
directors of a company (Turley, 2015). Such a trust bestowed upon the management and
directors often results in a situation where the management will not be tested properly based on
the representations and information provided to the auditor.
Partners Threat
The partner’s threat arises when one particular partner decides to open up his or her own
business and later carry out audit work for a former employer.
Apart from the audit threats, there are also a variety of audit risks which the auditors are often
exposed to during their audit work. Audit risk refers to the hazard which arises when values in
the financial statements are made to be incorrect factually, but the figures appear to correct when
verified by the financial officials. The following are the categories of risks which a particular is
likely to be faced with when conducting audit work with the aim of being independent.
Control Risks
The control risk aims at verifying the figures reported by the employees of a company to
find out if they are accurate and correct. The control risks can be identified through the
determination of certain key areas in an organization where there could be problems and other
challenges. A key example of control risk occurs when the internal control system is weak and
hence the financial materials may be incorrect (Alles, Brennan, Kogan & Vasarhelyi, 2018). The
control risk can be curbed by setting up of a proper internal control system, and this should be
over the financial reporting with the aim of ensuring that financial statements do not contain any
material misstatement. The above risk can be reduced using a variety of techniques which may
include, the establishment of proper risk assessment by the auditor at the early phases of
planning the audit work. The risk assessment should be aimed at understanding the internal

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control activities of a particular organization. Another approach would be to use the COSO
frameworks to help in evaluating the internal controls.
Inherent Risks
An inherent risk is typically difficult to identify by the financial officers and the internal
auditors, and hence it requires the assistance of an external auditor to recognize it. It usually
occurs when the transactions involved are complex, and thus a high degree of judgment is
required to ascertain the financial estimates (Tepalagul & Lin, 2015). The failure of the internal
control system can also result in the occurrence of inherent risk in an organization. The inherent
risk can be eliminated by the auditor by setting up a proper audit approach, audit strategy, and an
audit plan. Such techniques should be relevant to the inherent risks which are expected to impact
the financial statements.
Detection Risks
The detection risk occurs when an auditor is unable to identify a material misstatement in
the financial statements of an organization. The auditor typically ends up providing an incorrect
opinion of the audited financial statements. There are a variety of reasons which may lead to
detection risk, and such include, low competency, poor management, poor audit planning,
inadequate understanding of audit client and a wring audit methodology. The auditor is usually
to blame for this type of detection risk and not the client (Knechel & Salterio, 2016). The
detection risk can be minimized using a variety of techniques by the auditor. For example, the
right audit strategy should be set by the auditors during the planning of the audit work. The
auditors should have a clear comprehension of the nature of a particular organization by knowing
the complexity of various operations of the company including the financial statements. The
auditors should also have a wide understanding of the internal control system of the particular
organization, especially in the financial reporting.
Factors Which Undermine Auditors Independence
There are several factors which affect the independence of an auditor in the course
carrying out his or her duties. The factors include nature of conflicting issue, the financial
condition of an audit client, the size of the audit firm, the effects of gifts, the amount of audit fees
and the audit committee (DeZoort & Taylor, 2015). However, there are also other factors which
also influence the independence of an auditor such as the tenure of an audit company, level of

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competition in the audit service market, the practice of non-audit services by a section of auditors
and the purchase of arrangements based on discounts (Ali & Nesrine, 2015).
Review on Failures of WorldCom
The following were the failures of the WorldCom as indicated below in the paper
Corporate Governance Failures
Based on the review of the case, it was found out that the Lehman Brothers had a weak
corporate governance arrangement and this, therefore, did not protect the company from a big
risk taking which typically resulted in an economic crisis (Crosina & Pratt, 2018). The company,
however, did not have the mechanisms which could identify the failures, and it is believed that
such failures were hidden in a successful market. The downturn only recognized the failures. The
identified weakness areas were on nomination committees, remuneration scheme, corporate risk
management and the board of directors.
Board of Directors
According to the House of Representative Committee, the board of directors was
composed of nine retired members, four of them were aged above 75 years and that only two of
the board members had experience in the financial services industry (Chernov & Sornette, 2016).
The independent directors, on the other hand, did not have the incentive and hence had no
adequate time due to a variety of responsibilities to work on behalf of the corporation. It was also
noted that there some of the members who were involved in more than one committee.
Nomination
Based on the case, there was one member of the board of directors who had knowledge of
the current financial sector. Out of ten, four of the members were old and were aged above 75
years, and this was against the rules and regulations of the company.
Scheme of Remuneration
According to Nguyen (2016), the year 1993-2007, the CEO of the company had already
received an amount of money close to a half billion dollars. The staff members, on the other
hand, were given higher pay in the Lehman stock options. By the time the firm had gone public,
nearly all the workers had owned 4 percent of the organization, and later in 2006, each of them
owned 30 percent of the company. Just prior to the collapse of the company that is four days, the
CEO had been given a total pay of about $500 million. The chairman on his part argued that the

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company’s board of directors had provided a lot of support to him and the firm at large which
was not true.
Risk Management
The company was made up of six committees such as risk and finance committee. The
committee constituted the executive committee of the company, and they were supposed to meet
on a weekly basis. However, the committee only met twice that was in 2006 and 2007.
According to the report by Timothy Geithner, Lehman had put the company into a high-risk
business before it became bankrupt (Gottschalk, 2016). The report also showed that Lehman had
violated the risk concentration limits with the aim of pursuing huge earnings. The bank collapsed
due to the failings of the auditor and Lehman Brothers, and this resulted in a financial crisis
which had never been witnessed before. Lehman can also be said to have gone beyond the
internal risk controls and limits.
Technical Issues
The misbehavior of the top management executive who was typically inactive in the
auditing firm and as board members forms one of the key reasons which led to the failure of
Lehman Brothers. It was also noted there were certain similar events of the collapse of Lehman
Brothers and Enron and this resulted in the reduction of the assets and leverages. In Lehman
Brothers, for example, there were 105 double transactions (Grove, Clouse & Greiner, 2017). The
Lehman Brothers additionally, lost the clients and lenders confidence, and this was because of
the inadequate liquidity which would enable it to meet various obligations when they fall due.
Misleading Information
A report by Wall Street indicated that the former chief executive had provided certain
misleading accounts in their financial reports (Nguyen, 2016). The board of directors of the
company had contributed adversely to the net leverage ratio through public consumption. At one
point, the Treasury Secretary had issued a warning to the former chief executive officer, Mr.Fuld
that failure to stabilize the finances of the company, it would eventually collapse.
Lessons Learnt
Based on the case, there are a variety of lessons which can be learned. For example, it is
prudent for a company to practice good corporate governance and this is because of the wide
benefits which will be generated by a particular firm. Some of the benefits would entail efficient

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performance and generation of more profits (Pontell, Black & Geis, 2014). Another lesson which
can be drawn from the case is that there is the need for the hiring of the experienced and
qualified audit committee who will identify some of the weaknesses in the internal control
system of an organization.
The audit committee should typically comprise of individuals who are experienced, and
this was unlike in Lehman Brothers Company where there was only one member who had the
knowledge in the financial sector. Additionally, all companies must disclose information which
reflects the true fair view of the company to avoid misleading the public and other financial users
such as the lenders. Unlike in the Lehman Brothers who misled the lenders and customers and
this resulted in lack of confidence which was never to be regained again. Another lesson is that
the board of directors committee should comprise of individuals who are below the age of 75
years since they are energetic and will focus on the business of the company.

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References
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Perceptions of Financial Analysts. Journal of Finance and Accounting, 3(3), 42-49.
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