Role of Auditors in Corporate Collapses: Enron and Lehman Bros.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

1AUDITING
Introduction
In the process of auditing, it is the responsibility of the auditors to conduct the
necessary analysis and evaluation of the financial statements of the audit clients in order to
make sure that they are free from material misstatements (Knechel & Salterio, 2016). It needs
to be mentioned that the financial operations of the companies are becoming more complex
and for this reason, it has become necessary for the auditors to deal with complex financial
reporting phenomena while performing the necessary audit procedures. At the same time, it is
needed for the auditors in the current time to take into consideration the lessons from the
large corporate collapses where the auditors were lacking some major audit requirements like
audit independence, professional skepticism and others (Louwers et al., 2015). At the time to
conduct the audit procedures, it is also needed for the auditors to consider the aspect of going
concern assumption related to the ability of the companies to continue as going concern
companies. The main aim of this essay is to take into consideration various aspects of audit
profession along with considering major corporate collapses.
Role of Auditors in the Collapse of Enron and Lehman Bros.
The aim of this part of the essay is to discuss about the collapse of Lehman Bros. and
Enron. It is evident from the liquidation of these two companies that the auditors issued
unqualified audit report by stating the fact that the financial statements are free from material
misstatements. However, the truth was that the financial accounts of these companies were
materially misstated and the auditors ignored them as they had significant interest in the audit
clients that led to the violation of professional skepticism and auditor independence.
At the time of the collapse of Lehman Bros., the auditor of the company was Ernst &
Young (E&Y). It can be seen from the collapse of Lehman Bros. that the company took the
help of Repo 105 in the illegal manner for making their statement of financial position better
and the auditors of the company had the full knowledge about this incident (Kandemir, 2013).
E&Y provided major assistance to the management of Lehman Bros. in showing the use of
Repo 105 as sales transactions. It was the decision of the audit team of E&Y not to disclose
this matter in their audit report after discussing this particular aspect with Lehman Brother’s
senior management team. After that, in the presence of major personal benefits, E&Y issued
the unqualified audit report in the favor of Lehman Bros (Presley & Jones, 2014).
Same type of incident can be seen in the case of the collapse of Enron. Arthur
Anderson was the audit partner of Enron at the time of their collapse. It can be seen from the

2AUDITING
collapse of Enron that Arthur Anderson received $25 million and $27 million from Enron for
providing auditing related services and non-audit services respectively. It shows that Arthur
Anderson received more fees for providing non-audit services to the company and it indicates
towards the financial dependency of Arthur Anderson on Enron (da Silveira, 2013). It also
needs to be mentioned that Arthur Anderson played the role of both the external auditors and
internal auditor for Enron. As an internal auditor, Arthur Anderson had the responsibility to
prepare the financial statements of Enron and the role of external auditor put the obligation
on them to audit the prepared financial statements. Professional skepticism of Arthur
Anderson along with auditor independence was affected with this aspect. For these reason, it
was not possible for Arthur Anderson to identify material misstatements in the financial
statements prepared by them. Due to these reason, Arthur Anderson provided Enron with the
unqualified audit opinion (Bhasin, 2016).
In the presence of all the above-discussed reasons, both the companies received
unqualified audit report from their auditors that did not reflect the presence of material
misstatements in their financial statements.
Guidance and Regulations on Auditing Complex Financial Instruments
The International Auditing and Assurance Standards Board (IAASB) is considered as
an independent body that is responsible for setting standards and serves the public interest by
setting high-quality international standards. At the same time, IAASB provides necessary
guidance to the auditors to deal with the complex financial instruments. In this context, it
needs to be mentioned that IAASB did approve ISA 540 Auditing Accounting Estimates,
Including Fair Value Accounting Estimates, and Related Disclosures and it can be considered
as a complex financial instrument in the process of auditing and financial reporting
(iaasb.org, 2019).
It can be seen that in the recent years IAASB has taken an initiative to bring some
important revision in ISA 540 and there are certain objectives of this project. The first
objective is the establishment of vigorous requirements along with appropriate detailed
guidance with the aim to increase the audit quality by making the auditors perform
appropriate audit procedures with the aim to tackle complex audit procedures. Another major
objective of this project was the determination of non-authoritative guidance and support tool
should be developed in the near future with the aim to address complex audit considerations
relevant to the financial institutions (iaasb.org, 2019).