Auditing Failures and Corporate Scandals

This assignment analyzes the consequences of the Enron scandal on auditing public accounts. It explores how the scandal revealed vulnerabilities in auditing processes, leading to reforms like the creation of the PCAOB. The paper discusses the roles and responsibilities of auditors, the impact of deregulation on auditing standards, and real-world examples like Tesco's accounting failures.

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Introduction
The article explains in detail the issue of insincere audit by auditing firms which has
become an issue of great concern by investors. The paper discusses the various case
studies that have shaped fraud in auditing of financial statements by independent
auditors. Failure by the auditors to conduct a thorough audit on companies` has
resulted to huge losses by major companies globally. The paper expands that the lack
of proper legislation placing more legal responsibility on the auditor in case they give
unqualified opinion on the financial statements and they later turn to be fraud. Tesco
used dodgy accounting to exaggerate their financial results so that investors could be
lured into buying the companies` stock. The company was found to be have
overstated the rebate income and hence exaggerating the revenues of the company.
The other auditing firms also failed to detect fraud at Colonial bank which ended up
becoming insolvent. Enron and WorldCom scandal was the most popular of these
cases and it became the biggest accounting failure in history (Zimmermann &Werner,
2013). This instigated the formulation of new laws governing auditing. This paper
analyzes the roles and responsibility of auditors in any given organization. The paper
also discusses regulations and deregulations in accounting as well as the impact.
My view of the paper
The paper analyzes the major cases in auditing fraud and the results of dodgy auditing
activities. Auditing is a very sensitive process in an organization and therefore it is
important that auditors are very thorough in their work. The auditing of a firm’s
financial statements has to be done with the interest of the shareholders at the
forefront. The big four auditing companies globally have been faced a by a series of
cases where the companies have given a clean record on the financial records of an

organization whereas there is a lot of fraud, misstatement, and omissions in the
financial statements (Welytok, 2008).The auditing companies tend to create a warm
relationship with the companies. The companies give handsome fees to the auditing
companies and hence they end up compromising the standards of auditing and hence
leading to an increase in these cases. Some auditors are personally responsible for the
mess and they need to be legally responsible for the fraud and the misleading financial
statements audited by their parent companies`. The regulatory body which is the
Auditing and Assurance Standards Board should put more stringent measures to
ensure that the interest of the shareholders is protected. The legislation should place
individual legal responsibility on the auditors to who carried out the audit. This would
help in increasing competence and professionalism in auditing profession so as to
ensure that thorough audit is conducted on the companies and hence increasing the
confidence of users of the financial statements who currently have lost faith in the
external auditors( Great britain.2011). The auditors have to ensure that the companies`
do not approve financial statements that are full of fraud. The auditing big auditing
firms also need to take responsibility and raise the bar on auditing standards so as to
save the investors from the huge losses that they have incurred as a result of
misleading audited financial statements.
Critical evaluation of role and responsibility of the auditor
The auditors have a very large responsibility in protecting the interests of shareholders
and other important stakeholders of the client company. The external auditors play a
very critical role in scrutinizing and validating the financial statements of the client
company. The audited financial statements of a company are very important to the
lenders of finances and other creditors. If one of these stakeholders realizes that the
auditor failed to detect material misstatements in financial statements. This gives a

bad impression on the accounting firm and the company being audited. The bad
publicity may come as a result of this failure and it may end up being very costly to
the company itself and the auditing firm (Stachowicz-stanusch, Amann& mMangia,
2017) It is therefore very important that auditors attached to a particular auditing firm
have to be aware of the standards set by the regulatory bodies and the company itself.
The following are the major responsibilities and duties of auditors;
The auditors are responsible for providing an opinion on the financial statements
prepared by the company. The external managers are in charge of ensuring that the
financial statements prepared by the accounting department of a company are in line
with the accounting principles and standards stipulated in the International body of
accounting and the Australian Accounting Standards Board (Bryson&Daniels, 2015).
The external auditor is not responsible for preparing the statements. They scrutinize
and ensure that what is recorded in the financial statements is the ideal thing before
giving an opinion on the financial reports. For this role to be played perfectly, the
auditor needs to be very professional and independent.
The auditor have the role of evaluating and understanding the internal control system.
This helps the auditor to understand the major loopholes in the internal control
system. This will also help the auditor to identify the most risky areas and rank them
appropriately (Doyran, 2011). This will help to understand the
The auditor has a responsibility of understanding the entity and the environment
which the entity operates. The auditor needs to understand the nature of the industry
in which the company is operating in. The auditor also needs to understand the
challenges faced in the operating environment of the company and understand the
items that are at the core of the businesses operations (Pietra, Mcleay&Ronen, n.d.).

This will be important for the auditors to conduct risk assessment for the company
and compare it with the other companies in the industry before deciding on how to go
about their accounting work.
The auditor also needs to obtain sufficient material evidence when making an opinion
on the financial statements. The quality of evidence collected by the auditor is also
crucial in backing up the opinion expressed by the author.
The auditors have a responsibility of being independent throughout the auditing
assignment. They should ensure that their independence is not compromised at
whatever cost. The audit firms should not have a financial interest in the company
which is the client. This will ensure that all the records are investigated thoroughly
and a fair and true opinion is expressed by the auditor (Klikauer, 2012). This helps to
raise the credibility and assurance of the external audit.
The auditor has a responsibility of testing the documentation and supporting balances
of accounts. The trial balances of the company and other testing documentation have
to be investigated by the auditor. The auditor also has to observe and confirm the
physical inventory to ensure that what is listed in the financial statements is actually
what exists physically.
Independence of auditors
The issue of independence of either the external or the internal auditor is very critical.
This is because the auditors are required to investigate the financial statement by the
company and make an honest and true opinion on the financial statements. The
auditors need to be independent from parties whether companies or individuals who
have a financial interest in the company that is audited. The external auditor needs to

be independent from the companies or the entities that have an interest in the financial
statements of a particular entity (Hill &Rae, 2010). The independence of an auditor is
at the core of the code of ethics of the accounting profession and every auditing firms
code of ethics. This is because the role of auditors in a company is to investigate
financial statements independently without favoring any of the parties interested in
the financial results. The independence of the auditor means that the users of the
audited financial records will have increased confidence in the results. The scandals
experienced since the year 2000 such as the Enron scandal has cast doubt on the
independence of the auditors. This is because as discussed in the case studies, it is
seen that the largest auditing companies have committed accounting failures that have
been very costly to the companies and the investors (Beattie, Fearnley&Hines, 2011).
Some auditing firms have colluded with the companies they are auditing to persuade
them to compromise the auditing standards so as to accommodate material
misstatements and issue unqualified opinion on the financial reports. New regulations
need to be put in place to make the companies adhere to the principle of independence
and hence enhance the confidence that parties have on audited financial statements.
Regulations and deregulations
There are very many changes in regulations that have been made to laws in the
auditing sector to help reduce the failures that have been witnessed over the years.
The audit/accounting failures witnessed since the year 2001 has necessitated an
initiate to change the regulations of the industry and the profession to help increase
confidence among the users of audited financial statements. Some of these changes
have involved significant removal of some regulations which interfere with the ability
of the auditors to deliver a true and fair opinion on a company’s financial statements.
There has been a call for companies to change auditors regularly. There has been

proposals that an auditor should be given a contact of ten years after which their
performance can be renewed to evaluates whether they are the best option. In the US,
the Sarbanes -Oxley Act was implemented to deal with the issue of conflict of interest
on the part of the auditing company Auditing firms were no longer allowed to offer
consultancy services to their clients to present the conflict of interest. In 2005, the
Supreme Court in America ruled that the shareholders must prove a direct causal link
between the actions of the auditor and the decline in share price which has resulted to
losses (Niskanen, 2007). The Public Company Accounting oversight Board (PCAOB)
was formed to play a supervisory role over the auditing companies to ensure that the
companies` adhere to the code of conduct and to other regulations regarding the
auditing of public companies. The Financial Reporting council also plays the same
role.
Conclusion
The Enron scandal brought about a new chapter in auditing of public accounts by the
big auditing firms. The collapse of the company revealed many loopholes in the
auditing of public companies financial statements. Many companies such as Tesco
have found themselves in trouble with their investors due to failure by the auditors to
detect risky areas in the company which have had a huge effect on the companies`
books of account. Companies over the years have tried to cook financial records in
order to impress the shareholders and gain a favorable price on their shares hence
raising share capital. The auditing companies have failed to meet the auditing
standards and have been lax in performing their audit functions and hence leading to
many accounting failures. Changes have been made to help seal these loopholes by
trying to place more legal responsibility on the auditors. The report discusses the roles

and responsibilities of auditors and the regulations and deregulations that have been
made to the on auditing over the years.
References
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