Auditor’s Public Interest Responsibilities, Audit Quality & Enron Case

This report analyzes the public interest responsibilities of auditors and their impact on audit quality, focusing on Metcash Limited as an ASX-listed firm. It examines the stakeholders of Metcash and how material misstatements in financial information can affect their decision-making. The report also discusses the concepts of independence and whistleblowing for auditors, relating them to APES 110, and draws lessons from the Enron scandal, particularly concerning the role of Arthur Andersen. Finally, it addresses audit quality and steps to address warnings from regulatory bodies, emphasizing the importance of ethical conduct, adherence to accounting standards, and the need for stricter regulations to maintain the integrity of the audit profession.

Running head: AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Auditor’s Public Interest Responsibilities and Audit Quality
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1AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Executive Summary:
The report has focused on the analysis of stakeholders of an ASX listed firm, due to which
Metcash Limited has been taken into account. It becomes prominent that Metcash Limited has
various stakeholders and they have different interests in the organisation. If the financial
information of the company is not free from material misstatements, there would not be any
favourable impact on their decision making procedure; instead, they would be misguided to
undertake wrong decisions. In addition to this, the concepts of whistleblowing and
independence are the two concepts acting as barriers to the illicit practices adopted by some
organisations for manipulating their books of accounts. The collapse of Enron is a similar
incident, as it has manipulated its books of accounts by collaborating with the auditor to show
inflated profit margins to the stakeholders. From this collapse, the auditors have to learn a
number of lessons owing to which they should ensure professional competence and due care at
the time of performing their audit obligations.

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Table of Contents
Introduction:....................................................................................................................................3
1. Stakeholder analysis of Metcash Limited and effect of material misstatements on their
decision making process:.................................................................................................................3
2. Independence and whistleblowing for auditors and their relation with APES 110:...................5
3. Lessons for the auditors from the scandal of Enron:..................................................................6
4. Audit quality and steps to address the warning statement of Greg Medcraft:........................10
Conclusion:....................................................................................................................................13
References:....................................................................................................................................15

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Introduction:
During the conduction of substandard audits and absence of adequate ascertainment of
assurance, the important stakeholders are prone to a number of risks and they are evident for
the auditors as well. The paper would focus on the analysis of stakeholders of an ASX listed
firm, due to which Metcash Limited has been taken into account. It is one of the leading
wholesale marketing and distributions organisations in Australia with revenue generation of
$14 billion in 2018 (Metcash.com 2019). The main reason that the stakeholder analysis is
conducted is to find out the effect of material misstatements on each category of stakeholders,
if no proper disclosures are made. The next section would deal with independence and
whistleblowing for the auditors and the association could be identified between these two
aspects and public interest requirements laid down in APES 110. After this, the auditors have to
take certain lessons from the Enron scandal with special emphasis on the work of Arthur
Andersen. Finally, the paper would shed light on audit quality and steps for addressing the
warning statement of Greg Medcraft.
1. Stakeholder analysis of Metcash Limited and effect of material misstatements on their
decision making process:
Metcash Limited has a number of stakeholders and in case, the financial information of
the firm has material misstatements, the impact would be unfavourable on the stakeholders.
The detailed discussion below would help in evaluating the same:
Shareholders and investors:

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
For ensuring sound communication with the shareholders, Metcash Limited arranges
yearly general meetings and it has appointed different personnel so that its share register could
be managed effectively. Moreover, investor briefings are held every year twice for
communicating the half-year and full-year financial outcomes. The shareholders and investors
of the company are interested to know about the competition level in the industry, technique
of capital allocation and any significant events affecting its share price. Thus, the failure of the
auditor of Metcash in identifying material misstatements would misguide the investors owing
to which they would not be able to make sound investment decisions (Ball, Tyler and Wells
2015).
Suppliers:
According to the policy of Metcash Limited, the company focuses on future outcomes by
realising that sound negotiations would help in maintaining its sustainability as well as that of
the suppliers. Thus, if situation arises like the decline in profit margin of the company, it might
not have the ability of clearing its short-term obligations. Therefore, the impact would be on
the risk of material misstatements like categorisation of valuing current assets or current
liabilities and as a result, the concerns of the suppliers would be increased (Bandyopadhyay,
Chen and Yu 2014).
Staffs and customers:
Metcash provides ample opportunities to its customers for making contact with the
company via letters, telephone calls, mails, websites and others. The feedbacks obtained are
taken seriously and responses are provided within the minimum possible time. In addition, the

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employee base of the organisation is 6,000 and they are provided with the opportunity to
participate in the decision making process and communication is made through mails, surveys,
personal communication and others (Metcash.com 2019). Therefore, if a number of items get
overstated owing to material misstatements in financial reports, the impact would be adverse
on their decision making process.
2. Independence and whistleblowing for auditors and their relation with APES 110:
Audit independence is defined as the independence of the external auditors. The
integrity and objectivity approaches assist in characterising the independence concept. This
concept needs the auditors in carrying out their obligations without outside intervention for
fulfilling the principle of objectivity. Some significant attributes of the profession include
whistleblowing technique and audit independence and they form a critical part of the ethics in
accounting that govern the profession of accounting. As per audit independence, the auditors
are required to report violations and misstatements in the financial reports at the time of
identification. Hence, one of the significant characteristics of ethical and professional liability in
audit is represented by the independence commitment.
The commitment of independence has positive and direct impact on whistleblowing
motives among the independent auditors. The reason is that the scope of the commitment of
independence possessed by the auditors directly influences the motives of whistleblowing. It is
to be borne in mind that whistleblowing takes into account a number of policies enabling the
employees of the companies in reporting illicit practices, if any. As commented by Bell,
Causholli and Knechel (2015), whistleblowers are generally persons that reveal any malpractice

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or incorrect financial information irrespective of the nature and kind of the firm. This assists in
the formulation of a sense of commitment as well as loyalty towards the firms along with
descriptions of the jobs.
The “Accounting Professional and Ethical Standards Board (APESB)” has designed “APES
110 Code of Ethics for Professional Accountants”. It is prominent from “Paragraph 210.11.1 of
APES 110” that the auditor chosen after nomination would seek permission from the client so
that it could engage in communicating with the previous auditor (Apesb.org.au 2019). The
auditor has the right to reject the nomination, if the client does not provide such permission.
However, when permission is granted, the auditor has the option of communicating with the
past auditor in writing about the needed information so that the final nomination decision
could be taken. As a result, protection would be given to the whistleblowers engaged with the
government along with revealing misconduct related to the agency. In addition, it is essential to
assure the speech of freedom for the staffs as well as the contractors. The whistleblowers could
file complaints freely, which have violated the ethical principles by gathering necessary
evidences in accordance with “Paragraph 100.1 of APES 110”. The violations could be in the
form of drainage of gross funds, violation of norms, malpractices and material threats to the
stakeholders.
3. Lessons for the auditors from the scandal of Enron:
The scandal of Enron is deemed to be one of the biggest international scandals, which
eventually led to the downfall of the firm. This incident contains a number of lessons that the

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auditors should learn so that such incidents are not repeated in future and the lessons are
explained briefly as follows:
Manipulating the books of accounts:
The books of accounts are the primary requirement so that an effective capital market is
ensured appropriately (Bowlin, Hobson and Piercey 2015). From the viewpoint of Arthur
Andersen, which was the auditor of Enron during that period, the collapse of the firm is
indicative of the entire profession. Specifically, the mistakes of the auditor are the primary
reason that this decline took place showcasing the faulty records and hence, investigation was
required. The audit failure was due to the business relationships, which have been widened
further because of the conflicts of interest and perverse incentives. From the theoretical
perspective, the auditors are appointed by the shareholders and the former is liable to report
significant incidents to the former (Causholli, Chambers and Payne 2014). However, this is not
so in reality, as the top executives of the company select the auditors and the latter become
liable to the former. The companies are observed to obtain consulting services from the audit
clients and it has been even witnessed that some external auditor are provided with higher-
level jobs in the organisation. This helps the companies to use the fear of the external auditors,
as the latter fears losing their audit work. As a result, compromise is made in audit quality
under such circumstances (Asic.gov.au 2019).
Therefore, for dealing with this issue, the government agencies would need to
undertake audit responsibilities from the private firms; however, such variation is yet to
become crucial. However, even if government agencies are used for audit work, the audit

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quality might contain inherent risk and it is not possible to assure that they would not make the
similar mistakes like the private firms as well as engaging in conflicts of interest (Ege 2014).
Therefore, in order to ensure short-term goals, the top level executives of the organisations
need not choose the external auditors. Instead, the government agencies could be entrusted
with this responsibility of selecting the external auditors for the audit clients after carefully
analysing the names provided in the list by the latter. The only duty of the audit clients would
be to clear the audit fees of the external auditors.
Moreover, there needs to be more string statutory regulations to enhance the quality of
the audit profession and this should take into consideration the disciplinary powers. The
auditors have managed to flee away from the self-regulation fiction by seeking assistance from
professional groups and peer review that they dominate. Furthermore, the private external
auditors need to be limited in providing advisory and consulting services to the audit clients
(Gay and Simnett 2017). Another step would be changing the audit partner in each four year so
that the auditors are not over committed to the clients. When a company attempts to review
the books of accounts of the predecessor, it is necessary to carry out suitable peer review
(Kleinman, Lin and Palmon 2014). This has mandated the need for the “Australian Securities
and Investments Commission (ASIC)” in enforcing restrictions on the companies appointing
internal auditors and managers from the private external auditors.
Looking for enhanced standards:
The accounting standards play a crucial role that eventually led to the downfall of Enron.
From the behaviours of the companies, it has been found that in certain areas, especially the

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treatment of off-balance sheet items; the US accounting regulations do not ensure uniformity.
Moreover, the standards are subjective in nature because of the broader doctrines could not be
analysed (Kraub, Quosigk and Zulch 2014). The strident lobbying has imposed restriction on the
“Financial Accounting Standards Board” in improving the standards of accounting inherent in
USA. Due to this, it becomes critical to implement rigorous accounting standards that must
constitute of sound principles instead of subjective procedures. Therefore, the auditors have to
consider the globally accepted standards for maintaining compliance with the necessary
regulations.
The decline of Enron has focused on the ineffective policies of corporate governance of
big multinational organisations. With the passage of time, there should be introduction of
various balances and verifications for the leaders in serving the agent functions for their
shareholders to ensure successful conduction of the process. However, the chief executives
have the ultimate power in keeping such checks aside through maintenance of the maximum
possible stock options (Krishnan, Krishnan and Song 2016).
Thus, realigning the system would help the companies to perform their obligations for
fulfilling the expectations of the shareholders. It is necessary for the firms to ensure the
presence of skilled non-executive personnel, effective payment by providing necessary
attention to the jobs, accurate independent remuneration, audit committees and work
segregation of the chief executives and the chairpersons. Therefore, the auditors as well as the
organisations are obliged to assure effective governance and audit, which would aid in assuring
steady flow of its business operations.

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Behaviour of Arthur Andersen:
At the time Arthur Andersen has carried out the audit function of Enron, the former was
the second oldest audit firm. It has the obligation of ensuring accuracy in the financial
information of the company as well as its internal bookkeeping. From the audit report of Arthur
Andersen, investment decisions were undertaken by the shareholders of Enron, as they
believed that the financial reports of the company did not contain any material figures as well
as accounting errors. It has been identified that Arthur Andersen and Enron were business
partners during that timeframe, which was inherent after some executives of Arthur Andersen
accepted jobs in Enron. Due to such employment, Arthur Andersen deliberately overlooked the
partnership terms when it comes to correct analysis of the financial information of Enron.
Moreover, the auditor has destroyed some crucial accounting documents in March 2002 of
Enron and thus, it could be held liable behind the collapse of Enron. Another fact that could be
identified from this incident is that Arthur Andersen has not acted professionally and ethically
due to the fact that Enron offered huge amount of money as audit fees to the former (Kwon,
Lim and Simnett 2014).
4. Audit quality and steps to address the warning statement of Greg Medcraft:
Audit quality has no acceptable global definition yet. For assuring quality in external
audit activities, there needs to be rigorous accounting procedures including professional
scepticism to be carried out in accordance with the necessary guidelines and regulations.
However, certain other components are included in audit quality as well. These include critical
insight of the sector knowledge, type and degree of critical judgements, observations taking

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place from the audit processes or ability to ensure effective service coordination from different
global locations (Litt et al. 2014).
As per the statement of Greg Medcraft, Australian auditors need to learn lessons from
the case of Enron unless adequate actions are undertaken by the top four audit firms in
enhancing the overall auditing standards (ABC News 2017). Hence, this mandates the
accounting books of the companies to enforce appropriate auditing standards so that there
could be no financial crisis in future.
In case, the audit work is not carried out effectively, the probability of occurrence of
incidents such as Enron might increase. In order to ensure sound audit work, the auditors are
expected to perform their duties diligently by providing assurance that no material
misstatements are present in the published financial information of the companies and they
contain accurate values (Wang, Yu and Zhao 2014). In compliance with “Paragraph 2 of APES
110”, the auditors have to provide the assurance that the financial statements do not contain
material values that might hamper the decision making process of the users. Greg Medcraft has
correctly identified that Enron has fallen because of the failure of audit conducted by Arthur
Andersen and the decline has added to the global financial crisis. Therefore, the accountability
of the auditors needs to be increased so that they could provide error-free financial information
to the stakeholders of the clients along with carrying out their duties appropriately (Maroun
and Atkins 2014).
After careful assessment of the news article, ASIC collected various audit samples for a
period of 18 months within December 2016. These samples include the audit work of the top