Auditing Theory and Practice: Corporate Collapses and Ethical Issues

This report provides a comprehensive analysis of auditing theory and practice, focusing on the impact of corporate collapses, specifically the Enron Corporation and HIH Insurance scandals. The report delves into the roles of auditors, audit procedures that contributed to the collapses, and the importance of auditor independence and professional ethical behavior. It examines the improvements in auditing standards and principles implemented after these failures, such as the Sarbanes-Oxley Act, and offers recommendations for enhancing the auditing profession. Additionally, the report applies the American Accounting Association (AAA) decision-making model to a case study involving ethical dilemmas faced by auditors, analyzing the facts, ethical issues, values, alternatives, consequences, and decision-making processes. The analysis underscores the significance of strong corporate governance, accounting standards, and ethical conduct in preventing corporate fraud and ensuring financial market stability.

Running Head: AUDITING THEORY AND PRACTICE
AUDITING THEORY AND PRACTICE
Name of the Student
Name of the University
Author Note

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Executive Summary
The occurrences of the corporate collapses have revealed the weakness in the corporate
governance system in the business organizations. The occurrences of the corporate collapse
does not occurs instantly rather it involves gradual process that means the signs as well as
symptoms are developed over the passing years. Hence, this report will discuss, two major
corporate collapses that is of Enron Corporation and HIH Insurance. Therefore, at the end of
the report, it has been analyzed that development of the standard relating to accounting and
auditing practices as well incorporating strong corporate governance that is important for
reducing the occurrence of the corporate collapses.

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Table of Contents
Task 1.........................................................................................................................................4
Introduction................................................................................................................................4
Discussion..................................................................................................................................4
Corporate Collapses...............................................................................................................4
Collapsed Companies Auditor...............................................................................................5
Analysis of Audit Procedures that Contributed to Collapses.................................................6
Auditors Independence and Professional Ethical Behavior...................................................6
Improvements taken Place in Auditing Standards and Principles after Collapse..................7
Recommendations..................................................................................................................7
Conclusion..................................................................................................................................7
Task 2.........................................................................................................................................8
Introduction................................................................................................................................8
Discussion..................................................................................................................................8
AAA Model............................................................................................................................8
Determination of Facts...........................................................................................................9
Definition of Ethical Issues..................................................................................................10
Identification of major principles, rules and values.............................................................10
Specification of Alternatives................................................................................................11
Comparison of Values and Alternatives..............................................................................11
Assessment of Consequences...............................................................................................12
Making the Decision............................................................................................................12

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Conclusion............................................................................................................................12
Reference..................................................................................................................................13

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Task 1
Introduction
The collapse of the corporate in the recent years has grown because of the
involvement of the corporate in the fraudulent activities. These corporate collapses generally
involve bankruptcy or the insolvency of the major business organizations. The scandal of the
corporate involves alleged or the actual unethical behavior by the people who acts within or
on the behalf of the corporation. There are various recent scandals as well as corporate
collapses, which involves false or the inappropriateness of the accounting of some sort
(Miglani, Ahmed and Henry 2015). Therefore, under this assignment, discussion will be done
on the two corporate collapses that are of Enron Corporation and HIH Insurance. Further,
auditors responsible, analysis of the audit procedures, auditor independence will be
explained. Lastly, explanation will be given on the improvements in the standards of auditing
standards as well as principles of auditing, since then and recommendation will be given
regarding improvements in the professions of accounting.
Discussion
Corporate Collapses
Scandal of Enron Corporation
Enron Corporation was the American energy company that was based in Houston,
Texas. The scandal of Enron Scandal has been publicized in October 2001, after the
revelation of the involvement of corporate corruption as well as accounting fraud of the
seventh largest company of Australia. The company’s shareholders have lost around $74
billion that lead up to the bankruptcy as well as their employees have lost their jobs and
billions of amount in the pension benefits. The Enron Corporation was involved in the buying
and selling of the energy. When the company started, they used to produce electricity as well

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as natural gas that was transmitted as well as sold by the state regulated monopolies (Clarke,
Dean and Egan 2014). They used the magic of the Wall Street for transforming the supplies
of the energy into the financial instruments, which would be traded in online stocks such as
stocks and bonds. The company has fooled the regulators with their fake holdings as well as
practices of off the books accounting. They have used special purpose entities for hiding their
mountains of debt as well as toxic assets from the investors as well as creditors. This
fraudulent practice of the company and negligence of the auditor has led towards the failure
of the company (Carnegie and O’Connell 2014).
HIH Insurance Scandal
HIH Insurance was the second largest company of insurance before it has been placed
into the provisional liquidation on the period of March 15, 2001. This was one of the largest
corporate collapses in the history of the Australia, with the liquidators’ estimation of total
losses of HIH to be $5.3 billion. The investigations into cause of collapse have towards
convictions as well as imprisonment of the handful of the members of the management of
HIH on the different charges that relates to fraud. Ray Williams, who was one of the founder
of the company with his cohorts, has done these fraudulent activities by gross
mismanagement as well as by largely charging too less for the premiums as well as filing for
putting away enough for putting out the claims. The HIH Insurance collapses has sent
shockwaves to the business community of Australia (Abid and Ahmed 2014).
Collapsed Companies Auditor
The main role played by the auditor in the collapses of Enron was Arthur Andersen &
Company. Anderson has taken the active role in the business of Enron by both accounting as
well as immediately. Hence, this is enough to for making the question in the independence of
Anderson.

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Moreover, the major role played by the auditor in the HIH Insurance collapse was
also Arthur Anderson. The auditing role of Anderson was disastrous to the HIH that has lead
towards collapse of the company (Enofe, Ekpulu and Ajala 2015).
Analysis of Audit Procedures that has contributed to Collapses
The auditor of Enron was involved in applying the reckless standards in their audits; it
is because of the conflict of the interest that was over the significant amount of the consulting
fees, which was being generated by the Enron.
In case of HIH Insurance, there was lack of independence for the non-executive
director from management. The member of the audit committee has used to be FAI auditor in
1980 and in 1998, FAI was sold to the HIH. This became the major cause of the later failure
of the HIH Company because HIH was used to pay huge sum of cost for acquisition of FAI.
The contribution of this awful transaction took place because of the undue diligence for the
investigation work as well as misjudgment of FAI (Dibra 2016).
Auditors Independence and Professional Ethical Behavior
In case of Enron Corporation, the independency of the auditor Arthur Anderson has
not only turned the blind eye to the improper practices of auditing but it was also actively
involved in the devising of complex financial structures as well as transactions that hs
facilitated the deception (Davies 2016).
In case of HIH Insurance, the board of HIH was having three partners that were
Arthur Anderson and auditors of HIH. Anderson has received $1.7 million for working as
director for his 12-month service. Hence, Anderson independence was highly questionable
and his close personal relationships with the HIH and his unquestionable acceptance of the
outcomes of internal audit processes as well as work of consulting actuary has mounted the
extremely cogent argument (Ali, Liu and Su 2014).

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Improvements taken Place in Auditing Standards and Principles after Collapse
It was after the prolonged period of the scandals such as Enron and HIH Insurance,
Sarbanes-Oxley Acts was enacted in the year 2002 for restoring the confidence in financial
markets as well as close loopholes, which allows the public companies for defrauding the
investors. This act has a great effect on the corporate governance in the country of US.
Moreover, the practices of corporate governance have come to force as the outcome of the
number of scandals that has taken place. It mechanism of corporate governance helps in
providing the structures, practices as well as policies for addressing towards the economic
sustainable growth as well as shareholder’s rights protection (Tricker and Tricker 2015).
Recommendations
The recommendations that can be given in respect of improving the profession of
auditing is developing of the accounting as well as auditing guidance and industry specific
guidance. Moreover, there should be strong adherence to the corporate governance that would
enhance audit and risk management. Further, they should make independent decisions and
should not be influenced by anyone else in the company (Abid and Ahmed 2014).
Conclusion
Therefore, it is concluded from the analysis that the illustration of the recent corporate
collapses has clearly shows that the corporate accountability practices have failed to match
the managers’ rhetoric who are being responsible for business probity. Hence, after the
number of scandals aroused, the steps has been taken by the government such as
implementations of different standards as well as framework for shareholders protection such
as corporate governance that helps in reducing the likelihood of accounting fraud
occurrences.

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Task 2
Introduction
Two audit seniors, Andrew and Mike was working for the Ford & Associates. They
both were employed in one company in same time and having same position. They were
senior in the company for almost two years and are looking for the promotions as the audit
supervisors. Andrew has replaced Mike on the audit of Kent Ltd. and realized that Mike’s
client and Mike has some personality issues, which he has compliant to audit manager by
saying that he is not impresses with Mike. Further Andrew knows that Mike has done good
job but he think audit manager would not disclose the allegations of client and he also knows
that it would be beneficial for him to be promoted. Hence, under this report discussion will be
on the scenario by using the American Accounting Association-decision-making model and
actions that would be taken by the Andrew.
Discussion
AAA Model
The American Accounting Association is the model that is the report for the AAA
written in the year 1990 by Rockness as well as Langenderfer. They have suggested the
logical process of seven-step for making the decision that takes the issues of ethics into the
account. This model contains seven steps. The first step includes establishing the facts of
case. It means that there should be no ambiguity in relation to what is into the consideration.
The second step includes identifying the ethical issues in case. It includes examination of the
facts of case as well as asking that what issues of ethics are at the stake (Starbuck 2015). The
third step includes identification of the norms, values as well as principles related to case. It
consists of placing decisions in the ethical, social as well as in some of the cases in the
context of professional behaviour. In the professional behaviour context, the professional

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code of the ethics or the social professional expectations is taken to be values, norms as well
as principles such as in case if there is involvement of rules of stock market in the decision,
then it would be relevant factor that is being considered in the step. The fourth step includes
identifications of the each alternative courses of action (Collier 2015). It consist of stating
each one without considering principles, norms as well as values identified in the step three
for ensuring that each of the outcome is being considered, although appropriate or
inappropriate may be the outcome. The fifth step overlays on the options that are identified in
the Step four. After it is done then it would be possible for seeing that which particular
options accords with the norms and which does not. The sixth step helps in considering the
consequences of the outcomes. This model has the purpose for making implications of each
of the outcome unambiguous so that the final decisions made should be in full recognition as
well as knowledge of each one. Lastly, in the Step seventh, the decision is being taken
(Brown-Liburd, Issa and Lombardi 2015).
a)
Determination of Facts
 Andrew is auditor and he has commitment towards mortgages. Moreover, Mike, who
is also senior auditor, has joined the organization at the same time with same position,
is having no commitment because he is single. They both are looking for the
promotions as the senior auditor.
 The audit manager giving the project of Mike to Andrew, without disclosing the fact
regarding what Mike’s client has said is questionable.
 Andrew knows that Mike is not wrong but he has not disclosed it. This intention of
Andrew is questionable (Griffin and Wright 2015)
b)

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Definition of Ethical Issues
 The non-disclosure of what Mike’s client has told to the Audit Manager and
straightway delegating that Mike’s client assignment to his colleague Andrew is
unethical.
 Andrew intention for getting the promotion is unethical. The intention for getting the
promotion has insisted him for not disclosing the fact that Mike has done wonderful
job and his client does not wanted Mike to do his assignment because he knew that he
would disclose the issues related to the project and he was having some personality
issues.
 The audit manager has assigned the Mike’s client assignment to Andrew without
letting him know that what the issue is. This is unethical on the part of being the audit
manager of the company. He should have disclosed the issues (Vasarhelyi, Kogan and
Tuttle 2015).
c)
Identification of major principles, rules and values
 The code of ethics states that the auditors should must perform his job with integrity,
objectivity, confidentiality as well as competency.
 Integrity of internal auditors helps in establishing the trust and it serves as the basis on
their judgement.
 Internal auditors should exhibits highest professional objectivity level in gathering,
communicating as well as evaluating the information about processes or the activity
that would be examined. They should make balanced assessment of every relevant
circumstances and it should not be influenced by others or own interest in the
formation of the judgement.

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 The value as well as ownership of the information should be respected by the internal
auditors and they should not get involved in disclosing the information without having
appropriate authority unless until there is legal obligation for doing so.
 The knowledge, experience and skills should be applied by the internal auditors that is
required in the internal auditing services performance (Cao, Chychyla and Stewart
2015).
d)
Specification of Alternatives
 The company Ford & Associates must follow the ethical code of the auditors.
 The audit manager as well as the senior auditor should not compromises their
business as well as the professional judgement that owes to bias or the undue
influences of the other as well as interest of the conflict.
 Andrew should disclose the real intention of Mike’s client and should not do anything
for getting promotions.
 Audit manager should disclose what Mike’s client has told him about Mike and do the
investigation that whether facts disclosed by client is correct or not about Mike.
e)
Comparison of Values and Alternatives
 The alternative suggested fulfills the ethical code of integrity, objectivity and
competency.
 The professional should maintain the integrity and honesty in performing the services
of the audit service. The alternative given here suggests that the auditor should
discloses the fact and should perform their services with honesty as well as integrity.