Describe about the Professional Accounting for Business Auditors.
Auditors and auditing firm are those groups of people that protect the interest and management of business organisation has complied with applicable laws. Audit can be defined as the systematic process of examination of financial statements of business organisation i.e. auditors has to ensure true ands view of financial statements.
Role of auditor is to check internal control system that is present in entity but not to implement internal control system. Auditor’s role is to independently assess, examine and put its opinion on internal control system. Under internal control audit performed by auditors can provide recommendation to management but not required to implement those recommendations.
Role of auditor is to act in best interest of shareholders and public at large. Role of auditor includes representative and protector of shareholders and public. Any misstatement or fraud detected by auditors shall bring to the notice of share holders through audit report (Dibra, 2016, 22-29).
Another role of auditor is to audit the financial statements of the business entity. This role of auditor shall be kept far away from the role of consultant of management. As a consultant, auditors can give advice to management of business organisation. These advices are related to betterment of financial statements and making adjustments in financial statements while presenting.
Enron Scandal had been uplifted in 2001 and since then questions on auditors and their roles and responsibilities has been raised. Enron Scandal pinpoints systematic accounting and auditing fraud in its financial statements that has lifted its stock prises (McLennan and Park, 2016, 55-60). Relying on auditor’s report of Enron, Arthur Andersen & Company, put many shareholders in loss. In this case, Arthur Andersen & Company has supported such fraud by indulging in window dressing of financial statements of Enron (Brown et al., 2014, 425-430). This scandal has puts many questions on roles and responsibilities of auditors while performing audit of any entity.
In case of Enron, auditor had merged both the roles and has acted in the capacity of auditor and management consultant (Crockett and Ali, 2015, 80). This act of auditor Enron, Arthur Andersen & Company diluted the real role and responsibility as auditor that they have towards share holders and public. As a consultant Arthur Andersen & Company has provided various advices to Enron enterprise like merger, acquisition, de-merger, sub division and other management decision related consultancy. In the capacity of consultant, auditor of Enron has provided services for restructuring of financial statements in order to adjust management transactions (merger, acquisition, demerger, etc). Therefore auditor has performed both their roles at the same time and lacks or ignores most important responsibility of being independent and free from biasness.
Auditor plays important role in Enron scandal in helping management in conducting fraud in financial statements by providing unqualified opinion on false or material misstated financial statements. It is not possible that auditors are not aware of the facts that management and directors has misstated or indulge in such activities. Auditors acting as a consultant of Enron, has co-operated with the management for committing fraud. Another fact that auditors of Enron, Arthur Andersen & Company, are auditors of Enron for past many years and are aware about all facts (Dogui et al., 2014, 17-23). Therefore this situation also proves that auditors, Arthur Andersen & Company, has played important role in Enron scandal. Enron has used the concept of consolidation of accounts as they had created a SPE (Special purpose entity) with auditors to play major role in it. Then at that point of time role of auditor comes into play in terms of making full disclosure to share holders regarding act of management of Enron (Brown et al., 2014, 425-430). Auditors are not able to perform their duties or role as protector of interest of share holders.
Auditors conduct audit of financial statements and following are roles of auditors:
Opinion on financial statements- Primary role and responsibility of auditors is to provide opinion on financial statements. They are not responsible for correcting or rectifying but to examine and then make opinion on financial performance of business entity. Opinion of auditor is to opine that financial statements of business organisation are free from material misstatement. Auditors are not required to rectify miss-statements in financial statements of business entity but to establish their opinion (Simpson et al., 2016, 710-714). Opinion of auditors is based on detailed examination and verification of books of accounts. In Enron scandal, auditors, Arthur Andersen & Company, fails to perform this responsibility as they had provided biased opinion on financial statements of Enron.
Protection to shareholders- Another responsibility of auditors is to protect stakeholders of the business organisation by examining actual financial position of the business organisation. Auditors have responsibility to reflect its opinion on truth and fairness of financial statements of business organisation. This is one of most important responsibility of auditor to protect interest of share holders and group of stake holders who are interested business entity (Blythe, 2015, 198-206). In case of Enron scandal, auditors was failed to perform this responsibility as they provided false opinion on financial statements and financial position of Enron. Enron has incorporated special purpose entity for diverting assets and debt to show strong financial statements (Zager et al., 2016, 695-698).
Conflict of interest- Conflict of interest is the situation where auditor is not independent towards his / her work or in disclosing true and fair view of financial statements of business organisation. It is the responsibility of auditor to free from any biasness; same has been encountered in the case of Enron Scandal. In this case, auditor had not performed its responsibility of making themself free from conflict of interest, many directors and management had influenced auditor for such conduct (Bazrafshan, 2016, 305). Therefore it can be said that, it is the primary responsibility of auditors to check and examine independence in any business entity. Another point that shall be noted is that Arthur Andersen & Company is the auditor for Enron for many years and is aware financial position.
Detection of fraud and informing management- Responsibility of auditors include detection of frauds and errors that are present in financial statements of business entity. Detailed examination and application of audit techniques while performing audit are expected from auditors appointed by business entity (Hoffman et al., 2014, 103-110). This responsibility of auditor is lacking in the case of Enron, they are required to inform management and to share holders through audit report.
Conclusion
At last it can be concluded that auditors of any business entity are well aware of financial position while performing their duties. Earlier auditors enjoy liberty of not having any penal provisions on their negligence of work or indulging in fraud. But as Enron’s scandal becomes public, it was warning alarm for professional bodies and for professionals. There are certain roles of auditors that they are required to perform while discharging their duties. Auditor shall clearly distinguish their two major roles i.e. as management consultant and as auditor of business organisation. Enron scandal has separated these two roles or services from each other and more transparent vision can be seen from here. Responsibility of auditor includes maintaining independence while performing their duties ad shall be free from any biasness.
References
Bazrafshan, S. (2016). Exploring expectation gap among independent auditors’ points of view and university students about importance of fraud risk components. Iranian Journal of Management Studies, 9(2), 305.
Blythe, S. E. (2015). The in pari delicto defense for auditors in professional negligence cases: Imputation of managers’ unlawful acts to the client firm. Accounting, Economics and Law – A Convivium, 5(2), 193-226. doi:10.1515/ael-2013-0057
Brown, V. L., Daugherty, B. E., & Persellin, J. S. (2014). Satyam fraud: A case study of india’s enron. Issues in Accounting Education, 29(3), 419-442. doi:10.2308/iace-50735
Crockett, M., & Ali, M. J. (2015). Auditor independence and accounting conservatism: Evidence from australia following the corporate law economic reform program. International Journal of Accounting and Information Management, 23(1), 80.
Dibra, R. (2016). Corporate governance failure: The case of enron and parmalat. European Scientific Journal, 12(16) doi:10.19044/esj.2016.v12n16p283
Dogui, K., Boiral, O., & Heras?Saizarbitoria, I. (2014). Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), 14-26. doi:10.1111/ijau.12008
Hoffman, W. M., Frederick, R. E., & Schwartz, M. S. (2014;2013;). Business ethics: Readings and cases in corporate morality (Fifth;5;5th; ed.). US: Wiley-Blackwell.
McLennan, A., & Park, I. (2016). The market for liars: Reputation and auditor honesty. International Journal of Economic Theory, 12(1), 49-66. doi:10.1111/ijet.12080
Simpson, S. N. Y., Aboagye-Otchere, F., & Lovi, R. (2016). Internal auditing and assurance of corporate social responsibility reports and disclosures: Perspectives of some internal auditors in ghana. Social Responsibility Journal, 12(4), 706-718. doi:10.1108/SRJ-09-2015-0134
Zager, L., Malis, S. S., & Novak, A. (2016). The role and responsibility of auditors in prevention and detection of fraudulent financial reporting. Procedia Economics and Finance, 39, 693-700. doi:10.1016/S2212-5671(16)30291-X
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