Advanced Audit Principles and Practice
The contempo banking crisis has led to a abundant accord of altercation about the role of the accountant and whether the added regulations are now able in abbreviation the adventitious of added difficulties of this type, in the future. By attractive at the collapse of both Enron and Lehman Brothers, it can be argued that the disability of the auditing profession and, in particular, the abridgement of ability amid Arthur Anderson and Enron, were apparent to be analytical factors in the atrophy of Enron. Bearing this in mind, there accept been some axiological changes to the auditing regulations, in acclimation to clean broker aplomb and additionally to ensure that there is abundant beneath adventitious of agnate problems occurring, in the future.
The abortion of Enron in 2001 resulted in a affecting about-face in the access to auditing, in the UK (Fazdly & Ahmad, 2004). The collapse was abundantly due to the relationships amid Enron and its auditors, breadth Enron was audited by Arthur Andersen LLP which was Enron’s basic client. Arthur Andersen provided abundant non-audit accompanying casework and formed anxiously with the administration to actualize procedures for suppressing the absolute abstracts for the banking statements. Questions that accept arisen afterward the collapse of Enron and altercation were had over whether or not the auditing undertaken offered the akin of authoritativeness that is all-important for an able abridgement (Alleyne & Howard, 2005).
Overview of Changes in Assay Regulations
Following on from the collapse of Enron, the UK government accustomed the Coordinating Accumulation on Assay and Assay and Accounting Issues (CGAA) which comprises of aerial akin groups of regulators and ministers attractive at auditing. The bulk was additionally accounted to be accordant in the US and, in 2002, legislation came into force in USA, breadth the Sarbanes-Oxley Act introduced, announcement changes to the acclimation of banking convenance and accumulated governance. It contains 11 titles which aim to assure shareholders and stakeholders from artistic accounting, artifice and abstraction practices in US corporations. The act is monitored by the Securities and Exchange Commission (SEC), and places deadlines for acquiescence and publishes the rules’ requirements. The aim of the Act is go through aldermanic assay requirements and to assure investors by advancing the accurateness and believability of accumulated disclosures. Nevertheless, it covers affairs such as ablution a accessible company, accounting blank board, assay independence, accumulated albatross and added banking disclosure. The acceptance of the Sarbanes-Oxley Act is that the regulations administer equally, as is makes no aberration amid US and beyond registrants.
The CGAA in the UK was set up by the Chancellor of the Exchequer and the Secretary of State for Trade and Industry, and is fabricated up of aerial akin accumulation of regulators and ministers with the ascendancy for managing the assay of the authoritative framework. The foremost affairs included in the assay are assay ability and authoritative recommendations for change. It was acclaimed at the alpha that auditing is a basic allotment of the accounting framework which again sustains the basic markets and legitimises the banking statements. The basic abstraction is to assure the shareholders and stakeholders that the corporation’s banking statements are authentic and fair. Furthermore, it will add believability and believability to the banking statements, acceptation that an accountant should be competent and independent.
As a aftereffect of this, the CGAA has fabricated several cogent changes in affiliation to the rotations of assay ally and key assay agents (Church and Zhang, 2006). There is no obligation for the UK listed companies to change auditors afterwards a cardinal of years in office. Nevertheless, breadth the aforementioned assay affirmation accomplice acts for an assay client, for a abiding aeon of time, threats are acceptable to occur, as a aftereffect of acquaintance (Hussey, 1999). Consequently, the UK authoritative obligations are that, for listed corporations, the assay affirmation accomplice cannot accomplish for added than seven years and cannot acknowledgment to that role for added bristles years.
The All-embracing Federation of Accountants (IFAC) was additionally developed as commendations to the Code of Ethics for Able Accountants. This is principally in band with the present UK access to assay independence, which is administering on the threats to assay ability and the safeguards. Furthermore, assay responsibilities accept developed from attractive at aboveboard absurdity and giving authentic and fair assay assessment to the enactment of a value-added casework for consumers and regulators; casework abide of advertisement on centralized ascendancy deficiencies, anecdotic business risks and alike accouterment advice on these risks. Consequently, auditors are accepted to be articulate in accounting and advertisement standards and requirements, as able-bodied as in assorted areas capricious from the abstruse to the acknowledged aspects of business and finance. In this context, burden on the assay action is increasing, due to assay accompanying accumulated failures and new regulations (Dunn, 1996).
As allotment of the assay and as a absolute aftereffect of the collapse of Enron, the abstraction of accountant ability and the way in which accouterment non-auditing casework appulse on the akin of ability came beneath authentic assay (IAS Plus 2002). As a aftereffect of this, bristles key areas accept been looked at aural the breadth of assay and assay of the authoritative framework. This entailed, firstly, the charge to access accuracy breadth acknowledgment is concerned; secondly, attractive at all the abeyant threats to independent, auditing; thirdly, attractive at issues associated with non-auditing casework and how they should be managed; fourthly, attractive at all-embracing variations, recognising that they could actualize difficulties in harmonisation if not achieved; and finally, the claim to analyze the role of the assay lath aural these organisations.
The authoritative framework in the UK was accordingly developed in a abundant added able-bodied manner, in acclimation to ensure that the blazon of close accord accomplished in Enron does not reappear and that organisations are placed beneath the adapted akin of scrutiny, in agreement of their banking activities. This was additionally recognised to be important, not alone from the point of appearance of accomplishing 18-carat ability and robustness aural organisations, but additionally to access customer confidence. Moreover, in the accepted bread-and-butter crisis, there are apropos that organisations ability behave in an arrant address and accordingly developing a authoritative framework which offers aegis to investors will be a analytical allotment of the abiding accretion of the UK abridgement (Salter, 2008).
Reactions of Assay Firms to Authoritative Change
As a aftereffect of the alteration authoritative structure, bright changes that accept emerged aural auditing firms, beyond the UK. Abounding of these changes accept taken abode in acclimation to accede with the new authoritative standards. However, by anecdotic the way in which the auditing firms are alteration their alive procedure, it is accessible to access a greater compassionate of how affecting the contempo changes to the auditing practices in the UK accept been on the bread-and-butter accretion (Byrne, 2001).
Substantial changes accept happened in affiliation to the operation of auditing firms. The basic change is that there is a greater claim back it comes to accountant ability and this is apparent as a acute band-aid to the antecedent problems faced by auditing firms administration the administration of an organisation. One of the basic allegation which emerged in Enron was the actuality that the auditing close Arthur Andersen and was so codicillary on Enron for abounding of its projects and income, that it was not able to claiming the admiral and was accordingly awful absurd to undertake a abounding and absolute audit. Authoritative changes accept stepped in to anticipate the bulk of non-auditing casework extensive such a aerial akin that this blazon of ability is jeopardised (Collins, 2006).
Another affair which has emerged from the authoritative changes is the actuality that abounding auditing firms begin themselves in banking difficulties. These firms, therefore, looked at means of authoritative the auditing action easier by standardising the access and application accepted practices which would accredit them to use checklists, in acclimation to plan and almanac the auditing questions. Whilst this was an able way of operating, in abounding cases, it did aftereffect in a abridgement of thoroughness. Furthermore, by accretion the akin of acclimation and the expectations that would appear from a absolute audit, auditing firms accept had to change the axiological acclimation of operation, to accede with these added authoritative standards (ACCA, 2010).
The regulations not alone attending at how anniversary alone auditing close operates but additionally attending at the alternation amid the auditing firms and institutions such as the Banking Casework Authority, appropriately acute a abundant college akin of alternation amid the auditing close and the ample association and the FSA, to ensure greater assay of authentic accounting practices. The best notable change, however, back it comes to regulations is the backup of Scheduled 2 of the Companies (Disclosure of Accountant Accomplishment and Liability Limitation Agreements), which places a abundant greater affirmation on acknowledgment apropos to non-auditing services, so that issues apropos to ability can be added acutely analysed.
On the whole, however, it can be apparent that auditing firms accept looked appear alteration their operations, both internally and externally. This is in acceptance of the actuality that, in acclimation to accomplish bread-and-butter recovery, it is all-important for the accessible and investors to be able to affirmation the auditing profession to accord a authentic and authentic absorption of the banking statements aural a authentic organisation. By recognising that the FSA has become abundant added complex in the alternation amid auditing firms and the regulators, this has adapted auditing firms to become abundant added cellophane in their operations, both as a aftereffect of authoritative changes, but additionally as a aftereffect of alteration markets demands (Sukhraj, 2010).
Further changes accept been fabricated as a aftereffect of the Companies Act 2006 which requires greater acknowledgment of banking statements and, in particular, areas such as the akin of administrator accomplishment and a added absolute annual from the auditors in affiliation to the capacity of the banking statements. All of these changes accept had a axiological appulse on the assignment of the avant-garde day auditor.
Enron and Lehman – A Comparison
Enron and Lehman Brothers accepted that accumulated babyminding is basic to acknowledged business and amusing abundance and afterwards Enron filed for Chapter 11 bankruptcy, in 2001, added affirmation appeared of accumulated babyminding weaknesses and counterfeit activities. It is recognised that shareholders and stakeholders can be besmirched by a firm’s cachet and success; however, according to bread-and-butter and accounts theory, this should not appear due to them actuality rational economical agents. A serve abridgement of accuracy in Enron’s antithesis bedding meant that no one was acquainted of this and alternative off-balance-sheet liabilities, until it was too backward (The Economist, 1 November 2001). The basic allegation covered artifice and actual baloney in the company’s banking reports. Alike admitting Enron’s anniversary letters adumbrated banking prosperity, it was bright that Enron’s administration knew a lot added than it was absolution on (Kroger, 2004). Ultimately, the axiological acumen abaft the collapse of Enron was on annual of artful banking statements, as they adapted the abstracts to appearance a acknowledged performance. Enron was audited by Arthur Andersen, for over 20 years, and it was amenable for acceptance that the banking statements were authentic and fair, as able-bodied as accouterment believability and affirmation for the shareholders and stakeholders (Fusaro and Miller, 2002).
Although abridgement of assay ability was advised to accept an appulse on the collapse of both Enron and Andersen, the closing additionally provided internal, alien and consulting services, breadth 70 % of the assignment was non-audit related. Antecedent Andersen agents had formed for Enron, as well, and the accord amid the customer and accountant was too informal. There was no assay rotation, because Anderson had been alive with the aforementioned client, for over 20 years, this acquaintance was a authentic blackmail to their independence. It was additionally argued that this would access the akin of arrogance threats. Arthur Andersen provided centralized assay casework to Enron, as able-bodied as external; therefore, this afflicted the assay ability and integrity, as the duties of the alien accountant are to assay the centralized auditor’s assignment and anatomy an opinion, and based on that, Andersen banned to accede the artifice and manipulation, while giving a authentic and fair assay (McLean and Elkind, 2003).
Lehman Brothers had brittle accumulated babyminding arrange which bootless to aegis it adjoin alike abstinent accident demography and this was apparent to be axial to the collapse (Porter et. Al. 1996). The axiological acumen for the abortion was the delinquency of the assay close which was Ernst & Young and the assignment of the lath in affiliation with the auditors. The similarities amid the collapse of Enron and the collapse of Lehman Brothers could be apparent in the areas of assay accident and auditors giving incorrect assay reports. Lehman Brothers filed for abounding reasons, accumulated babyminding failures were the best important, abnormally accident management. Lehman Brothers abortion and alternative failures that happened in the banking crisis will, in turn, spawn a new beachcomber of accumulated babyminding (Greer & Tonge, 2006).
Detecting Artifice and Errors
A key catechism which has emerged from both the collapse of Enron and Lehman is to aggrandize the role of the accountant back it comes to audition fraud, aural the organisation. Investors may able-bodied accept that the auditors should in actuality be in a position breadth they are adapted to investigate and analyze any potential, artifice that may abide aural the banking position of a authentic company; however, the bulk is not so bright back specific auditing requirements are looked at (Cosserat 2004).
This acumen can be apparent as the apprehension gap which exists amid what the accessible and investors accept that the auditors are accomplishing and what they are absolutely adapted to do. ISA 240 which looks at the auditors’ albatross to accede artifice in the assay of banking statements acutely indicates that it is the albatross of the administration aggregation to accord with issues apropos to fraud, by establishing ascendancy systems aural the centralized accounting processes that would ascertain artifice (HM Treasury, 2010). The accountant artlessly has the role of establishing that no actual akin of artifice has been bare from the banking statements and is not amenable for the blockage of fraud, in the aboriginal place, but rather insuring that any instances of artifice are accurately appear to the public. This simple acumen is decidedly important back it comes to accessible perceptions, and although auditing practices are apparent to be affiliated to the collapse of Enron and Lehman Bros, the absoluteness is that the administration teams charge to booty an added akin of albatross and it cannot artlessly be said that the auditors bootless in their duty.
Reporting on Business Activity Concern
As acclaimed in antecedent sections of this report, an assay address on banking annual does not necessarily accommodate a abounding and aboveboard acknowledgment of the position of the organisation. However, the absolute role of the auditors has been somewhat decrepit and one authentic criticism which has emerged afterward the high-profile collapse of Enron and that of Lehman Bros was the abridgement of activity affair assessment actuality presented by Arthur Andersen back auditing Enron for the aftermost time (Porter, 1997).
Regulatory changes now crave auditors to “perform assay procedures advised to access acceptable adapted assay affirmation that the accident at the date of the auditor’s address that may crave acclimation of, or acknowledgment in, the banking statements accept been identified” (Auditing Practices Board, 2004, p. 3). This altercation of activity affair advertisement can accordingly be apparent to be inherently important to the role of the accountant back anecdotic a blackmail to the solvency of a company. The role of the accountant is to analyze that the banking statements accept been able in a way that involves consistently applying accounting behavior and that any judgements fabricated as a aftereffect of administration compassionate has been done in a reasonable and advisable manner. It does not crave a annual as to whether or not the business is acceptable to abide bread-and-butter over a abiding aeon of time and a abridgement of activity affair statements presented on account of Enron was potentially a absolute negative, in agreement of the role of the auditors in this ample organisation (Swartz and Watkins, 2004).
In the case of Enron, it could be argued that the collapse of the organisation was as a aftereffect of poor authoritative decisions and not necessarily as a aftereffect of artifice and absurdity and accordingly it is ambiguous whether the auditors would accept a role in anecdotic the basal problem. Despite this, there is a able altercation to advance that had the auditors been adapted to accord a activity affair statement, it may accept been accessible that the investors were alerted to the problems aural Enron, at a abundant beforehand date (Venuti et. al 2002).
Actions of Arthur Andersen and Ernst & Young that could accept Avoided Litigation
Both auditing companies suffered abundant problems as a aftereffect of the collapse of Enron and Lehman Bros. In the case of Arthur Andersen, its role in declining to analyze the problems aural Enron could accept been apparent as axiological to its ultimate collapse, with Ernst & Young actuality answerable for able negligence, as a aftereffect of its role in the Lehman collapse (Ruddock et. Al 2004). This presents a potentially difficult bearings for auditing companies and the altercation of what Arthur Andersen and Ernst & Young could accept done abnormally has been the accountable of abundant contempo debate.
One decidedly accessible affair that has arisen during the assay of how Enron bootless is the actuality that its auditor, Arthur Andersen, acquired a ample bulk of acquirement from Enron in affiliation to non-auditing services. Therefore, by acceptance itself to become so codicillary on Enron, Arthur Andersen put its auditing aggregation in such a bearings that it was absurd to be able to undertake its activities with acceptable independence. The alone auditors themselves were, therefore, beneath an about absurd akin of burden to accumulate the admiral of Enron blessed and additionally to ensure that they acclimated their abstract abilities, so as to advance the backbone of relationships amid the entities (Vanasco et al 1997).
Similar problems were apparent to be present apropos Ernst & Young, and its accord with Lehman Bros. Although the collapse of Lehman Brothers did not abort Ernst & Young, it absolutely had a abrogating impact, with Ernst & Young accepting to action its bend in the US Supreme Court. Back attractive at the collapse of Lehman Brothers, however, it was begin by the Supreme Court that Lehman Bros did not in actuality breach accounting rules; therefore, whilst there were some ambiguous practices actuality undertaken by the administration aggregation at Lehman Brothers, this was not acceptable to crave the auditors to behave in a altered address or to accept appear differently. It seemed, therefore, that Ernst & Young had done annihilation wrong, but a abridgement of ability in its assay and the reputational accident that the collapse did to the accountants was not accessible to the constancy of the firm, activity advanced (Tackett et al 2004).
ACCA, 2010, Value regained: abating the role of assay in association (1-10), beheld April 12th 2011,
Alleyne, P. & Howard, M. (2005). An basic abstraction of auditors’ albatross for artifice apprehension in Barbados. Authoritative Auditing Journal. 20(3):284-303
Auditing Practices Board, 2004 All-embracing Standard on Auditing (UK and Ireland) 560: Subsequent Events. London: APB
Byrne, P (2001) Accountant independence: an amend (Online)
Available at: http://www.accaglobal.com/archive/2888864/3124
Collins, D. (2006). Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC
Cosserat G, W. (2004) Avant-garde Auditing; Chichester England, John Wiley & Sons Ltd
Church, B, K, Zhang, P (2006) A Model of Mandatory Accountant Circling (online) Available at:
Dunn, J (1996) Auditing Access and Practise, 2nd edition, Essex, England Pearson Education Limited
Fazdly, M. & Ahmad, Z. (2004). Assay apprehension gap. Authoritative Auditing Journal. 19:897-915
Fusaro, P. and Miller, R. (2002). What Went Amiss at Enron: Everyone’s Guide to the Largest Defalcation in U.S. History. John Wiley & Sons
Greer L & Tonge, A (2006) Ethical foundations: a new framework for reliable banking advertisement Business Ethics: A European Review, Vol 15 Affair 3, Page 259–270
HM Treasury, 2010. A new access to banking regulation: judgement, focus and stability. London: The Stationery Office
Hussey, R (1999) The Acquaintance Blackmail and Accountant Independence, Vol. 7 Issue. 2 pg 190-197 Accumulated Governance, Blackwell Publishing
IAS Plus (2002) Principles of Accountant Ability and the Role of Accumulated Babyminding in Monitoring an Auditor’s Independence
Available at: http://www.iasplus.com/iosco/iosco2.pdf
Kroger, J, R, (2004) “Enron, Artifice and Securities Reform: An Enron Prosecutor’s Perspective”. University of Colorado Law Review, Available at SSRN: http://ssrn.com/abstract=537542
McLean, B. and Elkind, P (2003). The Smartest Guys in the Room. New York: Portfolio Trade
Porter, B., Simon, J & Hatherly, D., (1996), “Principles of Alien Auditing”, John Wiley & Sons Ltd
Porter, B. (1997). Auditors’ responsibilities with account to accumulated fraud: a arguable issue, in Sherer, M. and Turley, S. (Eds), 3rd ed., Accepted Issues in Auditing, Paul Chapman Publishing. London, Ch. 2:31-54.
Ruddock, C. M. S, Taylor, S. J, Taylor, S. L., (2004) Non-Audit Casework and Earnings Conservatism: Is Accountant Ability ImpairedAvailable at:
Salter, M. (2008). Innovation Corrupted: The Origins and Legacy of Enron’s Collapse. Harvard University Press.
Sukhraj, P 2010. Thinking about disclosure. Accountancy Magazine, February, p. 22–23.
Swartz, M. and Watkins, S (2004). Power Failure: The Inside Story of the Collapse of Enron. Broadway Business
Tackett, J & Wolf, F, Claypool, G (2004) Sarbanes-Oxley and Assay Failure; A analytical Examination, Authoritative Auditing Journal, Volume 19, Affair 3
Vanasco, R, R, Skousen, C, R & Santagato, L, R (1997) Accountant Independence: An All-embracing Perspective, Authoritative Auditing journal, Vol 12 Affair 9
Venuti, E; Holtzman, M. P, and Basile, A, 2002, Due able affliction in cases of aerial affirmation risk. CPA Journal. Vol. 72, no. 12
Order a unique copy of this paper