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ACCT20040—Auditing and Ethical Practice

Assignment 1

The collapse of Harris Scarfe----Auditing failure

Submitted by:

Due date: 16/08/2007

Word count: 3020
Table of content

History of retailer Harris Scarfe2
Audit committee of Harris Scarfe3
Audit independence5
Legal liability of auditors6
Implications for the future of the Australian auditing profession7 Conclusion9
The collapse of Harris Scarfe----Auditing failure


Recently, there are a number of corporations collapsing in Australia, including the big corporations, such as HIH insurance, One.Tel, retailer Harris Scarfe and Ansett Australia, which is a great shock to the society. The corporate governance failure causes the collapse of these corporations, which effects the current Australian corporation management including accounting and auditing issues.

This essay analyzes the auditing failure of the collapsed company Harris Scarfe, Australia’s third largest department store group, which collapsed on 2, April, 2001. Harris Scarfe had been operated for 150 years. While unfortunately, it was placed into voluntary administration in 2001 after the Board of Directors discovered the accounting irregularities, which were lasting for six years. (McGany, 2002) However, the former auditors of Harris Scarfe, PricewaterhouseCoopers and Ernst and Young, known as the Big Four., did not find the fraudulence in the company’s accounts. After collapse, Harris Scarfe left a lot of debts and owes $93 million to the unsecured creditors. (Gluvas, 2006) The purpose of this essay is to analyze the auditing failure in the collapse of retailer Harris Scarfe, introduce the relevant auditing issues to this case, and discuss the implications for the future of the auditing profession in Australian arising by Harris Scarfe’s operation. Audit committee, auditor independence, legal liability for auditors are in crises in analyzing this case.

The first part of this essay traces the history of the retailer Harris Scarfe, the company’s operation and the reasons causing the failure of this company from auditing perspective. The second part discusses and focuses on how these failures impacted upon the future Australian auditing profession.

History of retailer Harris Scarfe

Harris Scarfe, one of Australia’s oldest retailers, was founded in South Australia in Adelaide in 1850. The Trescowthick family owned 46% of Harris Scarfe. As a big family company, its business developed well and grew quickly. Then it became Australia’s third largest department store retailer, owning 38 retail stores and two and half thousand employees, over all states of Australia. (Mathews, 2004)

In 2001, the cash-flow problems came up in Harris Scarfe, a 150- year retailer, which was a shock to the whole business. Sequentially, more problems were found in the failure of corporate governance, which was the major reason caused the collapse. After being investigated, it was found that the company had been running two sets of books to conceal its losses to show a picture of healthy financial status to the outside for six years, meanwhile, there are fraudulent accounting in the books and records. In April, 2001, Harris Scarfe collapsed, leaving debts up to $160 million, and within $30 million losing of the Trescowthick family. (Peacock, 2001)

The auditing failure affected a lot on the collapse of Harris Scarfe. The former auditing firms of Harris Scarfe are PricewaterhouseCoopers and Ernst and Young, which are known as the Big Four and the world famous auditing firms. Ernst and Young audited Harris Scarfe from 1988 to 1997, and PricewaterhouseCoopers audited it from 1997 to 2001. (Gluvas, 2006) These two famous auditing firms failed to uncover the company’s false financial status.

The chief employees and auditors of Harris Scarfe should be responsible for its collapse, since the false accounts of the company were artificially created. Dan...
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