In Dependence of Auditor – Enron and Arthur Andersen Case

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In Dependence of Auditor – Enron and Arthur Andersen Case

By | October 2010
Page 1 of 16
IN DEPENDENCE OF AUDITOR – ENRON AND ARTHUR ANDERSEN CASE

Introduction

The world economy in recent years has got some significant growth but also had quite serious scandals. They caused the shakes for many, both citizens and authorities. Therefore, it is a challenging time and it is the time for change. An absolutely necessity is to enhance the true reliable financial information because the success on the capital market depends on it. The key factor is to assure that auditors must take a completely independent role, an objective and fair judgment. “… [T]he dependence of auditors, both in appearance and in fact, is crucial to the credibility of financial reporting and, in turn, the capital formation process.”

(Schuetze 1994)

As indicated by the second Generally Accepted Auditing Standard (GAAS), ethical behavior and independence on the part of the auditor are vital to the audit function. The demand for auditing arose from the need for a competent, independent person to monitor the contractual arrangement between principal and agent. If an auditor is incompetent or lacks independence, the parties to the contract will place little or no value on the service provided.

Auditors are frequently faced with situations that may test their professionalism, ethic character, and independence. For example, auditors’ independence is tested when clients engage in opinion shopping - that is, when a client seeks the view of other CPAs, hoping to find an auditor who will agree with the client‘s desired accounting treatment. Clients sometimes attempt to influence the auditor to go along with the desired accounting treatment by threatening to change auditors.

The independence of auditor

Independence is mentioned in the Code of Ethics in the part of Independence, Objectivity and Impartiality. Many organizations that affect the public accounting profession such as American Institute of Certified Public Accountant (AICPA), Public Company Accounting Oversight...

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