Ethics and Professional Responsibility

Topics: Audit, Enron, Auditing Pages: 7 (2721 words) Published: April 13, 2011
Like most business professions, there has to be a strong sense of ethics and responsibility. Especially professions like law or public accounting. They must have strong standards of integrity. In public accounting, people rely heavily on the information being provided on companies. Any mistakes or intentional cover up will have high costs to the economy and dire consequences. Even though there are laws and standards that regulate auditing, it does not completely stop or prevent firms from doing immoral acts. Before Sarbanes-Oxley Act of 2002, auditing for both public and privately held companies followed the AICPA's standards of the 10 generally accepted auditing standards. In the years 2000-2002, there had been an increased of major corporate accounting scandals. Large corporations such as Enron and WorldCom went into bankruptcy by trying to cover up their losses and debt. In response to the all the fraud, the US government passed the Sarbanes-Oxley Act. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board, or PCAOB, and changed how audits of public companies are being done. The PCAOB adapted the rules and standards of AICPA for auditing and also included auditing of internal control as part of the report, leaving less room for auditors to move around. Here are some of the few companies that led to a drastic change of auditing standards for public companies. Enron was one of the fastest growing American energy company of its time. In the span of 4 years Enron's revenue had increased by over 750 percent. Despite growing at such a rapid pace, Enron filed for bankruptcy the following year. One of the main issues Enron had was independence. Enron's main auditing firm was Arthur Andersen, however the firm did more than just auditing, they have also provided other non-audit services. This is mostly encouraged by Andersen's compensation policies. The more the non-audit services the auditor can sell in addition with auditing, the more he or she will earn. Also, Duncan, the main partner for Enron with Andersen, developed a close relationship with Enron's Chief Accounting Officer Richard Causey, who also worked for Andersen for almost 9 years. Because of this, Enron had created a sort of “integrated audit”, where the firm who does the internal auditing, also performs the external auditing as well. Andersen has already violated the independence standards on two occasions. Andersen should not be providing any internal auditing services to Enron. Also, they should not place an accountant with a company that has close ties with key figures, such as the Chief Accounting Officer. All of these led to their independence being impaired. Andersen should have never implemented that compensation policy. The policy only pushed the accountants to do more than what they're allowed to do, causing accountants, like Duncan, to become independence impaired. Even worse Andersen doesn't stop, but continues to strength their relationship between the two companies. The Fund of Funds was forced into bankruptcy in the 1970s. It was later discovered that King Resources Company, an investment adviser for Fund of Funds, had overcharged FOF for the properties that were sold to FOF. The Fund of Funds sued Andersen for failing to inform them of the overcharges. Arthur Andersen ended up having to pay around $70 million to FOF. Both FOF and KRC were audited by Andersen. Andersen viewed KRC as a risk to their firm. John King, the owner of KRC, provided serious difficulties and problems for the auditing firm. The Denver's Andersen office did audit work of NRFA, another investment adviser, for FOF and also auditing KRC. The office was well aware of the relationship between FOF and KRC. A part of FOF audit scope was to determine the market value of the NRFA interests. However, Andersen did not determine the market value and only review the valuations to see whether it's in accordance with FOF guidelines. Clearly Andersen had an issue with...
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