In Dependence of Auditor – Enron and Arthur Andersen Case

Topics: Enron, Audit, Internal control Pages: 16 (4928 words) Published: October 18, 2010


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 Board (PCAOB), Securities and Exchange Commission (SEC) are also discussed in the section of independence as mandatory part of audit function.

In a part of Independence, Objectivity and Impartiality (as cited in Code of Ethics and Auditing Standards, Auditing Standards Committee at the XVIth Congress of Intosai in 1998 in Monteviideo, Uruguay in 1998, PP 15) stated that “[14] Independence from the audited entity and other outside interest groups is indispensable for auditors. This implies that auditors should behave in a way that increases, or in no way diminishes, their independence. [16] It is essential that auditors are independent and impartial, not only in fact but also in appearance. [17] In all matters relating to the audit work, the independence of auditors should not be impaired by personal or external interests. Independence may be impaired, for example, by external pressure or influence on auditors; prejudices held by auditors about individuals, audited entities ,projects or programmes; recent previous employment with the audited entity; or personal or financial dealings which might cause conflicts of loyalties or of interests. Auditors have an obligation to refrain from becoming involved in all matters in which they have a vested interest. [20]It is important that auditors maintain their independence from political influence in order to discharge their audit responsibilities in an impartial way”

In Section 100 Rule101 of the AICPA Rules contains two rules related to independence, integrity, and objectivity whenever the audit firm performs attest services for the client including finance statement audits, financial statement reviews, and other attest services as defined in the Statement of Standards for Attestation Engagement (SSAEs) as follow:

“Rule 101: A member in public practice shall be independent in the performance of professional service as required by standards promulgated by bodies designed by Council”.

In addition, there are...
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