The factor of client relationship that creates a power imbalance in favor of the client is money. When partners in the audit firm are compensated according to their number of client, partners are more likely willing to do almost anything to keep their client happy. The independence of auditor is impairing in front of consulting fees, and interpretations of GAAP will be push to the limit to satisfy client’s need. Due to this power imbalanced in favor of client, lots of company went in to bankrupt, each in companies where financial statement misrepresentation had taken place, billions of investment and retirement dollars were lost, and the perception that auditors were not independent from their clients were formed. Finally in 2002, congress passed the Sarbanes/Oxley Act in response to massive accounting scandals. In particular to the problem of the unbalanced relationship in favor of the client, Sarbanes requires boards of directors be independent of organization and exercise oversight over management and the audit function. Further, the board of directors through its audit committee is the “client” of the public accounting firm. The audit committee must have at least one person who is a financial expert, other members must be knowledgeable in financial accounting and control, and must be comprised of “outside” directors, not members of management or have other relationships with the organization. Meanwhile, they have oversight responsibilities over the internal audit and financial reporting process, be apprised of all significant accounting decisions made by management and changes in accounting systems and system control. On the audit company side, audit engagement partners, as well as other partners and managers with significant roles in the audit, must be rotated off the engagement every five years.
According to the case, the evidence Hope collected that supported USSC’s claim that the cost involved tooling modifications are simply being told by USSC’s officers. “On May 3, 1982, the USSC officials inform Hope that in early 1981, they had instructed More, the Lacey general manager, to make certain tooling changes that would result in improved efficiency in the production of USSC products. The executives then provided an elaborated and confusing explanation as to why the tooling modifications were charged out on a per unit basis.” However, the audit evidence that supported the position that the costs were generic production expenses rater than non-current asset. According to the generally accepted auditing standards, the key evaluative criteria that auditors should consider when assessing audit evidence has 2 standards, general standard and fieldwork standard.
Approve the audit without making the changes to move the motors out of inventory and into assets. This does not protect the public interest and would violate professional standards. Milton Manufacturing would qualify for the
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
Proverbs 10:9 states: “People with integrity walk safely, but those who follow crooked paths will slip and fall” (New Living Translation).” This Scripture suggests that individuals who do not walk in integrity follow “crooked paths.” They walk in ways that are not morally sound, pure, and honest—but in ways that are corrupt. Clients want accountants with integrity. Thus, integrity is critical to the public trust. As a matter of fact, one of the general definitions of integrity provided by the AICPA Code is that it is a quality from which the public trust derives. Also, it is an element of character fundamental to professional recognition, and it requires members to be (among other things) honest and candid within the constraints of confidentiality (Duska, Duska & Ragatz, 2011). Integrity in the accounting profession involves adhering to the rules and principles of the profession. This includes remaining free of conflicts of interest and maintaining client relationships in which the accountant can remain objective in discharging his or her responsibilities. This requires independence in fact and in appearance as mandated under section 1.200.001.01, Independence Rule the AICPA Code. In other words, no one should be able to view the accountant as being biased with respect to a client’s financial reporting due to an improper client relationship. Lack of integrity in accounting practices has been, and continues to be, a key element in the downfall of many institutions which has hurt the public trust in the accounting
When I hear the word ‘Forensic’ the idea and image of a homicide investigation in which evidence gathered is analyzed at a laboratory to determine ‘who done it’. Shows like CSI, Bones, Law and Order depicts the forensic aspect in their broadcast. Being a registered nurse, another thought comes to mind when hearing the term ‘forensic’. I like to watch Dr. G medical examiner on the Discovery channel. That is a reality show regarding investigative research on how a person died. This is done by performing an autopsy and analyzing the pathological reason for a death to determine if foul play was involved. However, I rarely placed the thought that accounting can have a forensic aspect, too. I was always under the impression that auditors were the forensic accountants. Internal Revenue Agents to audit income tax filings to make sure all income are reported, and deductions have receipts as supporting evidence. Certified Internal Auditors to look at business operations and financial statements within a corporation to make sure internal controls are in place, financial statements are properly recorded, and government regulations have been met. External auditors perform audits for SEC compliance and to attest that the company is in good standings to ensure protection of the public interest. These auditors, in essence, would be able to detect fraud in their job when reviewing audit trails and documentations. Needless to say, I my conception have been construed. There is a whole new field of accounting that is on the rise, which specifically deals with fraud detection. This is called Forensic Accounting. This area sparked my interest.
Corporate governance changed drastically after the case of Andersen Auditors, Enron’s auditing service showed that they contributed to the scandal. Andersen was originally founded in 1913, and by taking tough stands against clients, quickly gained a national reputation as a reliable keeper of the people’s trust (Beasley, 2003). Andersen provided auditing statements with a ‘clean’ approval stamp from 1997 to 2001, but was found guilty of obstructing justice by shredding evidence relating to the Enron scandal on the 15th June 2002. It agrees to cease auditing public companies by 31 August (BBC News, 2002).
Conflict of interest is a big problem between Enron and its auditing firms. It is believes that Enron’s auditors was hide many information and external auditors never aware or hide the losses in Enron. From audit committees to transparency committees would increase the likelihood that a firm’s key business ricks are transparent to investors (Healy & Palepu 2003, p. 21). Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader.
...ction. Product development, service delivery, materials purchasing, product design, and manufacturing operations must all be included. I Auditors will look for continuous improvement in the system. These improvements can include better education of employees, better communication of ideas from and to employees, better reporting of environmental impacts within the company, and improved identification of environmental aspects. ISO 14000
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.
...pendence, whether pro forma or substantially, the quality of professional assurance service of professional accountants will be doubted by public and that will probably lead to serious results. The factors affecting independence of external auditors are multiple. Market competition among external auditors and the imperfection of laws regulated the external auditing industry are tow of most important factors. In order to maintain and guarantee the independence of external auditors and try to avoid the scandals like Arthur Andersen, some research on how to improve and maintain the independence of external auditors are necessary. It is possible for researchers to put emphasis on how to control the market competition among auditing organizations and enhance the ability of accounting regulators to supervise and manage the professional accounting industry in the future.
No matter auditors work with technology or not, the most important thing in process of auditing is evidence. The basic framework for the auditor understands of evidence and its use to support the auditor's opinion on the financial statement. In reaching an opinion on the financial statements, the evidence gathered from the audit procedure is used to determine the fairness of the financial statements and the type of audit report to be issued. The characters of paper audit evidence are: