Throughout the years, the news covered stories of corporate scandals involving accounting unethical practices. These unethical corporate acts had a tremendous negative impact on these company’s stockholders, investors, employees and the whole U.S. economy. Most of these scandals would have been prevented, if the independent audits of these companies were conducted in an ethical manner. With this in mind, two corporate scandals will be the subjects of further review to understand that an auditor might encounter ethical dilemmas, if independence and objectivity are not part of the audit process.
An auditor should keep objectivity at all times. Maire Loughran, a Certified Public Accountant and University Professor, explains “objectivity means the ability to look at facts the client presents, and reviews them with no preconceived notions or prejudices” (52). In other words an auditor has to exercise his ability to review information in a no subjective manner, and perform auditing work free of conflicts of interest. Many instances have occurred when objectivity was not present while performing audits, for instance the case of Bernard Madoff’s auditor, David G. Friehling, from the firm of Friehling & Horowitz, illustrates it well. On 2009, William K. Rashbaum and Diana B. Henriques, both reporters at The New York Times, inform in the online version of their newspaper:
The civil complaint by the S.E.C., in addition to citing the deceptive audits, accused Mr. Friehling of collecting “ill-gotten gains” in the form of substantial audit fees — about $186,000 a year — from the Madoff enterprise and millions of dollars…he and his family maintained with Mr. Madoff accounts….
Mr. Friehling “essentially sold his license…for more than 17 years...
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...d unethical behavior, to the unethical side. An auditor needs to follow, abide and comply with the standards, rules and regulations of their profession, as these will help the auditor to recognize when independence and objectivity would be compromised.
Works Cited
Gray, Iain and Stuart Manson. The Audit Process: Principles, Practice and Cases. London: Thomson Learning, 2008. Print.
Holt, Michael F. The Sarbanes-Oxley Act: overview and implementation procedures. Oxford: CIMA Publishing, 2006. Print.
Loughran, Maire. Auditing For Dummies. Hoboken: Wiley Publishing, 2010. Print.
Madura, Jeff. Financial Markets and Institutions. Mason: South-Western Cengage Learning, 2009. Print.
Rashbaum, William K., Diana B. Henriques. “Accountant for Madoff Is Arrested and Charged With Securities Fraud.” The New York Times. The New York Times, 18 Mar. 2009. Web. 3 Dec. 2011.
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).
“After law school, Peter Madoff’s daughter became his deputy at Uncle Bernie’s firm, where she served as compliance director (Arvedlund).” She spent almost $400,000 at a high-end sex store on the company’s American Express (Arvedlund). The company also paid $2.9 million for a house in East Hampton for her and about $250,000 for rent in New York City between 2002 and 2004 (Arvedlund). “Shana married Eric Swanson – former SEC official whose team of examiners ran a routine check of Madoff’s brokerage firm in 2004 and reported nothing odd (Arvedlund).” It is obvious that this company was swimming in nepotism and fraud and that even the SEC didn’t have independence in auditing when it came to Bernie Madoff’s
Objectivity also needs to be evaluated to make sure the internal audit is reliable. The internal audit needs to be free of conflicting responsibilities as well
middle of paper ... ... They had complete disregard for ethical standards that they should have looked towards when making their decisions. They allowed greed, and notoriety, to take over their basic perceptions of what is right, and what is wrong. So in conclusion, I have provided my analysis of ethical behavior that surrounded the financial events of Bernie Madoff, and the events that surrounded Enron.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
"Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark." On the Bernard L. Madoff Investment Securities LLC’s Web site, this sentence used to attract hundreds of thousands of investors came. Surprisingly, on December 11, 2008, federal authorities arrested Bernard Madoff, the largest Ponzi scheme in history by him was exposed and shocked the Wall Street as well as the world.
There are common ethical dilemmas facing auditors today. The rules of conduct in Generally Accepted Auditing Standards (GAAS) and their application to the auditing process are paramount to auditors because it shows that an independent auditor plans, conducts, and reports the results of an audit in accordance with generally accepted auditing standards. Auditing standards provide a measure of audit quality and the objectives to be achieved in an audit. Auditing procedures differ from auditing standards. Auditing procedures are acts that the auditor performs during the course of an audit to comply with auditing standards.
The Australian Auditing Standard (ASA) establishes requirements on the responsibilities of an auditor when contracted to undertake an audit of a financial report, complete set of financial statements or other historical financial statements. Reports generated by auditors need to be of quality, meaning that the main objective of ensuring the financial statement is free of material inaccuracy and that material deficiencies detected are addressed and communicated through the audit report. Audits reports have to be as accurate as possible as it is key to confident and informed markets and investors. Improving quality of audit execution is crucial to maintaining =confidence in the independent assurance audit firms provide.
Accounting ethics has been difficult to control as accountants and auditors must keep in mind the interest of the public while that they remain employed by the company they are auditing. The accountants should take into account how to best apply accounting standards when company faces issues related financial loss. The role of accountant is crucial to society. They serve as financial reporters to owe their primary constraint to public interest. The information provided is critical in aiding managers, investors and others in making crucial economic decisions. An accountant is responsible for any fraudulent financial reporting. Some examples of fraudulent reporting are:
With the help of Madoff’s father, a retired accountant, the company attracted investors and scored an amazing client list. "Madoff Investment Securities” grew famous for its reliable annual returns of ten p...
1.Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties.
An audit is an inspection performed by an independent (unbiased) person of an entity’s financial statements, stating if they are honest and true and comply with an “applicable financial reporting framework”(IFAC 200, 2014). For most entities in the UK, audits are legal requirements under Companies Act 2006. Their purpose is assuring shareholders (sole recipients) of the financial statement’s accuracy in his/her opinion via a report, supported by sufficient, applicable evidence. This encourages investment by enhancing the user’s degree of confidence. This, and the “overall all objectives of the independent auditor” (IFAC 200, 2014) is ISA 200 and applies to most frameworks. Ethical requirements, professional scepticism and appropriate response to audit risks are required under ISA 200.
The code of ethics promotes the ethical values that internal auditing professionals are to uphold and practice by. The first principle in the code of ethics is integrity. The integrity of an internal auditor builds the foundation for trust with the client; if a client trust’s the auditor the communication process will be smoother when delivering difficult messages. The second principle is objectivity. Objectivity requires an internal auditor to preform and report the results of the audit without any bias. Objectivity aids in the delivery of grim news because the stakeholders can be assured that the findings and reports are the truth and aren’t swayed by the dislike or favoritism by the auditor. The objectivity principle also requires an internal auditor to disclose all material known facts so the stakeholders have the full picture and not just bits and pieces that could alternate the overall impression of the final report. Another principle within the code of ethics is competency. The competency requirement ensures that an internal auditor can’t perform and audit in which they don’t have the expertise or knowledge. Knowing that the auditor performing the audit and delivering the difficult findings and messages is competent and knowledgeable in what they are doing eases the communication process. Clients have the security and comfort of knowing that the auditor isn’t just pulling something out of a hat so that it appears as though they know what they are talking about. The auditor must actually understand the rules, regulations, laws, and obligations a company has to abide by before even entering into an auditing
Integrity refers to behaving consistently and maintaining the appearance of what is factual. In order to do that, the accountants must remain honest to their customers, even when the information they are sharing is negative. The accountant needs to respect the privacy of the customer and keep the information confidential. The only exception to confidentiality is when required by law to share the information. The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment where as for external auditors, open-mindedness is an essential ingredient of integrity, which means that accountant should be open to the reporting needs of various interest groups and not just the needs of those with economic
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.