Answer:
An auditor might protect his reputation by ensuring that the code of ethics, higher degree of professionalism and ethics are followed properly. In addition, the auditor could rely on the firm and staff resources by accumulating second opinion to assure the accuracy and impartiality of individual judgments (Deis & Byus, 2016). Thus, by reviewing the cases of Enron and Andersen, there are plenty of lessons, which could be learnt. One of such lessons takes into account the fact that greed could result in undertaking personal gain and irresponsible decisions with the help of money. Thus, it need not be the driving force while undertaking decisions. The executives of Enron have conducted “millions off the run-up” in share prices and Andersen had retained $50 million and clients by not disclosing the real facts. Thus, these organizations have not considered their integrity at the time of committing these acts.
In case, I am engaged or perceived to be engaged in such a situation in which I work, it could affect my career adversely. The situation could be in the form of depicting greater revenue through higher charges from the customers. Even though I am not engaged directly or knowledgeable of such situation, some people might not believe that I am innocent, which could result in my termination from the organization. As a result, it could pose serious problems in finding new employment opportunities. When integrity of an individual is questioned, it could lead to a snowball effect and the other individuals would conduct the same as well (Carnegie & Napier, 2013). Hence, for avoiding such situations, it is necessary to remain honest and avoid questionable scenarios. With the help of written documentation and back-up of facts, such situation could be avoided and gaining an understanding of the time to engage higher levels or third party for reporting malpractices is the key to maintaining integrity.
In the words of Diermeier et al., (2017), “run on the bank” arises when an individual draws funds due to fear for avoiding insolvency in the upcoming future. Jeffrey Skilling, the CEO of Enron, has blamed the collapse of the organization as a classic “run on the bank”. In the first view, this definition suits the situation of Enron. However, Skilling has stated that every individual had backed away from Enron. Previously, Enron had been highly solvent and profitable; however, it was suffering from poor liquidity position. However, the situation had not been the same, as there is a myth that a run could decline a solvent bank (Diermeier et al., 2017). However, the function of run is that it recognizes the insolvent bank as insolvent.
This has been significant because while the withdrawals might have aggravated the collapse, this was not the real cause, since Enron had been on its way out already. This has been supported by the fact of selling 93,000 shares and Dynegy, JP Morgan Chas and Citigroup had not gone through with Enron. This depicts that they had known about the insolvency of the organization.
In case of Andersen, this analogy does not hold good, as the clients have left the organization. This is because they had perceived that either the organization was involved in conducting unscrupulous practices or the sheer appearance would hamper their own goodwill. The fear of insolvency was missing, the only reason is to isolate from the firm having negative brand image.
It has been observed that the public accounting organizations would encounter greater competition in contrast to the other organizations. Thus, the public firms are required to meet the expectations of the customers by providing effective services. As a result, the firm partners feel the pressure of undertaking tough decisions on the client accounting choices. In opposition to this, the firm might encounter the potential risk of losing its clients (Lai, 2013). Each partner would show interest in the overall business performance, as the partners’ income would depend on the revenues generated on the part of the organization. Sometimes, the partners feel the pressure of achieving the target revenue, which is not possible to accomplish; however, they need to accomplish the same forcefully.
The following measures could be undertaken for eradicating this problem:
- It is necessary for the auditors to recognize the importance of professional skepticism for ensuring the evidence of a misstatement that has occurred
- The organizations need not provide emphasis to the personnel involved in placing the public interest in the first place
- The accounting organizations require national sanction for the local partners in order to sign off few intricate positions to avoid the pressure of pleasing the client
- According to the Sarbanes-Oxley regulations, the auditor need to be debarred from providing both auditing and consulting services for the same firm.
The Sarbanes-Oxley Act has been initiated in 2002 for making necessary changes in restoring public trust in both the financial reporting and accounting profession of the organizations. In accordance with this act, the CEOs and CFOs of the organizations are needed to certify the financial statements and the measures should include the following:
- Personal review of the report
- Elimination of omissions or material misstatements based on knowledge
- Inclusion of financial statements and information in the report by depicting the actual financial condition and outcome of operations related to the firms (Singhvi, 2015)
- Establishment and maintenance of internal controls for assuring that material information has been obtained within time
- Disclosure to the audit committee about any fraud and important deficiencies in the operation of internal controls, which could influence the ability of the issuer in recording, processing, summarizing and reporting financial information
- Indication of whether there is any significant change in internal controls and providing corrective actions to minimize the deficiencies
The enacted laws need to be reviewed periodically for ascertaining their adequacy. In situations, where any further unscrupulous behavior resulted in misstatement of financial reports and other affected parties, studies could be conducted for ascertaining the needs of additional standards.
References:
Carnegie, G. D., & Napier, C. J. (2013). Popular accounting history: evidence from post-Enron stories. The Accounting Historians Journal, 1-19.
Deis, D., & Byus, K. (2016). Who audits America's local governments? Government clients move downstream to regional and local audit firms. SAM Advanced Management Journal, 81(2), 21-32.
Diermeier, D., Diermeier, D., Crawford, R. J., Crawford, R. J., Snyder, C., & Snyder, C. (2017). Arthur Andersen (B): From Waste Management to Enron. Kellogg School of Management Cases, 1-6.
Diermeier, D., Diermeier, D., Crawford, R. J., Crawford, R. J., Snyder, C., & Snyder, C. (2017). Arthur Andersen (C): The Collapse of Arthur Andersen. Kellogg School of Management Cases, 1-10.
Lai, K. W. (2013). Audit reporting of big 4 versus non-big 4 auditors: The case of ex-Andersen clients. The international Journal of accounting, 48(4), 495-524.
Singhvi, M. (2015). Audit Committee Composition and Functioning Post-Enron.
