...Kanebo for five years. After this scandal was uncovered, the Japanese Financial Service Agency revised auditing standards, the CPA Law and the Financial Instruments and Exchange Law. The FSA also introduced the Internal Control Report and Audit and quarterly financial statement reviews. In addition, the CPAAOB was formed and was to become an independent regulator under the FSA. Further reforms include requiring auditors to rotate client teams every seven years, with a two year interval before they return. Another development was the Olympus Corp. fraud of 2011. Olympus Corp. admitted to hiding large securities losses by using payments to merger advisers and venture capital funds. The two auditing firms that were under investigation were KPMG ASZA and Ernst & Young ShinNihon. With each firm, there was a failure to obtain sufficient, competent evidence to support the auditors' opinion on the financial statements. Based on this scandal, the PCAOB was given more international freedom. The PCAOB and Japanese regulators reached an agreement that allows the two countries to carry out joint inspections of auditing firms in Japan and the US. As a result, the PCAOB conducts inspections of international firms that audit public companies...
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...senior auditor, and one or more staff auditors. The partner-in-charge leads the engagement team and is responsible for all final decisions made while conducting the audit. The manager, senior auditor, and staff auditors are to perform the actual audit examination. The engagement team’s responsibility is to complete the audit with competency and objectivity. What is the purpose of having both a partner-in-charge and a consulting partner on each audit engagement? Should the partners be rotated periodically? Why or why not? The partner-in-charge is responsible for leading the engagement team through the audit and making decisions during the process. The partner is responsible for reviewing the team’s final work, monitoring quality control standards and maintaining the human-resource policies of the firm. It is required that partners rotate periodically. Auditing & Assurance Services states “as required by the Sarbanes-Oxley Act, the SEC independence rules require the lead and concurring audit partner to rotate off the audit engagement after five years.” (Arens, Elder, and Beasley, 2014, pg. 89) Can an accounting firm hope to accrue any real benefit from a marketing campaign such as the one carried out by Abernethy and Chapman? Should the management of a company select its auditors based on advertisements alone? All companies need to have some type of marketing strategy in place in order to be successful and generate new sources of revenue. In today’s day in age of technology, it is...
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...research function (like Andersen's PSG) is important in the operations of a CPA firm. What role does the function play in completing the audit? Due to new regulations, NYSE listed companies are required to have internal audit departments. The purpose and importance of an internal audit team are very obvious. The internal audit team is responsible for determining the scope of the work and having the personnel and budget to complete it. This internal entity is very important ever since such accounting scandals as Enron and WorldCom. They are required to provide management and the audit committee with ongoing assessments of the company's risk management processes and system of internal control. In terms of these groups in association with CPA firms it is also important to have. As seen in the Enron case, the PSG group voiced its nonapproval to the companies formation of a new entity. These groups usually have the companies general goal in mind during the decision making process. In the case of Enron, it did not see any benefit in the creation of a new group. A member of the group cited several reasons including conflict of interests by having the CFO manage the venture equity group. Internal auditing functions play large role in the scope and budget of an audit. 2. Please consult Section 103 of SOX. Do you believe that the Engagement Leader of an Audit (like David Duncan on the Enron audit) should have the authority to overrule the opinions and recommendations of the accounting...
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...function (like Andersen's PSG) is important in the operations of a CPA firm. What role does the function play in completing the audit? Due to new regulations, NYSE listed companies are required to have internal audit departments. The purpose and importance of an internal audit team are very obvious. The internal audit team is responsible for determining the scope of the work and having the personnel and budget to complete it. This internal entity is very important ever since such accounting scandals as Enron and WorldCom. They are required to provide management and the audit committee with ongoing assessments of the company's risk management processes and system of internal control. In terms of these groups in association with CPA firms it is also important to have. As seen in the Enron case, the PSG group voiced its nonapproval to the companies formation of a new entity. These groups usually have the companies general goal in mind during the decision making process. In the case of Enron, it did not see any benefit in the creation of a new group. A member of the group cited several reasons including conflict of interests by having the CFO manage the venture equity group. Internal auditing functions play large role in the scope and budget of an audit. 2. Please consult Section 103 of SOX. Do you believe that the Engagement Leader of an Audit (like David Duncan on the Enron audit) should have the authority to overrule the opinions and recommendations of the...
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...Mandatory Auditor Rotation Policy Through the course of an audit, auditors are constantly faced with pressure from the client regarding financial reporting and other issues that may arise. Clients can threaten to terminate the auditor, resulting in lost fees and tarnished reputations as the firm tries to pursue future clients. In these cases, partner evaluations can be negatively affected since they are judged based on hours billed and the number of clients they are able to secure. Mandatory auditor rotation is defined as the obligation to limit the number of years during which the accounting firm may be the auditor of record for a client. The Public Company Accounting Oversight Board (PCAOB) is a strong advocate in favor of mandatory auditor rotation, while a majority of accounting firms are opposed to the idea. Problems are more likely to develop in the initial years of the audit relationship (fraud and bankruptcy) when the auditor tries to gain as much knowledge as possible about the client. According to an American Institute of Certified Public Accountants (AICPA) study (Church and Zhang 2006, page 3), audit failures are three times more likely to occur in the first two years of the auditor-client engagement. Auditor rotations have never been mandated in the United States, and I believe this should continue in the future due to the high costs and decreased auditor effectiveness that would result from continual changes in the auditor-client relationships. There...
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...I. Audit Quality The primary role of accounting is to reduce information asymmetry by providing investors with relevant and reliable information in order to create an efficient allocation of resources. However, there is often a tradeoff between relevance and reliability that needs to be considered when imposing regulations (Scott, 2012). When information asymmetry is present, investor faith decreases, compromising the efficiency of the market. In order to prevent market failures, it is critical to maintain investor confidence; this can be done by achieving high audit quality. Definition The PCAOB defines audit quality as providing “independent and reliable audits” regarding management’s financial statements, internal controls and potential threat for going concerns (PCAOB, 2013). Four key aspects of audit quality include independence, objectivity, skepticism, and competence. Maintaining and improving the four elements is critical to increasing audit quality and the usefulness of the information provided. Independence According to the PCAOB Auditing Standards, auditors should maintain independent mental attitudes. Independence is defined by the AICPA Code of Professional Conduct as independence of both, mind and appearance. Independence of mind requires the auditor to act with integrity, free of outside influence whereas independence of appearance requires the avoidance of situations leading to potential conflict of interests. Unless, the auditor is truly independent, the...
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...NW Washington, D.C. 20006 Telephone: (202) 207-9100 Facsimile: (202) 862-8430 www.pcaobus.org ) CONCEPT RELEASE ON AUDITOR ) INDEPENDENCE AND AUDIT FIRM ) ROTATION; ) ) NOTICE OF ROUNDTABLE ) ) PCAOB Release No. 2011-006 August 16, 2011 PCAOB Rulemaking Docket Matter No. 37 Summary: The Public Company Accounting Oversight Board ("PCAOB" or "Board") is issuing a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced. One possible approach on which the Board is seeking comment is mandatory audit firm rotation, which is explored in detail in this release. However, the Board seeks advice and comment on other approaches as well. The Board will also convene a public roundtable meeting in March 2012, at which interested persons will present their views. Additional details about the roundtable will be announced at a later date. Public Comment: Interested persons may submit written comments to the Board. Such comments should be sent to the Office of the Secretary, PCAOB, 1666 K Street, N.W., Washington, D.C. 20006-2803. Comments also may be submitted by e-mail to comments@pcaobus.org or through the Board's Web site at www.pcaobus.org. All comments should refer to PCAOB Rulemaking Docket Matter No. 37 in the subject or reference line. Comments should be received by the Board no later than 5:00 PM EST on December 14, 2011. Board Contacts: Martin F. Baumann, Chief Auditor and Director of...
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...Sarbanes-Oxley Act of 2002 was a law signed in by President Bush. This act applies in general to publicly held companies and the firms that perform the audits on them. The act affects the accounting profession particularly. This act doesn’t just apply to the large accounting firms but any CPA that is working as an auditor of or for any publically traded company in the US. The first implication that this act puts into place is the Public Company Accounting Oversight Board also referred to as “The Board”. The PCAOB is a private sector and non-profit organization that was created by the Sarbanes-Oxley Act of 2002. The PCAOB was put together to oversee auditors and essentially protect the interests of US investors. But also is in place to further the public interest in the preparation of informative, independent, and fair audit reports. With the Sarbanes-Oxley Act of 2002 the rules for auditing a public company have changed slightly. There is now a need for a company to have a separate committee that oversees the company’s audits, within this committee there is to be no management from the company. The auditors for the committee must have their actions approved by the committee before any services exchange hands. With some exceptions of the services not banned, if preapproved by the committee, then the auditor can go through and exchange services with the company. Upon the committee the members must be on the board of directors and also be independent. In terms of being independent...
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...Commission (SEC) Public Company Accounting Oversight Board (PCAOB) Independent Audit Firm Audit Committee of the Corporate Board of Directors Internal Audit Function Internal Control System Corporate Governance & Financial Reporting U.S. Securities & Exchange Commission (SEC ) Public Company Accounting Oversight Board (PCAOB) Independent Audit Firm Corporate Board Of Directors Audit Committee CEO & CFO Internal Audit Function Internal Control System The U.S. Securities & Exchange Commission (SEC) The mission of the SEC is to protect investors, maintain orderly and efficient financial markets, and facilitate capital formation. The laws and rules governing the securities industry derive from a straightforward concept: all investors, large or small, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. Therefore the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to judge for themselves whether to buy, sell, or hold a particular security. For more visit: http://www.sec.gov/about/whatwedo.shtml Public Company Accounting Oversight Board (PCAOB) The PCAOB is a private, nonprofit corporation created by the Sarbanes-Oxley Act of 2002, under the oversight of the SEC, to supervise the auditors of public companies. The PCAOB was created to protect investors and the public interest...
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...one of the largest energy trading, natural gas and Utilities Company in the world that was based in Huston, Texas. The downfall of Enron is one of the most infamous and shocking events in the financial world, and its reverberations were felt around the globe. Prior to its collapse in 2001, Enron was one of the leading companies in the U.S and considered among top 10 admired corporations and most desired places to work at. Its revenues made up US $139 to $184 billion, assets equaled $62 to $82 billion, and the number of employees reached more than 30,000 people in 20 countries around the world. While on the surface it seemed like the perfect Corporation, internally it had highly decentralized financial control and decision-making structure, which made it practically impossible to get coherent and clear view on corporations' activities and operations. Enron manipulated its books and assets to help it report steady profit growth to Stock Exchanges and Credit-rating agencies. Investors generally are not willing to pay as much for the stock of a volatile trading operation, and this gave rise to manipulations. This paper briefly describes the legal and ethical breaches by Enron, the key factors and events that led to its collapse and the passing of the Sarbanes Oxley Act as a consequence of such a catastrophe. The paper also discusses the key components of the Sarbanes Oxley Act and its effect on publicly traded companies, its management and the auditors. Legal, Ethical and...
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...the auditor to give an unqualified opinion otherwise not re-appoint him. Areas of risks Financial interests Family relationships Business relationships Loans Fees Undue independence Gifts and hospitality Second opinion Provision of other services Auditors specific threats to their independence and objectivity 1. Dependence on income from a particular client or group of clients may impair objectivity and independence. Implications- auditor may not qualify the audit report when qualification is required because this will upset client who may move to another audit firm and thus cause loss of significant income. Safeguards Do not accept certain assignments. Resign from certain assignments. Do not stand for reappointment as auditor. Reduce non audit work with a view to control gross practice income from that particular client. As a general rule, recurring fees paid by one or group of connected clients should not exceed the threshold of the gross practice income as follows: Listed: 10% Non Listed: 15% 2. Family or other personal relationships- problems may arise where a practice or anyone closely connected with it has a mutual business interest with a client or with the employee of a client. Implications- auditor loses independence as he has a conflict between maintaining professional standards and personal...
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...to speak tackle the situation. The letter clearly expresses Watkins’ concerns with the SPEs including Braveheart, Rawhide, Raptor, Condor, and Talon. Andrew Fastow was the Chief Financial Officer; therefore, he should have been more aware. Apparently Fastow knew about the various SPEs because he named them after his children. Arthur Andersen & Co. was responsible for auditing the financial statements of Enron and should have been more aware. Their knowledge and expertise of accounting practices should have alerted them to the various SPEs and their treatment. They should have been more thorough in their investigation. Even when they did discover Enron’s treatment and communicated those thoughts, Enron did not address the issue. AA then had the responsibility to disconnect their firm from the audit. 2. Three types of consulting services that audit firms have provided to their audit clients include: Internal Auditing-Threat of biased audits and threat of objectivity Design of Accounting Systems-Threat of creating illegal programs, accessing files, and threats to database management Development of E-Commerce Initiatives-Threat of violating restrictions All of the above services can threaten the independence of an accounting firm. If a company offers more than market...
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...Comprehensive Case A.1 – Enron I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 201 Section 203 Section 204 Section 206 Section 301 Section 302 Section 305 Section 401 Title IX PCAOB Auditing Standard No. 5 Paragraph #2 Paragraph #9 Paragraph #11 Paragraph #21-22 Paragraph #25 Paragraph #28-30 Paragraph #69 Paragraph #A5 (in Appendix A) Paragraph #A8 (in Appendix A) III. Case Questions – Answer Key 1. Refer to the second general standard of Generally Accepted Auditing Standards (GAAS). What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? The second general standard of generally accepted auditing standards (GAAS) is, “In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” If the auditor is not independent, the financial statements are considered unaudited...
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...involvement in unethical or illegal activities, or the appearance of involvement which may adversely affect your career, would be participation in gambling. While this activity is legal in some states and venues, this activity could be extrapolated to one’s personality which could go against the moral of integrity of clients or supervisors. Since this is a perceived negative activity, a client or employer might wonder what risks of integrity or moral standards the individual applies in work activities. When this happens, clients or supervisors may lose trust in you and decide to work with someone else or you may be overlooked forpromotion or have other negative consequences. To preserve your reputation throughout your career, one should always conduct themselves with high ethical and moral standards to maintain their...
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...what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe are most responsible for that crisis. There are many responsible for the crisis at Enron. The two main are the top executives at Enron and the auditors at Arthur Andersen. The auditors at Arthur Andersen clearly had a conflict of interest. Andersen earned more form other accounting services from Enron than from auditing services performed. This would certainly lead to the notion that Andersen could and probably did alter the financial reports of Enron to their own benefit. The top executives at Enron were also just as responsible as each of them were profiting from the buying and selling of the company’s stock making huge profits. Both the auditors and the top executives were well aware of the special purpose entities to protect the data that should have been entered on the consolidated financial statements of Enron. The auditors and the top executive should have noticed the problem with the special purpose entities and reported them. Both the auditor and the top executives were profiting from the special purpose entities not being reported on the consolidated financial statements. 2. List three types of consulting services that audit firms have provided to their audit clients in recent years. For each item, indicate the specific threats, if any, that the provision of the given service can pose for an audit firm’s...
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