Ethics in Financial Reporting and Accounting

Most of the large accounting firm gave clean bills of health to several publicly held companies that were later discovered to have fraudulently misstated their financial statements. A significant flaw that is seen among these auditors is lack of independence. Independence is a vital factor in auditing. Independence means that external auditing firms need to be free from any influence of the client (Kuepppers & Sullivan, 2010). In most of these fraud cases, there is evidence of lack of independence from the auditors’ part. In Madoff’s case, it appears as if the auditors of the feeder funds relied on the financial statements provided by Madoff to give the clean bill of health rather than conducted independent investigations. It is the role of the auditor to examine companies’ financial statements and test their credibility using evidence. The auditor is expected to provide reasonable assurance by conduct thorough and credible examination on the financial records of their client. In Enron’s case, the auditor involved was also a consultant for the company. The consulting relationship between Enron and the auditor interfered with the independence of the auditor by introducing an agency problem (Crusher, 2010). External auditors act as agents of the members of the public. They are supposed to analyze companies’ statements and ascertain that the public is not defrauded. Therefore, auditors are agents while the public are the principle. An agency problem crops up when the interests of the auditors and that of the public are not aligned. In Enron’s case, the auditor had an incentive not to expose the company’s fraud because they wanted to protect the consulting relationship between them and Enron. The consulting relation between Arthur Andersen, the auditor, and Enron interfered with the independence of Arthur Andersen when analyzing Enron’s statements.

ReferencesrnCrusher, S. (2010). The collapse of Enron. Retrieved from http://www.zhp?tron_auditing_issues_ce_actions_management_of_ ons&b=50&c=43 rnKueppers, R., & Sullivan, K., (2010). Why and how an independent audit matters. Disclosure and Governance. 7 (1), 286- 293

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