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Should auditors be the only ones liable for business collapses?

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Introduction

Should auditors be the only ones liable for business collapses? Introduction In most simplistic terms, an audit is the means by which one person is assured by another of the quality, condition or status of a subject matte, which the auditor has examined, which has to be genuinely fair of a and true view. The profession of the audit world is constantly changing, but the main purpose always remains the same - an audit which reports on a company's accounts in accordance with the Company's Act 1985. In the UK economy and indeed the global economy, shareholders confidence in financial information can impact heavily across all areas of the market with an immediate force which can as seen in the Enron and Barings case, wipe off billions off the stock market or increase the value of the company and this is felt throughout the whole global economy. The Problem For an audit to be effective it must be perceived to be credible. A loss in confidence, reputation, or trust can have serious implications. Ultimately for an auditor to provide audit reports that are of a quality service to shareholders, "the reports have to be independent, reliable and supported by adequate evidence" (ICAEW, 2003). ...read more.

Middle

In the case of the auditing firm Pricewaterhousecoopers, who were the auditors for Barings Bank - whereby they falsified the banks account from 1993 to 1994, the auditors were held liable but to what extent, solely or jointly liable for the bank collapse. At the time of the collapse of the bank auditors had signed off four separate sets of accounts each ones as being certified as being "genuinely true and fair". The accounts showed the bank had made a profit of over �78m at December 1994, when infact it had made a huge loss of �174m. When this case was being investigated by the KPMG, the blame initially went solely to the auditors, but further evidence showed that a director and a rogue trader Nick Leeson had been liable for the business collapse hence liability being shared equally. The Barings case study shows of the agency theory - whereby the audit sees the rules to gain the desired result. One piece of evidence will always remain; Enron had overstated its income for more than four years before its collapse. The question is whether this was of negligence or intent to defraud. The agency theory can once again be applied to the audit in this case. ...read more.

Conclusion

Certainly, from the above evidence auditors can be perceived to be liable but their independence can be compromised based upon management, director's trust and ill judgement hence being auditors being declared non responsible if a business collapse was to occur. A Detailed Look - Andersen V's Enron As touched upon earlier in this report, the collapse of Enron was the biggest bankruptcy in U.S history. The company had dramatically re-stated its value, and the after effect was the loss of 4000 jobs of its employees. $70 billion of shareholders investments and employees pension funds were wiped away in an instance, but surprisingly Andersen the auditor of 16 years was not liable for the collapse (with an ongoing investigation) but the Enron demise was blamed on the top executives who gained themselves by securing their "long term financial status" (BBC UK Enron Auditors quizzed, 2002) The main argument that arised in this case was "Anderson also responsible?" Evidence suggests that he may have been perceived to be more at risk and therefore would benefit most from a rigorous audit are simply being refused by audit firms. The danger is that, ultimately the objective of an audit - that of serving the public interest and supporting the running of the economy will no longer be achieved. ...read more.

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