Should auditors be the only ones liable for business collapses?

the loss of it, but also the fact that if another auditor was conducting internal or external auditing alongside Anderson, then possible the energy company would have still been trading today, even with the internal problems that the company faced before its demise. Could Anderson be responsible for the collapse of Enron solely by sharing audit and accounting reports that not should not have occurred?, and if this had not occurred, then why did Anderson admit to the “shredding of the documents” (BBC UK 2002) whilst the investigation was still going on?.By Andersen shredding the documents, to the eye, one would immediately perceive as the auditor – Andersen, having something to hide, hence being liable for the business collapse too. But it is common practise in public accounting to shred audit work papers once they are no longer needed – the audit regulations and standards allow this. What is suspicious which is seen clearly, is why Andersen destroyed documents that may have been relevant to the investigation, but more importantly whether the shredding of documents began before the investigation or after, if before, then Andersen had been simply following common auditing practise and if after, one would perceive as the auditor having something to hide relevant to the investigation. Was Anderson Solely Responsible For The Enron collapse? Evidence clearly answers this question, which I believe is simply no. The responsibility I believe lied with other parties as well as the top executives who did contribute majorly to the company collapse. These include, a) the political system within Enron whereby campaign donations trades for favours should the recipients of donations eventually reach office, b) the labour working system that Enron conducted which allowed former government officials to join the company rather than banning government official from employment within Enron, c) the auditing conducted by Andersen, was it genuinely “fair and true” but more importantly was it independent and beneficial both to Andersen and the Enron executives d) the none use of accounting standards set within Enron, trying to bend audit ... ever evolving Auditing world. This is known as the “deep pockets syndrome”.Auditor IndependenceThe collapse of the energy trading firm Enron has focused mainly on auditor independence (Arthur Anderson), and whether he was also responsible for the collapse of Enron and if so to what extent was he reliable in the collapse of the company.It is still argued that in the auditing profession that auditor independence is a serious problem and indeed to an extent with the Enron case. Third parties, such as investors, the general public and regulators, regard a quality audit to be one that is truly independent and of a fair and true view. But there is a problem that compromises independence as explained by Parker in the following paragraph;“There is widespread concern that auditor independence has been compromised by audit firms keen to secure lucrative non-audit work from clients” (Parker, FT 04/11/02) If an auditor is seen to be independent the credibility of the financial statements are supported. Historically, auditors are assumed to have no incentive to be dishonest, but there are arguments to suggest that auditors may no longer be truly independent, which could lead to fraud, company collapses or even falsified reporting, which in many cases can lead to a business being declared bankrupt. 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.For Arthur Andersen there is no concrete evidence to suggest that he was solely responsible for the collapse or for financial gain but I believe there were more other factors involved to the collapse.Perception Of Auditors Independence – A Problem?It is clear that perception is a serious problem in auditing, and many shareholders also believe that independence cannot be guaranteed which seriously can affect the audit and could lead to information being misused. Another problem with independence is the nature of how auditors are paid and appointed. S390A of the Companies Act 1985 states “the remuneration of auditors appointed by the company shall be fixed by the company in general meetings or in such a manner as the company “shall determine”. In accounting practise this simply means that management appoint and pay the auditors. So in order to keep the auditing “clean”, there is an incentive to act in a manner to keep management happy and not at all truly independent, jeopardising not just the “fair and true” aspect of auditing but also the company in question, certainly if it is at risk, because if the company does collapse due to negligence from not only auditors giving a fair and true view, then directors who do not act upon this will also be responsible for the collapse of the company.  ConclusionIn conclusion, the role of an audit is to provide an assurance on what is being audited following thorough standards and legislation. Financial statement credibility will always be under question, if they are any doubts or certainly if a business does collapse. As demonstrated in this document, we should not shy away from the fact that auditors are never on most occasions solely responsible for business collapses – directors, management, fraudsters are just as liable. Where evidence suggests independence and liability does not only concern auditors but must involve directors and company seniors too.Because of the blame and external pressures put on auditors on various companies that have collapsed, certain industries or companies which areThe profession must address the problem of independence before confidence in financial statements can be restored. According to Moizer, (1997) actions, which could be taken include: 1) Rotation of audit appointments. 2) Peer review 3) Independent audit appointing and free settling body 4) Limiting the size of the auditors’ economic interest. Given the problems associated with audit quality it is not surprising questions are being raised of the credibility of the financial statements which the audits are intended to support. Serious questions must be asked when it can be argued that the ICAEW definition of audit quality, (independent, reliable and supported by adequate evidence (ICAEW: 11)) cannot be met. The most important question should be what can the profession do to solve these problems and can new practices such as the business risk assurance model overcome these difficulties. The Business Risk Assurance Model (BRAM): Why? There are many factors which have led to the development of the business risk assurance model or ‘The Audit of Tomorrow’ (Stewart, 2001:1) these include: Fee pressure As outlined above increased competition and the introduction of competitive tendering has put severe downward pressure on audit fees. For standards to be maintained and auditing to remain a viable commercial enterprise to the professions practices had to be altered. Technical advances The last 20 years has seen significant improvements in technology. As this gathers pace the systems which hold...directors as agents of shareholders and in this case showing that the directors were giving a too favourable picture of the accounts and the is-use of shareholders money. Auditor LiabilityAn issue which is significantly confusing in auditing terms is auditing liability. In auditing terms “an auditor must approach his work with an inquiring mind, not suspicious of dishonesty, but suspecting that someone may have made a mistake and that a check must be made to ensure that their has been none (Per Denning).In the case of the Kingston Cotton Mill (1896) the auditors had taken an assessment made by management on trust as to the amount of cotton they had in stock, and therefore failed to make an independent and physical check themselves. Assessments made by management were fraudulent – which in turn made the company better off then it actually was. In this case even though the Mill did not collapse because of the irresponsible judgement of the auditors based upon trust, the auditors were not held liable on the basis that they were entitled to “rely on the statements made by management of the company. 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 EnronAs 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. Word Count: 1900 Bibliography Rakesh RanaStudent No: 035731878Perspectives On Audit & Tax: 4AG001Assessment 1