Auditor Independence In Enron

Introduction

Auditor independence is a cornerstone in capital markets (Farmer, Ritenberg, & Trompeter, 1987), auditor capability and independence are necessary ingredients for a successful audit (Lee & Stone, 1995). Auditors should be able to objectively and fairly evaluate the financial statement of the auditees. In recent decades, many accounting frauds and company bankrupts because of lack of capability or lack of independence, such as Enron, WorldCom, Xerox, Waste Management Inc., HIH Insurance, etc. Especially the Enron and WorldCom bankruptcy forever altered the public’s view of auditor independence due to Andersen issued unqualified opinions on Enron 's financial statements (Lindberg & Beck, 2004). Audit independence is being growing

2. Auditors ' mission is assessing the internal controls of auditee to determine the level to which they can rely on an auditee’s accounting system. Enron’s internal controls had many weaknesses, a lot of contingent liabilities were not disclosed, and however Andersen ignored all of these weaknesses.

3. Former chairman of the SEC Levitt (2002) stated that Arthur Andersen hired 40 Enron 's internal auditors, and hired Enron 's former head of internal audit department continue responsible for overseeing the internal audit of Enron, which makes it more like Arthur Andersen to audit its own work. In addition, many Enron employees are from Andersen, including chief financial officer, chief accounting officer, and more than 100 employees. This cosy relationship between audit firm and client firm is inevitably serious impact on audit independence, and it contributed to the final collapse.

Since the establishment of Enron, all audit services are provided by Andersen. This long-term partnership resulted in Andersen already found the serious accounting problems of Enron, but did not take any effective measure to correct or disclosure these problems, and even issued serious distortion audit reports and internal control evaluation report. Above problems led the Andersen lack of independence, and thus lost it’s an attitude of professional skepticism, and also fail to protection of investors and

Conclusion

Many companies’ collapses and accounting frauds occurred since the year 2000, which lead the public began to doubt the independence of the auditors. through the cases of Enron and WorldCom can indeed found their major accounting fraud is caused due to auditors loss their independence. The reason caused auditor loss their independence are non-audit service provision, the self-review threat, auditors’ economic dependence on auditees, ex-auditor employment, and long tenure. these factors contributed a cozy relationship between auditors and client firm 's management, and therefore auditors more willing to meet the interests of the client company, rather than protecting shareholders and investors interests. Lack of audit independence will reduce audit quality, and cause audit failure. In other words, in order to avoid audit failure occurs, auditors must improve their independence. The methods which could increase the audit independence are mandatory rotation auditor and audit firm, restrict the same audit firm providing both audit services and non-audit services to the same client at the same time, and restrict the auditee company hired ex-auditors. Some regulations ' established after 2000, which also contributed to the increase auditor independence, such as Ramsay Report, IFAC independence rules, Sarbanes-Oxley Act, and Corporate Law Economic