Reason For Audit Failure Analysis

Audit aims to increase credibility, reliance and dependence of corporate bodies by the use of mechanisms to construct a system of checks & balances for entities for the purpose of credibility for external users of information. However, in recent times, we have seen audit failures that instead of increasing reliability of consumers have failed to accomplish what audit committees and boards stand for and instead have been confronted with a crisis of confidentiality and confidence. Audit failure occurs when there is a serious distortion of the financial statements that is not reflected in the audit report, and the auditor has made a serious error in the conduct of the audit (Arens, 2002).

There are many reasons why audit failures & financial scandals

Such risks may arise due to lack of management expertise to deal with economic changes in business environment, new products or services that build on risks for businesses, Inaccurate demand forecasts, inability to meet financial & legal requirements etc.

Internal reasons for audit failure may also persist. These include the inability of an auditor to comply with financial reporting standards, ethical practices or Acceptable auditing standards. Misinterpretation or misapplication of auditing standards may also result in the auditor’s failure to effectively carry out procedures. More seriously, auditors may seriously misstate or inflate financial statements as a result of pressure or threats from clients. It may also be due to the fact that the auditor has been bribed to ignore such issues in return of having financial interest in the company directly/indirectly. It is possible for auditors to have personal relationships with the client company’s authorities which may influence his audit in favor of the client.

An Introduction – The face of Enron:

Before filing for bankruptcy in 2001, Enron Corporation was one of the largest

With half the committee having financial ties to the company. The independence of the audit committee was questionable to say the least, as Arthur Anderson was auditor for Enron for 16 years. Forging ties of friendship, engagement, mutual profits and designed partnerships to hide undocumented failures and projects to producing entirely different results on the financials. Anderson was paid $27m for Non-Audit services by Enron, ordinarily paid for consultancy but in this case were paid to earn the firm’s silence. To be professional and effective, auditors must be independent of management and evaluate the financial representations of management for all users of financial statements. Less than 30% of the fees that Andersen received from Enron came from auditing, with the balance of fees coming from consulting. Andersen acted as Enron 's external auditor and as its internal auditor. Andersen 's work as a consultant raises several questions. It appears that Andersen 's audit team, when faced with accounting issues, chose to ignore them, acquiesced in silence to unsound accounting, or embraced accounting schemes as an advocate for its client.

Evaluation of Accounting -- Materiality

Auditors focus on material misrepresentations. A misrepresentation is material if knowledge of the misrepresentation would change the decisions of the user of financial statements. When Enron began to restate