Reason For Audit Failure Analysis

In the first place, nowadays we know that the audit firm was heavily conflicted on some client accounts, receiving millions of dollars in fees in return for the compilation of better audit reports. In addition to this, the management of the audit firm was more focused on the generation of revenue rather than on the quality and independence of their audit work. Another flaw in Arthur Andersen’s governance procedures was the fact that the executives did not manage to control and address the behaviour of internal lawyers and senior audit partners, who showed signs of misconduct and failed to abide by professional and ethical matters. Another mistake that the audit firm made was that when faced with suspicious manoeuvres within some financial statements, no further actions and investigations took place, giving rise to further wrongdoings. Furthermore, some partners of the audit firm were allowed to claim superiority over specialists and auditors, leading to conflicts of interest.

I find it difficult to believe that the managers were not aware of the reoccurring fraudulent activities. A bank’s work environment is highly commensurate with that of a sales environment. Banks often have sales objectives aimed at credit cards, lines of credits, mortgages, and more. Therefore, with my experience working in the sales industry, I imagine that there are unattainable sales goals that are set and managers create pressure onto the employees to hit unrealistic sales goals. The agency problem plays a significant role since managers know that if their branch hit their sales goals it looks good to upper management, thus creating job security with the company.

1. Internal control of a corporation must be improved to avoid the similar crisis to occur in the future. Failure to strengthen the internal control system will lead to collapse of the corporation. This is because a weak internal control will accumulate problem from the business operation and thus increase operation risk as a whole. This is a very common problem in the banking industry.

E&Y had no internal controls in place concerning Medicis. E&Y questioned themselves several times on Medicis sales returns reserve method; however, they never fully followed through and allowed the financials to be misstated. E&Y also had created a relationship with Medicis and that 20 years would cost them fines and censures Evaluate the primary ethical standards of the accounting organization’s leadership and values which contributed to approval of the accounting issues and thus created the litigation or fines in question. CPAs are considered professionals just like a doctor and/or a lawyer and they are required to hold to a higher standard than that of the average employee. Both public and private accountants have the responsibility to perform their duties within ethical standards and values, which have been established by the AICPA Code of Conduct.

The company’s reputation will be damaged if they report a fraud. This will move away investors or other interested parties from investing in the company and this might cause bankruptcy. The company could lose a lot of business due to the bad publicity. It is difficult to prove if a fraud happened in the company and many law enforcement lack the knowledge and the experience of fraud. It is costly and takes time for a company to investigate a fraud case.

It recognizes two kinds of independence; independence in fact and independence in appearance. In this case, both Enron and Arthur Andersen had been not independent in fact and in appearance. The shareholders and management of Enron should not choose Arthur Andersen as the external auditor since the chairman of audit committee, CFO and most of the accounting staffs were used to work in Arthur Andersen public accounting firm. Arthur Andersen should also refused the offer to become the external auditors of Enron because it will be not independent for them to audit the company since there was an indirect relationship between the people who used to work in Andersen with the public accounting firm itself. It will lead them to be not independent in appearance.

Insider trading is when one person has access to information that’s unavailable to the public and will likely have an impact on stock prices. For example, employees might know that their company is going bankrupt before the general public and sell all their stock before it becomes worthless. People who buy the stock will be deceived into thinking its worth more than it really is. In fact, it’s also insider trading for the employees to encourage family and friends to sell their stock using such “inside information.” Insider trading involves difficult moral issues. It’s not clear exactly when employees can buy or sell stock from their own companies; it’s not entirely clear how much information a company should “disclose to stockholders about

The Securities Acts and laws are in place to protect society from corrupt business practices, such as these acts committed by Sky Capital and the defendants. The defendants may have been in denial of the fraud and deceptive business practices they were using, but their impact was felt by many who had trusted them. Bad things happen when trust is met with ethical blind spots in managers high and low in company management. Each defendant found the monetary gain of their deceit and fraud more important than their professional responsibility to their customers and therefore created an ethical blind spot in management. In addition, as a group effort, the defendants not only participated with the fraud, but encouraged the continuation of the malpractice going on.

The moral hazard of too big to fail institutions also applies to creditors. If a creditor feels that a firm is too big to fail, they will demand less compensation for their risk. The financial markets in general can become less disciplined, further causing destabilization. This, combined with the moral risk within these large firms, can create a spiral effect of irresponsible financial decisions. Executive

Collapse of Enron The collapse of Enron was due to the unethical moral principles by Enron Executives and the misleading of financial accounts. Most of the reasons for collapse are described below. Misleading of Accounting Entries The one of the major part in company collapsed was the failed investments in other businesses apart from their main business like investments in Internet and Communication business and the use of Special Purpose Entities(SPE) which were backed by Enron stock, were created to keep the debt off from the company’s balance sheets and it also helps to prevent significant losses to appear on financial statements and it helps in support the share price to increase also. But when the stock prices start to decrease; Enron was not successful to back its guarantees and when these doubting accounting practices appear, all the profits which was reported was disappeared and Enron collapsed. Enron adopted the new form of accounting called “mark to market” created in 1980s, this accounting form, allows to calculate the fair value of an assets and liabilities on the base of