...T I N G Disclosure of the Engagement Partner in the Audit Report An International Perspective on the PCAOB Proposal By Jason Bergner and Ling Lin n December 4, 2013, the PCAOB conducted an open meeting to reconsider its proposal to require the disclosure of the engagement partner (and certain other participants) in the audit report, as part of its efforts to improve transparency. The PCAOB is carefully considering the likely costs and benefits of this requirement before making a final decision (http://pcaobus.org/News/Speech/Pages/120 42013_Harris_Transparency.aspx). The authors present arguments for and against requiring audit partner disclosure and summarize the current practice and empirical findings in foreign jurisdictions, such as the EU and China. While the debate for the past five years has been an argument about the possible costs and benefits of a signature or disclosure requirement, the authors believe that the movement of the international community toward adopting common standards may eventually warrant a similar U.S. approach. O Debating the Issue The signature/disclosure requirement has been an issue for almost a decade, first appearing on the PCAOB’s agenda in 2005 (Tammy Whitehouse, “Divided PCAOB Presses for Names in Audit Report,” December 4, 2013, Compliance Week, http://www.complianceweek.com/dividedpcaob-presses-for-names-in-audit-report/article/323604/). The current proposal to disclose of the engagement partner in the audit report stemmed, at...
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...Discussion What are the main duties of each of the positions that comprise Abernethy and Chapman’s engagement team? Abernethy and Chapman’s engagement team comprises of a partner-in-charge, a manager, a senior auditor, and one or more staff auditors. The partner-in-charge leads the engagement team and is responsible for all final decisions made while conducting the audit. The manager, senior auditor, and staff auditors are to perform the actual audit examination. The engagement team’s responsibility is to complete the audit with competency and objectivity. What is the purpose of having both a partner-in-charge and a consulting partner on each audit engagement? Should the partners be rotated periodically? Why or why not? The partner-in-charge is responsible for leading the engagement team through the audit and making decisions during the process. The partner is responsible for reviewing the team’s final work, monitoring quality control standards and maintaining the human-resource policies of the firm. It is required that partners rotate periodically. Auditing & Assurance Services states “as required by the Sarbanes-Oxley Act, the SEC independence rules require the lead and concurring audit partner to rotate off the audit engagement after five years.” (Arens, Elder, and Beasley, 2014, pg. 89) Can an accounting firm hope to accrue any real benefit from a marketing campaign such as the one carried out by Abernethy and Chapman? Should the management of a company select its auditors...
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...clients. In these cases, partner evaluations can be negatively affected since they are judged based on hours billed and the number of clients they are able to secure. Mandatory auditor rotation is defined as the obligation to limit the number of years during which the accounting firm may be the auditor of record for a client. The Public Company Accounting Oversight Board (PCAOB) is a strong advocate in favor of mandatory auditor rotation, while a majority of accounting firms are opposed to the idea. Problems are more likely to develop in the initial years of the audit relationship (fraud and bankruptcy) when the auditor tries to gain as much knowledge as possible about the client. According to an American Institute of Certified Public Accountants (AICPA) study (Church and Zhang 2006, page 3), audit failures are three times more likely to occur in the first two years of the auditor-client engagement. Auditor rotations have never been mandated in the United States, and I believe this should continue in the future due to the high costs and decreased auditor effectiveness that would result from continual changes in the auditor-client relationships. There are a number of reasons the PCAOB is in favor of mandatory auditor rotation. For example, PCAOB Chairman James Doty believes we should look at ways to protect auditor independence by considering a term limit on how long an auditor’s relationship with a client may last (Tysiac 2012, page 1). The PCAOB wants to consider the concept...
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...properly. As a result, which practices are needed to achieve total independence? Moreover, how do we weigh the cost of financial misstatements with the cost of redundancy due to rotation of audit firms? Demanding public companies to rotate their audit firms may appear reasonable on paper, however, this rotation brings more concerns than answers. Currently in the auditing of publicly held companies, lead audit partners are required to rotate of audits every five years. This ruling was enacted from the Sarbanes- Oxley Act of 2002 (SOX). Also, SOX requires a 1-year cooling off period if the Chief Executive Officer (CEO), Chief Financial Officer (CFO), controller, etc. was previously employed by and participated in the audit one year prior to the start of the audit. These laws were passed to promote auditor independence, yet some professionals argue this may not be enough. In 2012, the Public Company Accounting Oversight Board (PCAOB) investigated the concept of requiring United States public companies to change their auditors every few years. This concept was never passed however the PCAOB encountered numerous backlashes from CFOs of publicly traded companies in the U.S.. In October...
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...asymmetry by providing investors with relevant and reliable information in order to create an efficient allocation of resources. However, there is often a tradeoff between relevance and reliability that needs to be considered when imposing regulations (Scott, 2012). When information asymmetry is present, investor faith decreases, compromising the efficiency of the market. In order to prevent market failures, it is critical to maintain investor confidence; this can be done by achieving high audit quality. Definition The PCAOB defines audit quality as providing “independent and reliable audits” regarding management’s financial statements, internal controls and potential threat for going concerns (PCAOB, 2013). Four key aspects of audit quality include independence, objectivity, skepticism, and competence. Maintaining and improving the four elements is critical to increasing audit quality and the usefulness of the information provided. Independence According to the PCAOB Auditing Standards, auditors should maintain independent mental attitudes. Independence is defined by the AICPA Code of Professional Conduct as independence of both, mind and appearance. Independence of mind requires the auditor to act with integrity, free of outside influence whereas independence of appearance requires the avoidance of situations leading to potential conflict of interests. Unless, the auditor is truly independent, the credibility and the reliability of the financial statements are compromised, violating...
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...these groups in association with CPA firms it is also important to have. As seen in the Enron case, the PSG group voiced its nonapproval to the companies formation of a new entity. These groups usually have the companies general goal in mind during the decision making process. In the case of Enron, it did not see any benefit in the creation of a new group. A member of the group cited several reasons including conflict of interests by having the CFO manage the venture equity group. Internal auditing functions play large role in the scope and budget of an audit. 2. Please consult Section 103 of SOX. Do you believe that the Engagement Leader of an Audit (like David Duncan on the Enron audit) should have the authority to overrule the opinions and recommendations of the accounting and auditing research function (like the PSG)? Why or why not? Do you think that a PCAOB inspector would approve? The actions of David Duncan in the Enron case should never have transpired. According to Sarbanes-Oxley Section 103, Mr. Duncan should “provide a...
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...in association with CPA firms it is also important to have. As seen in the Enron case, the PSG group voiced its nonapproval to the companies formation of a new entity. These groups usually have the companies general goal in mind during the decision making process. In the case of Enron, it did not see any benefit in the creation of a new group. A member of the group cited several reasons including conflict of interests by having the CFO manage the venture equity group. Internal auditing functions play large role in the scope and budget of an audit. 2. Please consult Section 103 of SOX. Do you believe that the Engagement Leader of an Audit (like David Duncan on the Enron audit) should have the authority to overrule the opinions and recommendations of the accounting and auditing research function (like the PSG)? Why or why not? Do you think that a PCAOB inspector would approve? The actions of David Duncan in the Enron case should never have transpired. According to Sarbanes-Oxley Section 103, Mr. Duncan should...
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...Effect of Unethical Behavior In accounting, there are or have been situations that might lead to unethical practices and behavior. Unethical corporate behavior is caused by a variety of factors. For example, pressure from management or a Board of Directors when accountants are to meet unrealistic business objectives or deadlines is a huge factor. In addition, other factors like furthering ones career, protecting ones livelihood, working with an immoral environment, and simply the lack of consequences can cause unethical practices. It is no wonder why there have been a number of cases where it comes to reporting financial statements in a company’s stability. For example, scandals like the most recent Enron, WorldCom and Tyco disasters are just to name a few. This is why in 2002 President George W. Bush brought in a law called the Sarbanes-Oxley Act. The ultimate focus of this act was to reduce chance of accounting errors, and report enduring ethical issues. The Sarbanes-Oxley Act of 2002 also changed the state of the accounting profession. It affects certified public accountants in the way they process, execute, and operate for publically traded companies. The act permitted a committee called the PCAOB to investigate, public companies and their auditors. The SEC, for rectitude of companies, would manage this committee. In addition, the committee, five members, included two CPA’s and three other people who are not to have ever been CPA’s now or in the future. Furthermore, each...
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...Case 1.1- Enron Corporation 1) The Enron debacle created what one public official reported was a “crisis of confidence” on the part of the public in the accounting profession. List the parties who you believe were most responsible for that crisis. Briefly justify each of your choices. * Both the Securities and Exchange Commission and the Financial Accounting Standards Board had a hand in lack of the public’s confidence in the accounting profession. Due to the lack of regulation for SPEs at the time of Enron scandal, companies found it easy to exploit the “3 percent” loophole, which allowed them to avoid having to consolidate the SPEs balance sheets with their everyday operations. This, in turn, allowed companies to move liabilities off balance sheet without having to make too many disclosures. The lack of directive by the SEC and FASB made it acceptable for companies to report inflated gains on various misleading transactions. * Next, the audit firms that deviated from their fiduciary duty to their clients and the public contributed greatly to the crisis in the accounting profession. There is an inherent conflict of interest when a firm begins providing audit services and a wide range of consulting services; the firm loses its objectivity when it helps a client to pursue aggressive, irresponsible accounting tactics. In the Enron case, Andersen was complicit in the aggressive accounting schemes and nefarious financial reporting for its SPE transactions...
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...points allocated as indicated. Please complete your answers in a Word document and submit it using the Assignment 2 dropbox. This course is geared toward research and communication. That means you will be researching the appropriate standards and communicating your answers. Support answers with facts and/or examples. Your answers should be original – do not just copy or paraphrase the lecture notes, books, articles, or your classmates. All composition-type responses will be evaluated based on responsiveness to requirements, coherent organization, conciseness, clarity, grammar, and quality of presentation. For researching your answers, keep in mind that different rules may apply for nonpublic and public companies. SOX, SEC, and PCAOB rules apply to public companies. Links on the readings page may help you answer some of the questions. Use the new online AICPA Code of Professional Conduct that is linked on the readings page. There are 3 parts to this assignment. 1. (12 pts) Case 1.1 Enron Corporation (the high profile disaster that changed the face of auditing!) Watch the video Bigger Than Enron. Use this address to access the site outside of WTClass: http://vimeo.com/61053538 Read ENRON Ten Years Later: Lessons to Remember, CPA Journal http://viewer.zmags.com/publication/94edbcee#/94edbcee/18 a. After reading the case, watching the video, and reading the CPA Journal article, what do you believe were the three most significant contributors...
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...Chapter 1: Auditing: Integral to the Economy 5 copy 1. The need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information. True False 2. A financial statement audit is a systematic process of objectively obtaining and evaluating evidence. True False True False True False True False 3. Auditors should conduct their work with an attitude of professional skepticism. 4. A bank using Milton Company's financial statements to determine the creditworthiness of a potential loan to Milton is a good example of the need for unbiased reporting. 5. An integrated audit requires the auditor to assess the effectiveness of internal controls. 6. In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license. True False 7. The Center for Audit Quality was started by the International Federation of Accountants. True False 8. The Center for Audit Quality has the primary authority to set auditing standards. True False 9. In an audit, management is considered the “client”. True False 10. Auditing is the process of attesting to assertions about economic actions and events. True False 11. Auditing is the process...
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...financial interests and the provision of non-audit services. To illustrate the subjective and sometimes difficult nature of the judgments involved in the client acceptance decision, and to give students the opportunity to justify a recommendation on client acceptance in the presence of both significant positive and negative factors. [5] To help students understand how information gathered in the client acceptance process can help the auditor in planning the audit if the client is accepted. [4] KEY FACTS The student takes on the role of a newly promoted audit manager recently given the task of considering factors and making a recommendation with respect to the acceptance of a new prospective client. The request to consider the engagement was received two weeks past the client’s fiscal year-end. The accounting firm, Barnes and Fischer, LLP, is a medium...
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...1) Which of the following (according to Charles Fombrum) is not one of the four determinants that influence a company's reputation? a. Credibility. b. Reliability. c. Profitability. d. Responsibility. 2) The 5 E's of the accounting profession in Texas are Ethics, Enthusiasm, Education, Examination and Experience. a. True b. False 3) The P in CPA stands for Public? a. True b. False 4) The difference between what the public thinks it is getting in audited financial statements and what the public is actually getting is known as: a. Credibility gap b. Expectations gap c. Audit gap d. Stewardship gap e. None of the above 5) Which of the following is not a trend described in Chapter 1 as having an impact on the ethics of business? a. Directors’ legal liability b. Management’s stated intention to protect reputation c. Auditors’ legal liability d. Management’s assertions to shareholders on the adequacy of internal controls e. Management’s stated intention to manage risk 6) Which corporate report discusses subjects that include environmental, health and safety, philanthropic and other social impacts? a. Corporate annual report b. Corporate social responsibility report c. Corporate quarterly report d. Corporate stakeholder report e. Corporate ethics committee report 7) The goal of the State Board of Public Accounting is...
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...Running head: CORPORATE CULTURE AND ITS ROLE IN THE DOWNFALL Corporate Culture and its Role in the Downfall Of Arthur Anderson LLC and Sunbeam Corporation Darrell V. Davis Grand Canyon University Bus 604 Business Ethics July 5, 2009 Abstract Corporate culture plays an extremely important role in the development of a company. Whether explicitly stated or not, the culture of a company reveals its attitude, motivation, and intentions. Arthur Andersen’s and Sunbeam’s cultures revealed that they were on the hunt for huge profits at the expense of independence and sound financial reporting, respectively. They instituted accounting practices that they knew pushed the envelope of, if not legality, acceptability. In fact, they were bedfellows in Sunbeams accounting methods. With each of the company’s histories, they had the resources to make better decisions regarding their actions. Yet, it appears they ignored their responsibility to the public in order to garner the highest gain. Arthur Andersen LLP Arthur Andersen LLP, with its ninety year history, for a long while stood as one of the most well respected, influential, high-earning, and ethical accounting firms in the world. Yet, with the rise of its consulting services, several apparent oversights, the demise of a number of its clients, and questions of the firms relationships with clients; the company came under attack from investors of its clients, regulators, and courts. Without a valid...
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...THE COLLAPSE OF ENRON & THE INTRODUCTION OF THE SARBANES OXLEY ACT BY TREVOR GARRETT 02/25/2011 Abstract Enron Corporation was one of the largest energy trading, natural gas and Utilities Company in the world that was based in Huston, Texas. The downfall of Enron is one of the most infamous and shocking events in the financial world, and its reverberations were felt around the globe. Prior to its collapse in 2001, Enron was one of the leading companies in the U.S and considered among top 10 admired corporations and most desired places to work at. Its revenues made up US $139 to $184 billion, assets equaled $62 to $82 billion, and the number of employees reached more than 30,000 people in 20 countries around the world. While on the surface it seemed like the perfect Corporation, internally it had highly decentralized financial control and decision-making structure, which made it practically impossible to get coherent and clear view on corporations' activities and operations. Enron manipulated its books and assets to help it report steady profit growth to Stock Exchanges and Credit-rating agencies. Investors generally are not willing to pay as much for the stock of a volatile trading operation, and this gave rise to manipulations. This paper briefly describes the legal and ethical breaches by Enron, the key factors and events that led to its collapse and the passing of the Sarbanes Oxley Act as a consequence of such a catastrophe. The paper also discusses the...
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