The Role of Audit in the Collapse of Enron and Lehman Brother

Topics: Auditing, Audit, Big Four auditors Pages: 10 (2967 words) Published: April 6, 2013
Hamza Ahmad
Hamza Ahmad

Hamza Ahmad STUDENT ID: W12302464
Hamza Ahmad STUDENT ID: W12302464
Advanced Audit
Course work
Advanced Audit
Course work

Research Studies4
Response to Surbanes-Oxley Act5
Response to the European Commission’s proposals6
Enron Failure6
Arthur Andersen failure6
Lehman Brothers failure6
Ernst & Young failure7
Detection of fraud7
Going Concern7
Obstruction of Justice8
Consultancy service8
Conservative Audit8

In the UK, European Union and the United States the Global Financial Crises has sparked a series of high level inquiries into the role and effectiveness of Audit. It is noted that several large organisations including Lehman Brothers and Enron have filed for bankruptcy, shortly after being audited. Accounting firms providing the service have received large sums of money in audit and non-audit fees. These events have raised questions regarding the effectiveness and credibility of an Audit. The collapse Enron in November 2001, followed by the demise of Anderson was evidence of systematic risk in the US. The Ensuring crisis of confidence in financial reporting and auditing spread to other countries. The Accountancy Foundation Review Board which was at the time responsible for the independent oversight of the UK accountancy professional bodies took the leading role in the auditor independence review in the UK. In the US the Sarbanes-Oxley Act for passed in 2002 to restore confident in the US financial market and further regulations were passed around the world including the European commission review (Green Paper).

This report begins by looking at the recent changes in audit regulations after the recent financial crises, the challenges faced by auditors and how audit firms are responding to these changes. The second part of this report will compare the reasons behind the failure of Enron and Lehman Brothers and it will also be looking at how the auditing firms could have avoided or minimised litigation risk. CHANGES IN REGULATIONS

The collapse of Enron, in November 2001, followed by the demise of Andersen (SEC, 2002) and the WorldCom scandal provided evidence of systematic failure in the US regulatory framework for financial reporting, and raised widespread beliefs that Andersen had compromised its independence as auditors. The Sarbanes-Oxley Act was introduced in July 2002 to restore confidence in the US market with the aim to protect investors by improving the accuracy and reliability of corporate disclosure made pursuant to the securities law. The Act brought about new standards for accountability as well as new penalties for acts of wrongdoing. It requires all financial reports to include an internal control report which is designed to show that not only are the company’s financial data accurate, but the company has confidence in them because adequate controls are in place. (ICAEW 2009). In the UK, however, there had been no comparable failures in which the regulatory framework failed. The principle concerns in the UK focused on calls for rotation of audit firms and for banning of non-audit service provision by incumbent auditors. In 2002, the UK government set up the Co-ordination Group on Audit and Accounting Issue (CGAA) which was made responsible for leading the review of the regulatory framework, including the key areas of auditor independence, and for making recommendations for change. The interim report which was issued in July 2002 and the final report issued in January 2003 envisaged: an enhanced for audit committees by developing the existing Combined Code Guidance including making recommendations on appointment of auditors; further work on acceptability of certain type of non-audit services...

References: ICAEW. (2009). The impact of changes to the NON-Audit Service regime. Centre for business performace. 1 (1), 1-20.
Alan Zibel, “ 'Liar loans ' threaten to prolong mortgage crisis” (2008)
“Statement of Financial Accounting Standards No
Erin Nothwehr, “Emergency Economic Stabilization Act of 2008” (2008)
Ross Watts and Jerold Zimmerman, “Agency Problems, Auditing, and the Theory of the Firm: Some Evidence” (1983) pp. 618.
Edward Boyd, History of Auditing, in History of Accounting and Accountants pp78-88 (Richard Brown ed. 1905)
Ross Watts and Jerold Zimmerman, “Agency Problems, Auditing, and the Theory of the Firm: Some Evidence” (1983) pp
Ross Watts and Jerold Zimmerman, “Agency Problems, Auditing, and the Theory of the Firm: Some Evidence” (1983) pp. 630
Committee on Basic Auditing concepts, A Statement of Basic Auditing concepts
“The Market for Lemons: How Information Contributes to Efficiency.” January 05, 2010.
Shakun, Melvin F., “Cost-Benefit Analysis of Auditing. Research Study No. 3, Commission on Auditors’ Responsibilities.” New York: American institute of Certified Public Accountants, Inc., 1978
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