PART A.

Auditor conservatism following audit failures Stephan A. Fafatas

Williams School of Commerce, Economics and Politics,

Washington and Lee University, Lexington, Virginia, USA

Extract:

Findings - Empirical results indicate that auditor response to audit failure has changed over time. Auditors implicated in audit failure events occurring in the post-Enron and Sarbanes-Oxley period enforce more conservative accounting choices in the year following the event. Specifically, clients of the implicated firm's office report a significant decline in discretionary accounting accruals relative to clients of other auditors in the same city location. However, a significant change in client discretionary accounting accruals is not found following audit failures that occurred prior to 2001, the year of the Enron bankruptcy.

Under GAAP a company's reported net income includes both an operating cash flow component and a component related to accounting accrual adjustments. The amount and timing of these accrual adjustments are subject to management's discretion over accounting policies Auditor Conservatism after Enron Dorothy A. Feldmann , William J. Read

Extract:

Corporate scandals and the resulting passage of the Sarbanes-Oxley Act (SOX) in 2002 significantly affected the auditing profession. The quality of financial statement audits was called into questioned and the media and regulators held audit firms responsible. Several studies found evidence of an increase in the issuance of going-concern opinions after the passage of SOX relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 2008). Auditors, it appears, behave more conservatively when the profession is in the headlines.

Discuss how the auditing profession behaved after the Enron collapse and the introduction of the Sarbanes-Oxley legislation.

PART B.

Financial crisis and the silence of the auditors

Prem Sikka

Accounting, Organisations and Society (2009)

Abstract:

Against the backdrop of the current financial crisis, this paper seeks to stimulate debates about contemporary auditing practices. It notes that many financial enterprises have sought state support within a short period of receiving unqualified audit opinion. Auditors collected large amounts in audit and non-audit fees. The events raise questions about the value of company audits, auditor independence and quality of audit work, economic incentives for good audits and the knowledge base of auditors.

Extract

Accountants, as auditors, have cemented their status and privileges on the basis of claims that their expertise enables them to mediate uncertainty and construct independent, objective, true, and fair accounts of corporate affairs. This expertise, it is claimed, enables markets, investors, employees, citizens, and the state to limit and manage risks. Such claims, however, are precarious as measures of revenues, costs, assets, liabilities, and profits are contested technically as well as politically and also because capitalist economies are inherently prone to crises (O'Connor, 1987). The claims of expertise are frequently punctured by unexpected corporate collapses, frauds, and failures.

Such events fuel the suspicions that auditors lack the requisite independence, expertise and incentives to construct the promised 'true' and 'fair' account of corporate affairs.

Accounting firms have been accused of delivering ‘dodgy auditing' Discuss

PART C.

None of the Big Four accounting firms is a single firm; rather, they are accounting networks. What is an accounting network and what benefits are there for the big accounting firms? Discuss and explain

PART D.

Extracted from Australian Government - The Treasury

Auditors are currently exposed to unlimited liability for professional default.

Auditors, and other professional groups have traditionally dealt with their unlimited liability exposure for professional default through professional indemnity insurance. Professional indemnity insurance insures against loss arising from professional services offered by the insured professional.

Australia is currently experiencing a 'hard insurance market', that is, a market characterised by tougher risk selection by insurers. The recent submissions by the two professional accounting bodies to the ACCC indicate that the position in relation to the availability and cost of professional indemnity insurance has deteriorated in the current 'hard insurance market':

The backdrop to the CLERP 9 consideration of the issues relating to the professional liability of auditors is the important role that the independent audit function performs in relation to Australia's corporate governance framework and the efficiency of the capital market.

The following policy options have been raised by the accounting profession for the purpose of establishing an appropriate framework to address the profession's concerns in relation to the present system of auditor liability:

- The incorporation of auditors.

- The law of joint and several liability in relation to actions for negligence causing property damage or purely economic loss and its replacement by proportionate liability.

- The capping of professional liability within the framework of State and Territory Professional Standards legislation.

Discuss each of the aforementioned three points (i.e. could or should these changes be made)