Outside auditors play a crucial role in our nation's financial system. As the watchdogs of corporate accounting, they are supposed to protect investors" (Hildebrand, 2010). The question is how effective are these outside auditors in protecting investors? When you think about the failures that have occurred: Enron, World, Delphic, Taco, and Global crossing to name a few, one would really question the effectiveness of these outside auditors. As a result of these failures, Congress pass the Serbians Solely Act of 2002.
This act in turn created the Public Company Accounting Oversight Board (PEPCO) to police the outside auditors and ensures they are protecting the investors. This takes self-regulation away from the accountants and puts it in the hands of the PEPCO. The responsibilities of the PEPCO include: * "registering public accounting firms; * establishing auditing, quality control, independence, ethics, and other standards relating to public company audits; * conducting inspections, investigations and disciplinary proceedings of registered accounting firms; and * enforcing compliance with Serbians-Solely' (U. S. Securities and Exchange Commission, 2013).
Many ask if the PEPCO is effective in auditing the auditors. After all, they failed to prevent the recent financial crisis. How could this have happened under the watchful eye of the PEPCO? The board has "the power to rewrite the standards for auditors, but has made little use of that power. The old standards written by the auditing industry to insulate auditors from liability, for the most part remain unchanged" (Hildebrand, 2010).Read also
com/three-styles-of-policing-4157/">Three Styles of PolicingThe PEPCO is slow to investigate and take action when there is suspected negligence. They sometimes take years and by the time they do anything, it's too late. The investor has already be harmed by the actions of the company. According to Hildebrand, when the board does take disciplinary action it does not involve the large audit firms who audit the large companies.
It is the smaller audit firms who do not have the resources to fight back and contest the ruling of the PEPCO.The board is restricted by congress when it comes to letting the public know of accounting deficiencies it has found and although they are cases currently being investigated, no one knows about them. The protection to the investors is not there. The board faces other challenges, as it must answer to the Securities and Exchange Commission (SEC). SOX says the SEC can dismiss members of the board for cause but in a Supreme Court ruling, the Court said the SEC can dismiss members at will. This tends to limit the independence of the board members and their willingness to serve on the board.
The Aspic's code of professional conduct is over 300 pages long. In essence, it has specific rules of conduct their members are required to adhere to. Basically these rules include independence, integrity and objectivity, general standards, compliance with standards, accounting principles, inferential client information, contingent fees, acts discreditable, advertising and other forms of solicitation, commissions and referral fees, and form of organization and name. It offers general guidance to the members of the CPA in the above- mentioned areas.According to the Journal of Accountancy, specific information for some situations is currently scattered throughout the lengthy code and it is currently in the process of being rewritten to make it easier for the members to find information about the specific areas they have questions or concerns and it will make the information more consistent.
With all these guidelines available for auditors to follow and comply with, one would think there is no way outside auditors could manipulate audit work papers and records of clients engaged in fraudulent activity.However, as the old saying goes, "where there is a will, there is a way. " There are still those who give the appearance of independence and doing things ethically but for the right price, companies can still find auditors who will report as they want reported. There were multiple risk factors present in the Nectar Inc. Case.
Thomas Trigger, auditor, had authorized an unqualified opinion on Nectar's 2000 uncial statements although the evidence did not Justify an unqualified opinion.Nectar had huge operating losses and had been reporting much smaller allowances for bad debts than they had been observing. Their management regularly made material understatements of the company's allowance for credit losses. Also most of the financial decisions rested solely in the hands of Jeremy Lent, Chief Financial Officer. Another risk factor was the fact that the executives had large amounts of stock and immediately sold them after the lock down from the initial public offering was made.
Events from 2000 that were notable include the following: * During 2000, more than $1 billion of credit was issued to customers but it did not translate to immediate profits and this fact was downplayed to the media and ignored in public disclosures. * In February 2000 Nectar announced they continued to beat aggressive growth targets and boasted an average of $2000 per account. They omitted the fact that in 1999 they had a loss of $77. 2 million.
Insider trading - Lent and other colleagues sold large amounts of stock after the lock- up period had passed.They took the company public knowing about the large shoes. Ernst & Young motivation to destroy the audit work in this case does not and cannot reconcile with their obligation to provide assurances to financial investors. The obligations to the financial investors are to present an accurate picture of Nectar's financial picture and issue appropriate opinions based on the true finances of the company. The only assurances given are the ones to Nectar. It is fraud and lying to the financial investors.
They were only thinking of themselves and not about the investor's of Nectar. It was a blatant disregard of the trust put into hem by issuing an unqualified opinion on the financial statements when they knew it should have been qualified. Trigger had originally decided to let the original work- papers stand as well as his erroneous qualified opinion unless a federal investigation took place. When questions were being asked about the 2000 audit, Flanagan was asked by Trigger to help cover up the correct reporting and revise or destroy the original work-papers from the 2000 audit.This was a difficult task, as they had to ask Michael Mullen to assist in making the changes in the computer so as not to change the time stamp on the submissions. This was quite a cover up.
Flanagan should have questioned why the work-papers were being revised and why go to all the trouble of making the changes in the computer without changing the date stamp. It was obvious there was some type of cover up happening. By not questioning what was being done, he was guilty of being an accessory to the cover up.If he was uncomfortable questioning Trigger, he should have approached a higher partner and/ or the firm's ethics committee to alert them to what was going on. One person's dishonesty can reflect on the entire firm and make the look Just and guilty and they ill also be fined for the inconsistencies and fraud. Flanagan should have risked his job to protect the firm of Ernst and Young rather than risk losing his livelihood and license by cooperating and assisting with the cover-up.
Trigger was arrested on 2 charges.One was for obstructing the examination of a financial institution and the other was for falsification of records in a federal investigation, thereby violating the Serbians Solely Act of 2002. Flanagan pleaded guilty and settled an administrative proceeding for his role in the cover-up. (U. S.
Securities and Exchange Commission, 2003). Flanagan was denied the privilege of practicing or appearing before the commission. After 3 years he could request reinstatement to continue practicing as a preparer or reviewer. His work would have to be reviewed by an independent audit committee for his employer.
He would have to practice as an independent accountant. (U. S. Securities and Exchange Commission, 2003).
This was fair as Flanagan was doing as he was told to further his career. He also gave evidence in the investigation of this crime and against Trigger. Trigger was convicted of a felony and "sentenced to a year in federal prison and a $5,000 fine after pleading guilty to impairing with audit records for Nectar, Inc. " (Staff, 2005).
He "must also undergo 2 years of supervised release. " This really was peanuts compared to the money he cost the investors or Nectar, Inc. ND other stakeholders in the company. This was not much punishment at all for all the loss of people who relied on his financial opinion of the company. An article in Deal%k talks about the Securities and Exchange Commission (SEC) charging the Chinese affiliates of 5 large accounting firms with failure to produce documents from audits of several of their China-based companies who are under investigation for fraud.
These are Chinese companies who have gone public in the United States. "The auditors refused to cooperate citing prohibitions in the local law' (Wyatt, 2012).The issue here is that any firm that conducts an audit knowing they cannot obey the laws requiring access to their work- papers are facing serious sanctions. This case is still in process but the US firms involved are Dolomite, Ernst ; Young, KEMP and PricewaterhouseCoopers.
They are the largest 4 accounting firms in the US. "The fact that the action is being taken collectively against all of the four largest audit firms and one other firm demonstrates hat this is a profession-wide issue, not unique to one firm," PricewaterhouseCoopers said in a statement"(Wyatt, 2012).In May 2012, Dolomite Touché Topmasts received an enforcement action from the SEC for failing to produce documents from a Chinese client being investigated. Ernst & Young is facing charges in Canada for failure to perform a sufficient audit of Sino-Forest.
They could not provide the location of 2 million acres of forest plantations. Ernst & Young Canada said, "it was confident that its work on Sino-Forest met "all professional standards," including the so-called Generally Accepted Auditing Standards" (Wyatt, 2012).However in December 2012, Ernst & Young Canada settled a class-action lawsuit in this case in the amount of $118 million. You always hear people say, "Crime does not pay'. This is so true but in cases such as these, the crimes cause harm too lot of people.
