Question

Over a decade ago, Enron was a high flying publicly traded company. It’s stock had soared and created tremendous wealth for many employees and stockholders alike. The financial statements for Enron that were disclosed as part of their SEC filings were highly complex. A whistleblower within Enron led to disclosures that revealed fraud ultimately leading to its bankruptcy and collapse. Employees lost their jobs. Shareholders lost vast fortunes. Several executives went to jail. And Arthur Andersen, a leading accounting firm, had its name dragged through the mud as an accomplice to the fraud leading to the ultimate demise of that entire accounting firm. Should we expect accountants to uncover fraud and be an early warning signal? Do you think auditors are just “rubber stamps” for the management of public companies? In general do you think we can trust the financial statements released by public companies? In cases where a public company has to restate it's financial statements, should the blame be with the accountants or the management? Explain.

Answer 1

We cannot expect Accountants to uncover fraud and give an early warning signal to the users of the financial statements. This is because of the lack of independence of Accountants since they act as employees of the company. Auditors however are expected to uncover the fraud since they are expected to be independent of the affairs of the company.

In my opinion auditors are not just rubber stamps for the management of public companies. It is not right to generalize that auditors are not acting in their independent capacity is and are not giving a true and fair picture of the company's affairs. Hence the financial statements released by public companies in general can be relied upon. Exceptions however are always there.

Restatement of financial statements may be required when there are accounting errors or there has been a non compliance with the Generally Accepted Accounting Principles or misrepresentation of facts. Hence it is fair to say that the responsibility of restatement of accounts lies with the Accountants of the business.