Question

Independence is a requirement of the Professional Standards of Ethics for the Auditor. Define auditor INDEPENDENCE within the auditing process and discuss how Auditor Independence impacted Arthur Anderson's liability due to the business failure of ENRON due to fraud

Answer 1

Auditor's independence can be defined as the state of independence of the auditor associated with the entity from all the parties that may directly or indirectly have an influence in the financial interests of the business entity that is being audited. Independent auditors are those auditors who examine the financial records of companies and are not related in any capacity with the entities being audited.

Professional ethics and standards are the legal and moral standards that the auditor must adhere to during the course of discharging its duties.

Independence ensures that the auditor is free from all the prejudices and so the report that the auditor gives is true and fair. Independence is the concept that requires that the auditor must carry out his or her professional duties freely and in an objective driven manner. The auditing process is a goal oriented process; and the goal is to give an independent, true and clear audit report on the financial transactions of the business entity during the period.

The scandal of ENRON happened in the year 2001 changed the scenario of the corporate world.

DETAILS of the Enron scandal,

ENRON , once a high profile financially well business entity, was exposed as steadily being involved with fraudulent financial scheme worth millions of dollars. Ultimately, the company got exposed and went into bankruptcy. The big firm of accounting Arthur Andersen was associated with the company. The auditing firm was although not directly helping the company in fraudulent activities but Arthur Andersen was accused and found to have been grossly negligent with its duties. The negligence in properly overseeing and auditing Enron’s financials records made Andersen guilty of obstruction of justice because the company tore apart the financial and audit related documents of the company. Has the Arthur Andersen been a little more careful with its duties the innocent investors would have saved millions of dollars.

With this scandal, both the companies came out as a shocking news to the world. A big giant of the corporate world pulled off a massive fraud, and one of the world’s largest accounting and auditing firms was totally negligent in discharging its duties.

There were a lot of threats to the independence of auditor (Arthur Andersen) from the company Enron. Both the parties engaged in mutual deal of maximizing the profits by not following the generally accepted and necessarily required standards and policies mentioned in the declaration of independence as signed before accepting the audit. This was a pure unethical practice. Both the firms were doing wrong at their parts.It was ‘inappropriate and atypical’ threats of familiarity. The employees of the firm Arthur Andersen were  engaged in social activities of Enron. And Enron employees also participated in their auditing and accounting activities.

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• Independent audits provide a clear picture of a company's worth, which helps investors make an informed decision when considering whether to purchase a company’s shares.