Question

One issue concerning Enron’s collapse centered on the amount of non-audit fees paid by Enron to its external auditor, Arthur Andersen. For each of the following items, discuss the potential ethical issues between the firm and its auditor. For each item, list at least one reason why the statement might be viewed as a threat to the auditor’s independence, and at least one reason why it might not be viewed as such a threat.

1. The firm’s auditor is heavily involved in non-audit services.

2. The audit partner’s compensation depends on both audit and non-audit fees from the same client.

3. In 1995, Congress passed the Private Securities Litigation Reform Act.

Answer 1

Each of the statements are listed and view points are presented as to why it may or may not be viewed as independence threat to auditors

1. The firm's auditor is heavily involved in non audit-service

Point a - It may be treated as a threat to auditor's independence when the amount received for provision of non-audit services is greater than the audit fees, the auditor may not focus on audit work.

Point b - If the audit firm has taken all the appropriate approvals from the Board of the company, Consultation has been raised and has been approved by the Audit and Risk committee for both the parties.

2. The audit partner compensation depends on both audit and non audit fees from the same client.

Point a - Non -Audit services such as Valuation, Taxation, Due Deligience reviews etc. requires independence and specialisation, moreover if it is dependent on one client, he may try to manipulate the client by not fullfiling the objectives of the client.

Point b - Incase of large organisation a particular partner may have better understanding of the client and client may require specific partner due to his reputation and superior knowledge for that particular industry which may not harm independence of the audit firm.