“WHERE WERE THE AUDITORS?” STANDARDS FAILURE

source:Brink, Sawyer modern auditing .

The corporate accounting scandals and bankruptcies that surfaced in the early
days of this twenty-first century, including Enron, WorldCom, and others, all happened
in the same general time frame. Although these scandals did not raise
questions about the quality and integrity of internal auditors, CPA certified external
auditors were faced with multiple questions along the theme of “where were
the auditors”? These external auditors were responsible for auditing the books
and certifying that the financial statements were fairly stated. It is easy to suggest
that the once highly regarded but now gone Arthur Andersen represented what
had gone wrong with the major public accounting firms. Andersen had promised
to improve its processes as part of a settlement with the SEC regarding botched
audit procedures at Waste Management several years earlier. Andersen, however,
evidently shrugged off that settlement the way a driver shrugs off the ticket for
being caught in a speed trap. When they were implicated with Enron, regulators
at the SEC soon honed in on Andersen’s procedures. Enron’s internal audit function
had been outsourced to Andersen with the two audit groups essentially
speaking in one voice, Andersen seemed to be more interested in providing consulting
services to Enron than auditing its financial statements, and many Andersen
auditors were quickly rewarded with senior management positions at Enron
after brief periods on the financial internal audit staff.
Although Andersen was the center of attention for Enron, other external audit
practices soon faced questioning. Based on off-the-books accounts, corporate
executive greed, and other matters, it soon became apparent that some audited
financial statements were not all fairly stated, per the traditional CPA/auditing
terminology. Many situations were soon highlighted where the external auditors
had missed some massive errors and frauds in their reviews of organization
financial statements. Too often, the major public accounting firms were accused as
selling their auditing services as a “loss leader” with the objective of using that
audit work to gain assignments in more lucrative areas such as consulting or tax
advisory. To many observers, the whole concept of “independent outside auditors”
was seriously questioned. How could a team of outside auditors be independent,
the critics asked, if key members of the financial staff had just recently
been serving as auditors and then had accepted positions on the “other side.”
There were too many close ties, making independent, objective decisions difficult.
With a very few exceptions, there also was little evidence of internal auditors
raising issues at these accounting-scandal-implicated corporations. Many of
the internal audit departments at these corporations accused of accounting fraud
had been “outsourced” to their responsible external audit firms. Prior to Enron’s
fall, there were published reports describing the “great partnership” that existed
between the Arthur Andersen managed internal audit function at Enron and the
Andersen external auditors. They shared offices, shared resources, and spoke
essentially in one voice. This was really in contrast to the somewhat uneasy alliances
that independent internal audit functions sometimes had had with their
external auditors in the past. Although these internal audit outsourcing arrangements
had been in place for many corporations over some years, the Enron situation
raised many questions about the independence and objectivity of these
outsourced internal auditors.