BUACC5935 -Auditing

Task:

For many decades, practitioners and academics have struggled to find definitions for independence in the audit context. Perhaps the best known definition in the academic literature is that of De Angelo (1981, 186) ‘the conditional probability of reporting a discovered breach’. Others include: ‘the ability to resist client pressure’ (Knapp 1985); ‘an attitude/state of mind’ (Schuetze 1994); ‘a function of character with the integrity and trustworthiness being key’ (Magill and Previts 1991). More recent definitions contained in pronouncements from various representative bodies of the profession world-wide extend the definition of a state of mind, for example, ‘freedom from those pressures and other factors that compromise, or can reasonably be expected to compromise, an auditors’ ability to make unbiased audit decisions’ (Independence Standards Board (ISB) 2000).

In the text -  Behind Closed Doors: What Company Audit is Really About (Beattie, Fernley and Brandt 2001)  provides an analysis of six company case studies which show how accounting issues which arise during the audit process are resolved between audit engagement partners  and finance directors From these cases, audit quality is shown to be an holistic activity in which issues of competence, independence in fact and audit risk are inextricably linked. 

The restatement of the Enron accounts and the collapse of Andersen following the obstruction of justice finding against the firm (SEC 2002) shows the devastating effect of loss of confidence in the integrity of an audit firm. Despite the lack of knowledge about independence in fact, Enron  severely compromised independence in appearance. 

Required:

1.From a search of the academic literature, discuss risk and independence with a view to understanding  where  key audit risks, and threats to auditor independence really lie.  What is it exactly that undermines auditor independence.

2.Review the literature on the failure of Enron, Worldcom and Lehman Bros and what lessons have been learnt by the accounting profession from these collapses.