AUDIT FAILURE, AUDITOR INDEPENDENCE AND INTERNAL CONTROLS

Ermira Mazziotta Muhlenberg College

ABSTRACT

Audit failures are very costly to the investors, auditors and all the financial statements stakeholders. When an audit failure is identified the reputation of the auditors is also impacted. The auditing profession is still recovering from the aftermath of Enron and the failure of Arthur Anderson, the external auditor, to identify and uncover the financial statement fraud that cost millions of dollars to the investors, employees and all the stakeholders of Enron. The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002) has changed how Public Accounting Firms conduct audits.  The Act created the Public Company Accounting Oversight Board (PCAOB) that oversees the audits of public companies and other issuers in order to protect the interest of investors. PCAOB also subjects auditors to external and independent oversight for the first time in history.  Previously the profession was self -regulated.

 

INTRODUCTION

An audit failure takes place when an auditor express to the public that a client’s financial statements are fairly presented in accordance with generally accepted accounting principles (GAAP), when in fact they are not. This paper will examine some of the reasons that cause audit failures and particularly the auditor’s independence and lack of internal controls. This paper will examine the audit failure rate post Sarbanes-Oxley Act and the role of PCAOB.

Independence is the cornerstone of auditing profession and it should be maintained by the auditors in facts and in appearance. Independence is defined by the accounting/auditing profession in the United State as “the ability to act with integrity and objectivity†(AICPA). The impairment of independence impacts the results of an audit. Agreeing to a significant client-imposed scope restriction, accepting the word of management for something that normally requires independent verification, knowingly neglecting the critical evaluation of significant events and transactions and lacking objectivity and skepticism are some of the cases when auditor in fact lacks independence. This paper will also analyze the impact of client imposed restrictions and challenges auditor’s face to collect the data they need to complete an audit and reach an opinion.

 

 

 

Ermira Mazziotta  is an Assistant  Professor of Accounting at Muhlenberg College.   Her research interests include accounting education, conversion to international accounting standards, auditing, fraud and internal controls.