Business collapses

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In most simplistic terms, an audit is the means by which one person is assured by another of the quality, condition or status of a subject matte, which the auditor has examined, which has to be genuinely fair of a and true view. The profession of the audit world is constantly changing, but the main purpose always remains the same – an audit which reports on a company’s accounts in accordance with the Company’s Act 1985.

In the UK economy and indeed the global economy, shareholders confidence in financial information can impact heavily across all areas of the market with an immediate force which can as seen in the Enron and Barings case, wipe off billions off the stock market or increase the value of the company and this is felt throughout the whole global economy. The Problem For an audit to be effective it must be perceived to be credible. A loss in confidence, reputation, or trust can have serious implications. Ultimately for an auditor to provide audit reports that are of a quality service to shareholders, “the reports have to be independent, reliable and supported by adequate evidence” (ICAEW, 2003).

In many cases the question arises as to whether auditors should be the only ones liable when a business does collapse or when a business does have millions wiped off its value, whether the fraudster, the directors should also bear the blame and to what extent should the liability and responsibility be taken upon when shareholders are pursuing a claim for damages to their business. Another issue which can be addressed, is how liable are each party – should the liability be apportioned equally and so hence all costs are equally shared with all responsibility shared for a collapse?

Unfortunately this is not the case, evidence suggest that that in “practices, auditing firms are finding that they often have to carry all the responsibility and liability for the fraudsters, directors and management, even if their share of the blame is relevantly minor compared to others responsible” (Magazine for Chartered Accounting, June 2002, Vol 75).

This has been the trend for many years in the responsible for the collapse of the company. Andersen was not only the external auditor but he was also the internal auditor, which should have made him in a more stable and stronger position to effectively address the problems to directors which effectively were the cause of the collapse of the company – the directors that is!. By doing both roles he not only compromised his independency and probably indeed the loss of it, but also the fact that if another auditor was conducting internal or external auditing alongside Anderson, then possible the energy company would have still been trading today, even with the internal problems that the company faced before its demise.

Could Anderson be responsible for the collapse of Enron solely by sharing audit and accounting reports that not should not have occurred?, and if this had not occurred, then why did Anderson admit to the “shredding of the documents” (BBC UK 2002) whilst the investigation was still going on?. By Andersen shredding the documents, to the eye, one would immediately perceive as the auditor – Andersen, having something to hide, hence being liable for the business collapse too.

But it is common practise in public accounting to shred audit work papers once they are no longer needed – the audit regulations and standards allow this. What is suspicious which is seen clearly, is why Andersen destroyed documents that may have been relevant to the investigation, but more importantly whether the shredding of documents began before the investigation or after, if before, then Andersen had been simply following common auditing practise and if after, one would perceive as the auditor having something to hide relevant to the investigation.

Was Anderson Solely Responsible For The Enron collapse? Evidence clearly answers this question, which I believe is simply no. The responsibility I believe lied with other parties as well as the top executives who did contribute majorly to the company collapse. These include, a) the political system within Enron whereby campaign donations trades for favours should the recipients of donations eventually reach office, b) the labour working system that Enron conducted which allowed former government officials to join the company rather than banning government official from employment within Enron, c) the auditing conducted by Andersen, was it genuinely “fair and true” but more importantly was it independent and beneficial both to Andersen and the Enron executives d) the none use of accounting standards set within Enron, trying to bend audit …

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