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5)

Identify five recommendations made to strengthen the independent audit

function following the Enron scandal. For each of these recommendations, indicate why
you support or do not support the given measure. Also indicate which of these
recommendations were eventually implemented.
Reforming Auditing System - could reduce the probability of a financial disaster
1. PCAOB
PCAOB is a private-sector, non-profit corporation created by the SarbanesOxley Act
of 2002 to oversee the audits of public companies and other issuers in order to protect
the interests of investors and further the public interest in the preparation of
informative, accurate and independent audit reports. Part of the PCAOB's power to set
rules of the auditing industry includes the power to regulate the non-audit services
that audit firms may offer their audit clients (such as consulting or tax services). This
power was given to the PCAOB as a result of allegations, in cases such as Enron, that
auditors' independence from their clients' managers had been compromised because of
the large fees that audit firms were earning from these ancillary services. I agree with
that. The companies pursue an unqualified opinion. There would a loss if they dont
get an unqualified opinion. This would release the auditor pressures from companies.
Thus this is a way to improve the independence of the auditors. I think most of them
are eventually implemented except the first one. The PCAOB, although, is authorized
by Sarbanes-Oxley Act of 2002, its actually not an independent auditing agency but a
supervisor of the public companies and audit firms
2. RESTRICTIONS ON NON-AUDIT SERVICES TO AUDITED ENTITIES
Audit Committee approval is required for all permissible non-audit services after
having assessed the threats and safeguards to auditor independence. Audit committees
may also issue guidelines regarding the provision of tax and valuation services if a
Member State exercises its option to permit these. Expanded reporting by the
statutory auditor to the Audit Committee will promote greater transparency around the
audit process, improving the awareness of audit committee members by increasing the
focus on key audit issues Therefore, all audit and non-audit services to be provided by
the auditor of an issuers financial statements must be pre-approved by the issuers
audit. Prohibit the provision of all non-audit service to audit clients. I partly agree
with this. Non-audit service is a huge part of profit for auditing firm. Providing such
service is decided by market not only audit firms. I agree with that government should

have regulations to rule these services such as which service is prohibited, which is
limited, which should be supervised. We cannot simply prohibit all these firms.
3. COMPULSORY ROTATION OF AUDITORS
Andersen had audited Enron since its establishment in 1983. Certain partners may not
serve on an audit engagement team for more than five or seven years, depending on
the partners involvement in the audit require that audit clients periodically rotate or
change their independent audit firms. I agree with that. An audit firm would be
dependent if they work as auditors for a specific company for a long time because
their profit and fellowship would be associated with their client. This recommendation
would force the company keep their auditors independent. Because there will be
expensive for these firms to sign a ghost protocol every couple years. Require
independent auditors to work more closely with clients audit committee.
4. ONE-YEAR COOLING OFF PERIOD
Securities and Exchange Commission (SEC), Section 206 of the Act prohibits an
accounting firm from auditing an issuer's financial statements if the chief executive
officer, chief financial officer, controller, or chief accounting officer, or any other
person serving in an equivalent position at the issuer, had been employed by the
accounting firm and had participated in any capacity in an audit of the issuer during
the preceding one-year period. The new rules require that when a lead partner, the
concurring partner, or any member of the audit engagement team who has provided
more than ten hours of audit, review or attest services for an issuer accepts a position
with the issuer in a "financial reporting oversight role," the auditor will not be deemed
to be independent until after one entire auditing cycle has been completed. An
auditing cycle begins the day after an issuer's annual report is filed with the SEC and
ends on the day the next annual report is filed. Any individual who has direct
responsibility for oversight over those who prepare the issuer's financial statements
and related information that is included in SEC filings will be deemed to be in a
"financial reporting oversight role."
(Financial reporting oversight role means a role in which a person is in a position to or
does exercise influence over the contents of the financial statements or anyone who
prepares them, such as when the person is a member of the board of directors or
similar management or governing body, chief executive officer, president, chief
financial officer, chief operating officer, general counsel, chief accounting officer,

controller, director of internal audit, director of financial reporting, treasurer, or any


equivalent position.)
5. ELIMINATING CONFLICTS OF INTERESTS IN ACCOUNTING FIRMS
Under the rules, an accounting firms independence will be deemed to be impaired if
any audit partner receives compensation based on the directly selling to audit client
services other than audit, review and attest services. Thus, accounting firms will have
to discontinue compensating these individual for cross selling services. Establish an
independent audit agency. I agree with that. The independence of the audit firm is the
most important fact to the auditing procedures. It determines the detective risk of the
procedures. An independent audit agency would be much easier to keep independent
because they would not gain an additional profit from auditing.

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