Answer To: Page 1 of 5 BUACC 3741-AUDITING Semester 1, 2020 GROUP ASSIGNMENT DUE DATE AND TIME: XXXXXXXXXXWeek...
Akash answered on May 12 2021
BUACC 3741 - AUDITING
Semester 1, 2020
GROUP ASSIGNMENT
Table of Contents
Answer 1: 3
Lehman Brothers Holdings Inc. 4
Arthur Andersen LLP 4
One Tel 5
Answer 2 5
(a) 6
(b) 7
(c) 8
Answer 3: 8
a) 9
Infrastructure Bias 9
Media Bias 9
Sunk Cost Effect 10
Selective Perception 10
Selection Bias 10
Misinformation Effect 10
Overconfidence Bias 11
Planning Fallacy 11
(b) Four organisational constraints affecting auditor’s decision making 11
References 13
Answer 1:
The auditors are referred to as the watchdog of a company because of his knowledge, auditing skills and the skills possessed to audit the accounts of a company. According to Whitfield (2018), auditing is not a conclusive assurance that there is no fault in the accounts of the company. However, it provides reasonable assurance that there is no material misstatement in the financials of the company. Here it is important to note that auditors check that there is no material misstatement in the books of accounts. However, small and irrelevant errors may be left unchecked. What is more important at this point that whether in aggregate these minute errors may become material for the users; Here, the integrity and ethics of the auditor is important. The auditor may in consonance with the management may enter in any fraudulent activities or indulge in fraud or indulge and hide the fraud. This is one of the main reason for the collapse of the corporates. As commented by Adu-Gyamfi (2016), no matter how big the company is but fraudulent accountings, frauds and involvement to management and auditor to window dress these bad works leads to corporate failures. Here we are discussing three major corporate failures between 2000 and 2010 that raised a major question on the credibility of accounting and auditing profession. These are as follows-
Lehman Brothers Holdings Inc.
The discussion of corporate collapse cannot be done without discussing the biggest corporate collapse in the history of America and the world. The collapse of Lehman Brothers, which was a financial company and one of the biggest company in America. The company engaged in the business of financing mortgage assets, which was unregulated by the US government. It was also the fourth largest bank in America just behind Goldman Sacs others. Before getting bankrupt, it was engaged in business of trading in equity, investments, money market trading and similar issues. According to Ball (2018), the company has filed the petition for bankruptcy in US courts in 2008. This was just after rating agencies, investors and other stakeholders loosed confidence in the company. The company was indulged in window dressing wherein the financial position of the company was shown as more stable and reality. The performance was shown better by increasing the notional income, which the company never made. The quarterly results were manipulated and many thing else. Gradually, the company started reporting losses; however, the actual loss that the company was making was much higher than the amount reported to SEC. Of course, at this point the role of auditors were also questioned. As the company was flouting accounting rules, making irrational assumptions, changing accounting polices but the auditor was silent and the impact of such changes in spite of being material was never disclosed in the quarterly or annual reports. According to Adu-Gyamfi (2016), the US authorities had investigated all such reports and it was conclude that the integrity of the auditors was compromised, rules of accounting was not followed and all lead to major failure rather collapse of the company.
Arthur Andersen LLP
The name Arthur Andersen, every auditor knew. One of the big 5 competing with auditing giants like PWC, Deloitte, EY and etc. The auditing firm was best of them in its times providing services relating not only to auditing and accounting but host of other services like consultancy, legal advice, tax services, due diligence etc. The firm has been chosen because it is an audit firm and it gives an example of what can happen if the firm itself is engaged in the fraud. The firm audited financials of one of the energy company named Enron. The firm was found to be indulged in hiding the fraud of Enron Energy. It has been alleged that the management and the auditors have conspired to make false entries, adjustments in the books for their personal benefit. As noted by Dragomir (2019), the committee formed to investigate into the actions of the auditors submits its reports wherein it has been specifically stated that evidence have been fond for indulgent of the auditors in the corporate scandal of Enron. Although the firm fought for its existence until the last however, it had to surrender the license for practice and the firm was dissolved. According to Basioudis (2019), the collapse Arthur Anderson clearly shows the important of integrity in the field of auditing.
One Tel
One Tel is a largest telecommunication company of its kind in Australia. The company has been chosen to show that accounting is not the main reason behind corporate collapse however, bad business decisions, overlooking of the auditors expert recommendations and other factors are also equally responsible for corporate collapse. In this company, it provides headset and internet services, calling services to its customers. As noted by Munshi (2018), mainly the young generation was its target customers. The company became one of the largest telecomm company of Australia in 2001. However, it began to over purchase spectrums from the government, leading to cash crunch and losses. However, its directors did not gave up and began acquisition of other companies. Now at this point, the auditors recommended that already the company has made huge investments and the performance of the company is not in a position to make more such acquisitions. Further, the issue of right shares will also not assure the company to be afloat to run its business. However, the directors did not take the recommendations of its auditors and continue to make investments leading to cash crunch and losses in its books. The going concern was question of the company. Auditors needs to report the same. Investors loosed its confidence and finally the company was liquidated.
In all three scenarios, what is most important is the role of auditor. Although in first two cases, the integrity and ethics were compromised but in last case, the corporate was collapsed because of the wrong decision of the director. However, the auditor was aware of everything and it is his responsibility to report the same for the investors and other stakeholders. The auditor should never compromise its ethics...