It was agreed that certain partners were not to be involved with the audit process team for more than five years, depending on their involvement in the audit process. If a partner was to be involved in the audit process, the audit clients should be periodically rotated or changed in order to create an independent oversight in the audit process (Silveira, 2002). Anderson had been the main auditor of Enron since its inception in 1983, and he was a key player in the collapse of the company (Silveira, 2002). I do agree with this recommendation because it guarantees the independence of an organization’s auditors as the auditors will be held responsible for any malpractices by the incoming firm as their loyalty and profit lies will be associated with their client and not the financial gain that they would receive to hide any malpractices (Silveira, 2002). The independent auditors will have to work closely with the client’s audit committee making it harder for a firm to sign any ghost protocol every five years. The mandatory rotation of auditors was introduced so as to introduce periodic breaks to audit engagements to avoid the long relationships created between the auditor and the client.
The Enactment of the Sarbanes-Oxley Act (SOX)
On July 30, 2002, President George W Bush signed into law the Sarbanes-Oxley act as federal law in the United States in response to corporate fraud that was committed by organizations such as Enron, Tyco, and WorldCom. Such scandals made investors lose billions of dollars when the share prices of the companies collapsed, and this reduced the confidence that the public had in the nation’s securities markets (Pishay, 2003). I do agree with the enactment of the SOX as it has made it impossible for companies to collude with their auditor through the creation of a yearly report on internal controls within the company itself and the effectiveness of those controls. This was in response to the collusion between Enron and the public accounting firm Arthur Andersen & Co (Pishay, 2003).
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The Public Company Accounting Oversight Board
As a result of the Scandal at Enron and other companies such as Adelphia, WorldCom, and Tyco, the United States public lost confidence and trust in the financial reporting and auditing process of organizations. In order to restore investor confidence, the Public Company Investor Oversight Board (PCAOB) was created. PCAOB requires that audit companies must register with them, and their operations are subject to substantial and direct oversight by the securities and exchange commission (SEC) (Goelzer, 2015). These standards include auditing and attestation, ethics, quality control independence among other necessary standards that are necessary to protect the public interest (Goelzer, 2015). I do agree with the rules and standards set by PCAOB in order to prevent the loss of thousands of jobs to U.S. citizens and the billions of dollars lost by shareholders to companies such as Enron that built their success on financial illusions. For many years, corporations and accounting firms resisted strict supervision from the state, which led to a long series of accounting frauds that took a toll on investors and the economy at large (Goelzer, 2015).
Employment Cooling-off Period
Following the collapse of Enron, it was noticed that a threat to independence was created when a member of the audit engagement team joins the audit client in order to exert significant influence over the preparation of audit statements, or otherwise exert their influence over the outcome and conduct of the audit (Cameran, 2015). Anderson was both an independent auditor for Enron and also a provider for consulting services to the Houston trading company. The securities and exchange commission in collaboration with the SOX introduced safeguard that is to be adopted by professional bodies and regulators known as the "cooling-off period" between an individual that is leaving a firm or joining the client, and the engagement team in a such a position (Cameran, 2015). This safeguard requires an individual who intends to join the client during the auditing period is required to resign or the firm is not deemed to be independent. I do support the given measure because it helps interrupt any relationships created between the auditors and the firm by this regulation to help ensure independence. Enron was responsible for hiring 86 Anderson accountants, many of whom were in senior positions (Cameran, 201. Section 206 of SOX prevents some of these hirings before the expiry of the cooling-off period. If these laws had been enacted earlier, they would have highly impacted the engagement at Enron.
Elimination of the Conflicts of Interests in Accounting Firms
Enron collapsed due to conflicts of interest by the roles played by Andersen as a consultant to Enron and also as an auditor. The board of directors never paid attention to the off-books financial entities that did business with Enron as well as the lack of truthfulness by the management about the health of the company and its business operations ((Cameran, 2015). The accounting rules state that an, a firm’s independence will be found to be impaired if any audit partner will be found to have received compensation for directly selling to audit client services other than review, attest, and audit services. Accounting firms are therefore required to discontinue compensating any individual for any "cross-selling" services. I agree with this given measure as the independence of an audit firm is the most important in the auditing process (Cameran, 2015).
References
Cameran, M. (2015). The audit mandatory rotation rule: state of the art. The Journal of Financial Perspectives , 3(2).
Goelzer, D. (2006). Lessons from Enron: The Importance of Proper Accounting Oversight . PCAOB. Retrieved from https://pcaobus.org/News/Speech/Pages/07262006_GoelzerTokyoAmericanCenter.aspx .
Pishay, A. (2003). The fall of Enron and its implications on the accounting
Profession .
Silveira, A. (2002). The Enron scandal a decade later: lessons learned? Retrieved from https://poseidon01.ssrn.com/delivery.php?ID=120106117091006024073073085117003106053087095019051075010070117104064089086099122025120122060118005029010126010102089115101125103051037075027076004127017084107031027049091024092127115113066119069031084023070080030108090079016093111119085092125069007&EXT=pdf .
