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Transcript: Independence Maintaining an independent, objective and unbiased attitude of mind Independence in mind: Maintain a state of mind that allows the auditor to act with objectivity and integrity Independence in appearance: Avoid situations which might suggest to observers that the auditor is not unbiased and objective in his/her attitude Threats Self-interest threat: Arises when the auditor has a financial, personal, business or other self-interest in the client. Self-review threat: Difficulty in maintaining objectivity when a judgement formed in a previous audit or non-audit assignment needs to be challenged. Management threat: Partners and employees of the audit firm are prohibited from taking decisions on behalf of the management of the audited entity. Intimidation threat: Possibility that auditors may be intimidated by a threat by a director or senior manager of the client or some other party. Non-audit services: Non-audit services may be any services other than audit provided by an auditor to an audit client. The provision of non-audit services to audit clients as the key threat to auditors’ independent •Risk management advice •Mergers and acquisition •Taxation, including tax compliance and tax planning advice •Public offering •Portfolio monitoring •System and information technology •Forensic and litigation support •Recruitment and human resources •Transaction support and follow up •Corporate governance •Book keeping services Worldcom The company grew rapidly during the 1990s Multiple M&A pushed up stock price and company’s value Proposed Sprint merger During the year 2000, the business of the telecommunications industry began decreasing 1999-2002, the company used fraudulent accounting methods to disguise its decreasing earnings to maintain the stock price. The fraud was accomplished primarily in two ways: Booking ‘line costs’ as capital on the balance sheet instead of expenses. Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts". During 2002, a small team of internal auditors at WorldCom worked together, often at night and secretly, to investigate and reveal $3.8 billion worth of fraud. Soon thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly. It was estimated that the company's total assets had been inflated by about $11 billion. Threats: Auditor's independence threats vs Accountant's ethical issues. Enron Scandal An American energy company Lead to the bankruptcy of Enron corporation and dissolution of Arthur Andersen The biggest audit failure Shareholders lost nearly $11 billion Enron’s stock price achieved a high of US$90 per share during mid-2000, decreased to less than $1 by the end of November 2001 Self-review threat Non-audit service----------Consulting service Andersen set up Enron’s internal accounting procedures Advantages Telling companies how to set up internal procedures Disadvantages Vitiation of audit independence Cannot review the audit procedure critically Impartial view of relevant aspects of financial statements Familiarity Threat Andersen has been Enron’s audit for about 20 years Andersen even maintained a permanent office space Andersen’s employees attended and joined many events organized under Enron’s management Familiar with Enron’s accounting polices Easily overlook on the Enron’s compliance with relevant policies and requirement Self-interest threat $25 million for auditing services and $27 million for non-auditing services, including $3.5 million for tax work Enron ranked as Andersen’s second-largest client Wanted to foster long-term relationship Although Andersen knew there were serious problems with Enron's financial statements, they signed it off anyway. Management threat Employees left Andersen to work for Enron Integrated audit --- combined external and internal auditing Andersen took over Enron’s internal auditing in 1994 Incentives to keep bosses of Andersen and Enron happy Xerox From 1997 to 2000, Xerox Corp. was engaged in a fraudulent scheme that misled investors about Xerox’s earnings. Accelerating the recognition of equipment revenues of approximately $3 billion and increasing pre-tax earnings by $1.4 billion in Xerox’s 1997-2000 financial results. The SEC found that KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion “gap” between actual operating results and results reported to the investing public. Self-interest threat During the year between 1997 and 2000, 26m dollars audit fees were paid by Xerox, however, non-audit fees were up to 56m dollars. Self-review threat Since KPMG provided non-audit services to Xerox, it could influence audit independence when doing self-review. Familiarity threat In 2002, KPMG as auditors of Xerox had been 40 years. Safeguard: 1.Ceiling on fees from a client Price competition decreases the quality of audit work. 2.Restriction on other services In order to achieve economic benefits, audit will rely on

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