Question

It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Some feel that it is impossible for an auditor to give an independent opinion on a company's financial statements because the auditors' fees for performing the audit are paid by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.

Required:

How might an auditor's ethics be challenged while performing an audit?

Answer 1

The company may bribe the auditor or suppress payment from the auditor. This may lead to the auditor to “fail to notice” certain things in order to get paid. Auditors are expected to be free from all prejudice and look to the rules and regulations to lessen all risk of being partial. Services Industry, systems of internal control rely on people to be reliable; when internal controls collapse, it is often because individuals fail to do the right thing. Organizations can impart employees with ethics training, but making certain that everyone actually follows this training and dependably lives up to ethical anticipations is a much greater challenge. Companies pursuing ethical environments are up against enticement, prospect, and all the selfish elements of human nature that lead individuals off track. Although the withdrawal effect of the most recent corporate scandals will pass more laws and regulations, this will not essentially prevent these types of occurrences from recurring.