Question

3. Is it appropriate for an auditing firm “to function as a de facto adjunct” to a client’s accounting department? Why or why not? Which party or parties were primarily responsible for Deloitte being dismissed as Navistar’s independent auditor in April 2006? Defend your answer.

Answer 1

The basic requirement in eligibility of being an auditor to an enterprise is INDEPENDENCE.

An auditor or audit firm must be independent, i.e., their opinion about the financial statements of the enterprise must not be influenced or coerced.

This can only be prevented if the auditor has no personal interest in the affairs of the enterprise. In this way, the auditor would operate with utmost objectivity and independence in order to present a true and fair view of the enterprise's financial statements.

Thus, an audit firm can not function as a de-facto adjunct to a client’s accounting department. An auditor cannot remain independent if they are in fact the party that is completing the accounting transactions or advising on how the accounting of records should take place.

In the Deloitte-Navistar case,

The fault was of both the parties.

Deloitte should have dropped the consulting job (on accounting records) when it was appointed as the auditor of the company.

The board of directors & shareholders, shouldn't have appointed Deloitte as the auditor, knowingly that deloitte was also an outsourcer for the company's accounting department.

Both of them went on with the arrangement and the consequence was inevitable.