Misreprensentation Auditors Play a Crucial

Misreprensentation

Auditors play a crucial role in verifying the accuracy of financial statements. Their work is governed by ethical standards under the Professional Code of Conduct of the American Institute of Certified Public Accountants (AICPA). This industry association, however, has limited powers to punish auditors who behave in an unprofessional or unethical manner. While having a CPA is necessary for membership, not all CPAs are members of AICPA, so the organization does not have the ability to strip somebody of their CPA. I feel that it -- or another body -- should have this power. This would be the auditing equivalent of is disbarring a lawyer, and would provide significant motivation for auditors to behave ethically.

Legally, auditors are bound to certain terms, specifically under Sarbanes-Oxley (SOX). Auditors are now subject to oversight from the Public Company Accounting Oversight Board (PCAOB), which was created under SOX. This means that auditing firms are subject to oversight. There is significant risk; therefore, that auditor behavior could destroy the entire auditing firm (as happened at Arthur Andersen). Thus, removal from the auditing position at the company is likely insufficient punishment for transgression. The auditing firm should have the right to file suit against its former auditors for any damages that are inflicted as a result of improper oversight or fraud.

There is also concern that the Supreme Court decision in Arthur Andersen v. United States changes the legal framework regarding the enforcement of auditor behavior. As a result of this case, auditors are allowed to destroy evidence under almost all conditions -- though not once a specific investigation has been initiated. This significantly increases the risk of auditor fraud the likes of which we saw at Enron, the underlying situation of the case (Hasnas, 2005). I believe that Congress should amend the law to eliminate the loophole concerning the destruction of evidence that arises under Arthur Andersen v. United States. I feel that auditors should be held to the highest standards and any implication of illegal behavior should be punishable under law.

Supreme Court aside, Congress has done much within Sarbanes-Oxley to address the legal ramifications concerning auditor misrepresentation. The principles regarding the elimination of conflict of interest remove one of the most significant motivations for the commission of fraud. I feel that overall, the legal framework for prosecution is strong. I do, however, feel that the industry should hold itself to a higher standard. The PCAOB can make life difficult for auditing firms, and this acts as a means of control, but surely an auditor willing to commit fraud will not be discouraged. Even the threat of being removed from the profession may not suffice.