Reference no: EM13138034

PART A. 
Auditor conservatism following audit failures 
Stephan A. Fafatas 
Williams School of Commerce, Economics and Politics, 
Washington and Lee University, Lexington, Virginia, USA 
Extract: 
Findings - Empirical results indicate that auditor response to audit failure has 
changed over time. Auditors implicated in audit failure events occurring in the postEnron 
and Sarbanes-Oxley period enforce more conservative accounting choices in 
the year following the event. Specifically, clients of the implicated firm's office 
report a significant decline in discretionary accounting accruals relative to clients of 
other auditors in the same city location. However, a significant change in client 
discretionary accounting accruals is not found following audit failures that occurred 
prior to 2001, the year of the Enron bankruptcy. 
Under GAAP a company's reported net income includes both an operating cash 
flow component and a component related to accounting accrual adjustments. The 
amount and timing of these accrual adjustments are subject to management's 
discretion over accounting policies 
Auditor Conservatism after Enron 
Dorothy A. Feldmann , William J. Read 
Extract: 
Corporate scandals and the resulting passage of the Sarbanes-Oxley Act 
(SOX) in 2002 significantly affected the auditing profession. The quality of 
financial statement audits was called into questioned and the media and 
regulators held audit firms responsible. Several studies found evidence of an 
increase in the issuance of going-concern opinions after the passage of SOX 
relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 
2008). Auditors, it appears, behave more conservatively when the profession 
is in the headlines. 
Discuss how the auditing profession behaved after the Enron collapse and the 
introduction of the Sarbanes-Oxley legislation. 
PART B. . 
Financial crisis and the silence of the auditors 
Prem Sikka 
Accounting, Organisations and Society (2009) 
Abstract: 
Against the backdrop of the current financial crisis, this paper seeks to stimulate debates about 
contemporary auditing practices. It notes that many financial enterprises have sought state 
support within a short period of receiving unqualified audit opinion. Auditors collected large 
amounts in audit and non-audit fees. The events raise questions about the value of company 
audits, auditor independence and quality of audit work, economic incentives for good audits 
and the knowledge base of auditors. 
Extract 
Accountants, as auditors, have cemented their status and privileges on the 
basis of claims that their expertise enables them to mediate uncertainty and 
construct independent, objective, true, and fair accounts of corporate affairs. 
This expertise, it is claimed, enables markets, investors, employees, citizens, 
and the state to limit and manage risks. Such claims, however, are precarious 
as measures of revenues, costs, assets, liabilities, and profits are contested 
technically as well as politically and also because capitalist economies are 
inherently prone to crises (O'Connor, 1987). The claims of expertise are 
frequently punctured by unexpected corporate collapses, frauds, and failures. 
Such events fuel the suspicions that auditors lack the requisite independence, 
expertise and incentives to construct the promised 'true' and 'fair' account of 
corporate affairs. 
Accounting firms have been accused of delivering 'dodgy auditing' Discuss 
PART C. 
None of the Big Four accounting firms is a single firm; rather, they are accounting networks. 
What is an accounting network and what benefits are there for the big accounting firms? 
Discuss and explain 
PART D. 
Extracted from Australian Government - The Treasury 
Auditors are currently exposed to unlimited liability for professional default. 
Auditors, and other professional groups have traditionally dealt with their unlimited liability 
exposure for professional default through professional indemnity insurance. Professional 
indemnity insurance insures against loss arising from professional services offered by the 
insured professional. 
Australia is currently experiencing a 'hard insurance market', that is, a market characterised 
by tougher risk selection by insurers. The recent submissions by the two professional 
accounting bodies to the ACCC indicate that the position in relation to the availability and 
cost of professional indemnity insurance has deteriorated in the current 'hard insurance 
market': 
The backdrop to the CLERP 9 consideration of the issues relating to the professional liability 
of auditors is the important role that the independent audit function performs in relation to 
Australia's corporate governance framework and the efficiency of the capital market. 
The following policy options have been raised by the accounting profession for the purpose 
of establishing an appropriate framework to address the profession's concerns in relation to 
the present system of auditor liability: 
? The incorporation of auditors. 
? The law of joint and several liability in relation to actions for negligence causing property 
damage or purely economic loss and its replacement by proportionate liability. 
? The capping of professional liability within the framework of State and Territory 
Professional Standards legislation. 
Discuss each of the aforementioned three points (i.e. could or should these changes be 
made)