Your assignment is to participate in a Discussion of the 12 cases. The discussion should center on similarities and differences that exist among the cases(1), what has been done to strengthen the audit function since the cases occurred(2), and what has not been (or cannot be) done to reduce the likelihood that the situations that occurred in the cases occur again.
Enron
WorldCom
New Century
Madoff
Nextcard
Lincoln L&S
Health Mgmt.
Waste Management
United Way
Gazprom
CA of India & Tata Finance
Ligand
Sunbeam
Example of another person’s post:
Similarities and Differences Among the Cases
While all of the cases involved audit failures to some degree, I see a correlation or a connection between two cases in many instances. To start off, Enron and WorldCom both used shady accounting entries and methods in order to hide debt or move debt off of their financial statements in order to inflate their earnings and in turn inflate their stock prices. These two cases are known for being the ones that led the government to pass the Sarbanes-Oxley Act of 2002, which created the PCAOB to help protect investors. I would also add that the Health Management case is another instance where management used shady accounting and tried to hide it from auditors, just like Enron and WorldCom, overstating inventory to misrepresent financial statements, to meet earnings expectations. Both New Century and NextCard both engaged in extremely risky lending practices (mortgages for New Century and credit cards for NextCard), which led to failures of their companies. Auditors failed to identify irregularities in both companies while conducting their audits, and investors in both companies lost a lot of money as a result. While Gazprom and Tata did not necessarily have audit “failures”, auditors failed to acknowledge the amount of influence they were able to exert in their respective countries, with arguments to be made that both situations lacked independence from auditors. Not only this, but Gazprom operates in Russia, which is known for corrupt business deals, bribery, etc., and a renowned accountant was removed from the firm issuing a report on Tata after he did not agree with how their audits were conducted, proving how powerful both companies could really be. The Ligand case is very similar to that of Sunbeam because of their revenue recognition practices. Both management teams failed to properly account for revenue, Ligand underestimating sales, and Sunbeam used cookie jar accounting, to inflate earnings. In my opinion, the Madoff Securities case, Lincoln S&L case, and United Way cases all stand alone in terms of similarities between cases. In the Madoff Securities case, not only was Bernie Madoff getting away with a Ponzi scheme, the “auditor” never even completed an audit of the company. There was no case we discovered where an auditor just signed off on financial statements without even lifting a finger. As for the Lincoln S&L case, it is similar to Enron and WorldCom because Arthur Andersen audited them and it is similar to Enron due to the fact both companies had executives reach out to active members of government for bailouts. That leaves us with just United Way. United Way is the only not-for-profit organization that we examined throughout this semester. However, an argument could be made that the United Way and Madoff cases are similar due to the CEO’s (Madoff and Aramony) taking money out of their organizations fraudulently for themselves. For Madoff, it would not be a big deal if it was a Ponzi scheme, but it was, and for Aramony, it would not be a big deal if he was not running a charity, but he was. I am sure there are many other similarities and differences that exist, but these are the ones I identified.
Strengthened Audit Function
Since these cases occurred, there are several things that have happened to strengthen the audit function. The main improvement was the passing of the Sarbanes-Oxley Act of 2002, also known as “SOX”. The act helped put in place the Public Company Accounting Oversight Board which registers accounting firms, inspects accounting firms, sets auditing standards, and enforces the practicing of auditing standards. This has led to a massive improvement in audit function due to very strict audit procedures and practices. As a result of new guidelines, independence standards have been updated, along with those who are responsible for financial statements when they sign off on audited financial statements. In short, a lot more care is taken with audits after the PCAOB was introduced. Also, while it is not directly a result of failed audits, advanced technology, including AI and RPAs have helped auditors perform audits more effectively and efficiently in recent years. The introduction of quality control departments (such as Deloitte with Ligand) is another improvement that has been made since the cases have occurred to ensure proper audits are performed.
Has Not and Can’t
Taking a look at all the cases again, I am not sure anything that can be done to reduce the likelihood of something reoccurring has not been addressed. In regards that things that cannot be done, the cases of Gazprom and Tata stick out the most to me. It would be very difficult for those two companies to not have the influence they do within their respective countries due to how much income they churn out, and in turn how much in taxes they pay, as well as how many jobs they supply for the economy. With that being said, auditors need to be careful when performing audits to their standards. A large portion of these cases were due to a lack of associated responsibility with audited financial statements, and I believe SOX and the PCAOB addressed that issue very effectively.
