The question that arises after the Enron and Worldcom scandal is who should have detected a fiasco of such magnitude? The blame initially seems to fall upon the external auditor . However, if we understand the role and responsibility of the external auditor, are they liable, or in any way contribute to such a large-scale scandal? What part does the management, directors and shareholders of the company play? Are they manipulating a system that is inadequate or are they simply gullible, choosing to believe in so called advisers?
This paper will seek to examine some of the factors that were associated with Enron's failure.
Ms Loh Jenkim of Pricewaterhouse Coopers (PwC) Malaysia uses the analogy that the role of an auditor is best described as a watchdog not a bloodhound.
Auditors as it is seen are not responsible to detect fraud but are generally expected to do so. When requested to examine a set of accounts, the auditing process will be carried out using with a reasonable set of tests and examinations to ensure the accounts presented are fair.
However, the public or shareholders do expect auditors to detect and prevent fraud; hence an expectation gap is created.
One of the limitations of internal controls is the possibility that an authority abuses his/her position. In this case, a control is 'useless' and ironically this person is hired by the company and not by the auditors.
The potential for conflict of interest arises when the same firm provides both an audit and a consultancy service. A restriction of dual roles may not mean that auditors would be relieved of pressure. An auditor that has a principal relationship with a financial controller may have difficulty maintaining objectivity.
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