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.
An auditor will only begin a fraud investigation if they have reasonable evidence from the tests and examinations that they apply or information from any other sources. Pressure from shareholders to reduce auditors" fees may result in the scope of work assigned by the client being reduced over time. If time is restricted to finalise the audit, perhaps in order for the company to publish their accounts, the auditors will not be able to spend the time to undertake the detailed investigation, which may reveal fraud. External auditors are normally conducted on the client's premises over a short period of time, usually in the range of one to four weeks.
Mechanisms must be designed to ensure auditor independence. These may include a restriction to the extent which an auditor can earn non-audit service fees, mandatory rotation of auditors and compulsory tendering of audits.