Accounting

Since the collapse of some of the big institutions, such as Enron, Lehman Brothers, and others, it has become clear that the integrity of the audits that are regularly conducted in virtually all organizations is questionable. In the recent years, several lawsuits have been filed against virtually all of the major auditing firms with the allegation of having acted unprofessionally. This study is aimed at establishing the reason why the audit reports provided by these firms do not provide any surety of the financial soundness of an organization.

Audits and the Collapse of Giant Institutions
One of the big questions that one could ask is did the large number of institutions that have gone under have regular audits All of the facts available indicate that they in actual fact did. The most unfortunate thing however is that, most of the reports that were given by the firms responsible for the audits were falsely indicative of positive trends in the institutions (Bethany and Elkind, 2003). Consider the fall of Enron for instance, for several years, Andersen, the audit firm for this giant company, offered reports that indicated that the company was doing very well financially (Bethany and Elkind, 2003). This in turn made the company look very enticing to investors, raising the cost of the shares of the company. Arthur Andersen had a legal as well as ethical obligation to disclose the information regarding the real status of the company in order to prevent loss of investments. However, Andersen did just the opposite. This case is not isolated. More recently, AIG came up with a confession that some of their accounting deals with other companies had erroneous information going back as many as ten years (Glater, 2005). This automatically raises questions regarding the integrity of its auditing firm, PricewaterhouseCoopers. Audit firms do not, therefore, offer any guarantees that all is well. It is risky today, to take the auditors words as a gospel truth on financial matters.

Considering that most of the collapsed institutions had their accounts audited and positive reports issued, auditing cannot be claimed to be a foolproof way of determining the financial soundness of an organization. Guarantees may not be the solution. It is necessary that governments come up with indicators that can point out fraud regardless of whether audits are conducted or not, in order to protect investors from severe losses like the ones witnessed in the recent years. In other words, governments should come up with some kind of early warning signals, to show that all is not well. This could be in the form of direct government intervention, even in private companies, where governments appoint their own fraud experts to randomly check for the six possible fraud areas, that is, bribery, theft, fictitious transactions, embezzlement, extortion, kickbacks, conflict of interest, as well as bribery. These should be adequately trained in the various industrial skills, as well as in auditing skills, because unless one knows what the common practice is, there is a likelihood of overlooking some things, even where one is professionally trained in accounting. These experts should check on these areas, regardless of whether audits have been conducted or not. This is because, even where auditors have had no complicity, they may have failed to assess in depth, some of the areas requiring caution. This would involve the use of red flags in gauging the extent of the risks of fraud.