It was the indictment for shredding documents that finally prompted the demise of Andersen. However, the journey to this point included Andersen approval for off balance sheet vehicles that had the effect of misleading the investment community as to Enron's true financial position. Andersen clearly felt that the off balance sheet activities were within the ‘rules’ and that the reporting of these activities in notes to the financial statements was also within the ‘rules’. However, these judgments were in the context of very substantial fees for non-audit services ($27m was the last reported figure compared to an audit fee of $25m).
2.
As reported by Chandler,R., ‘Book Review on Behind Closed Doors: What Company Audit is Really About’, British Accounting Review, 34, (1), 2002, pp. 80–81.
3.
Hatherly,D., Brown,T. and InnesJ., ‘Free-form Reporting and Perceptions of the Audit’, British Accounting Review, 30, 1998, pp. 23–38.
4.
Free form reporting was first suggested by Estes,R., The Auditors’ Report and Investor Behavior, Lexington, 1982.
5.
Hatherly,D. and BrownT., ‘The Measurement of Audit Quality’, in Lapsley,I. and Mitchell,F., (eds), Accounting and Performance Measurement, London: Paul Chapman Publishing, 1996, pp. 77–86.
6.
See, for example, Porter,M., Competitive Advantage, New York: The Free Press, 1985 and Shank, J. and Govindarajan, V., Strategic Cost Management, New York: Free Press, 1993.
7.
FSA (Financial Services Authority), Investment Research: Conflicts and Other Issues, 2002, Discussion Paper (July).
8.
For a description of the new audit methodologies, see Lemon,W., Tatum,K. and TurleyS., Developments in the Audit Methodologies of Large Accounting Firms, ABG Professional Information, 2000.
9.
This point is made by Hatherly,D., ‘Is the Risk Driven Audit too Risky?’, Accountancy, 1998, May, pp. 82–83.
10.
Jeppesen,K., ‘Reinventing Auditing, Redefining Consulting and Independence’, European Accounting Review, 1, (3), 1998, pp. 517–539, criticises the reinvention of audit as management consultancy.
11.
Hatherly,D., ‘The Case for the Shareholder Panel in the UK’, European Accounting Review, 4, (3), 1995, pp. 535–553.
12.
APB, The Future Development of Auditing: a paper to promote public debate, London: The Auditing Practices Board, 1992.
13.
The Shareholder Panel itself may have to adjudicate cases of dispute between auditors and management regarding the disclosure of commercially sensitive information. It is unlikely that any Panel would be willing to do this unless it was awarded protection from litigation. The Panel could ideally contain a variety and depth of experience: for example, a retired CEO, retired audit partner and retired fund manager. However, nominations would come from and be elected by, the shareholders.
14.
APB, The Audit Agenda, London: The Auditing Practices Board, 1994.
15.
Bazerman,M., Morgan,K. and LoewensteinG., ‘The Impossibility of Auditor Independence’, Sloan Management Review, 38, (4), 1997, pp. 89–94.
Collins,J., Good to Great, London: Random House, 2001.
18.
As part of their financial management, investees will offer different financial products (e.g. different classes of shares, bonds, etc.) to suit different capital market needs. The auditor's investment report might cover the appropriateness of this financial management both in relation to the financial market demands and in relation to the underlying business model/strategy of the investees.
19.
One of the governance roles of active shareholders is to ensure that the time scales of the share options are relevant to the time scales of the ultimate investors. This might mean that options cannot be exercised until well after a director has left the company. As Collins [17] remarks, a notable feature of great companies is not the big personality followed by leadership problems, but the commitment of successive, quietly determined, leaders to build a great company.
20.
The Audit Commission concept appears to work well for the audit of local authorities. However, there are fundamental differences between the audit of public bodies and the audit of private companies. In essence, public bodies attempt to learn from each other in the pursuit of ‘best’ practice, whereas private companies attempt to differentiate themselves from the competition in the pursuit of exceptional returns; for their shareholders. These fundamental differences impact on the appropriate audit arrangements and Hatherly [11] argues that the audit of private companies requires a ‘micro’ solution.
21.
This point is well made by Gladwell,M., ‘The Talent Myth’, The Times, (T2 cover story) Tuesday, August 20th, 2002, pp. 2–4.
22.
The auditors of those financial services companies which conduct fund management potentially have a pivotal role to play, since their investment report and analysis to the shareholder in the financial services company would include an assessment of how the fund management was conducted. The audit firm's influence can therefore extend to the entire investor information value chain.
