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Liabliity of Accounting firms

Due to frequency of corporate scandals in the US, there have been many efforts toward restructuring.

Evaluate proposal of: Accounting firms should be liable to pay stock holders if they give a company a clean audit and it goes bankrupt in one year. Opinion with refrences to back up stated opinion if possible.

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Interesting proposal, indeed. Please see response attached (some of which is presented below) I hope this helps and take care.

RESPONSE:

Case Scenario:

Due to frequency of corporate scandals in the US, there have been many efforts toward restructuring. Evaluate proposal of: Accounting firms should be liable to pay stock holders if they give a company a clean audit and it goes bankrupt in one year. Opinion with references to back up stated opinion if possible.

This is an interesting proposal. I am always wondering what the sutdent, in this case you, are thinking in regards to this statement, though, and it would be helpful to me if you had given your general opinion, as I am sure you have formed some initial opinions separate from what others have to say on this topic. Personally, I think that the accounting firms should be liable to the extent that there was an intentional act to de-fraud or misrepresent the company. Otherwise, not, as there are so many other variables that can cause bankruptcy besides "cooking" the books (i.e., mismanagement or poor management, economic trends, etc.), which is separate from the accounting firm who did the audit. As we see below, many agree with my opinion.

However, it seems that the main cause of accounting irregularities slipping past auditors lies in the conflict of interest caused by auditor being paid by the company whose books they're examining. Is there a way to rectify this, such as the auditors being paid by the various securities exchanges, who pass the costs along to the shareholders and/or listed companies? To this, expert Om Malik says this: "I totally agree with you on the issue of conflicts of interest. What really surprises me that no one is talking about the fact that accounting firms should be accounts only. Since none of them were publicly traded, getting into all unrelated businesses such as consulting etc can only be attributed to the greed of the individual partners who wanted to rake it in. I think no accounting firm in the future should be allowed to take money for other activities. I think there should be one strike, and you are out rule for accounting firms as well. After all, money is the new religion" (http://www.usatoday.com/community/chat/2002-06-28-malik.htm).

One has to wonder, though, how WorldCom, Enron and other(s) could successfully deceived the public when all companies adhere by the same standard accounting rules and is or should the accounting industry in trouble as a result? I think I agree with Om Malik: "From my attempts at learning accounting, all I can say it is like voodoo. A creative accountant can massage the numbers in any direction. I think the accounting industry should be taken to task on this issue. I think government should focus on the "keepers of the faith" more and more" (http://www.usatoday.com/community/chat/2002-06-28-malik.htm). In other words, the accounting firms should be held accountable for intentional acts ...

Solution Summary

By example, this solution evaluates the statement: Accounting firms should be liable to pay stock holders if they give a company a clean audit and it goes bankrupt in one year.

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