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    Auditor Independence

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    Refer to article attached (Ernst and Young)


    1. A key issue with the SEC in this case appears to center on "Independence."
    Identify why auditor independence is deemed to be so important.
    2. The auditor-client relationship identified in the article began prior to the
    Enron scandals. Briefly outline how "independence" issues played a role in
    the demise of Enron's auditor.
    3. In your view, what impact will the SEC action have on the reputation and
    future viability of Ernst & Young? What actions do you suggest they take, if
    any, to overcome any damage done to date?

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    Solution Preview

    The objective of the case about Earnst and Young is to bring to your understanding the issues of independence, the demise of several auditing firms because they compromised their independence and the action taken against Ernst by the SEC. The key issues are importance of independence of external auditors, the post-Enron scenario in the auditing industry and the effect of SEC action on the future of auditing firms.
    <br>The case makes several assumptions. First, it assumes that the SEC is doing something positive by taking action against firms who have willfully surrendered their independence. This may not always be so. For instance one of the unwanted effects is that the number of auditing firms has fallen to a low level. This may also cause the insalubrious effects of monopolistic competition in the market for auditors. Second, the case assumes that SEC action destroys the reputation of the ...