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Primary reasons for audit failures and scandals

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What are the primary reasons for audit failures and the potential scandals that occur when problems are brought to light?

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Solution Summary

In 468 words, the solution explains the types of breakdowns that can occur to result in audit failures and scandals. The solution cites some of the rules which, when violated, can lead to the unraveling of a company and its audit firm. Enron and Arthur Anderson are noted.

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When you say 'audit failures', I assume you mean some of the recent blowups like Enron and Worldcom where the company failed but unfortunately they were helped along by their auditors.

For fault in the auditors, the primary reason such situations occur is a result of a violation of one or more of the AICPA Rules of Professional Conduct. For fault at the company, it can possibly be the result of illegal activity.

With all the standards of conduct, continual training of CPAs, experience in the field, licenses to protect and reputations to preserve, auditors have little excuse for violations. If a CPA firm is conducting an independent audit and suspects or confirms illegal or non-GAAP reporting, the firm has an obligation to correct the problem or withdraw from the engagement. Anderson did ...

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