So, Why Hide the Truth?
Two ethical dilemmas where the auditor may fail to report correctly and their respective consequences and motives are as follows (George E. Nogler 2008):
• Scenario 1: Not declaring going concern uncertainty for an entity that exhibits signs of future collapse in financial reports
- One motivator for this scenario is the company’s fear of being sued by its creditors; since going concern uncertainty directly implies not being able to repay debts to creditors in a timely manner. The ethical breach is concealing failure to avoid rightful legal action by creditors.
- Since one of an accountant’s basic duties is to report the financial standing of a company whether it ...view middle of the document...
It is believed that an auditor’s judgment could be significantly impaired in reporting a high-paying company’s going concern uncertainty where it is due, in favor of becoming a recurring future auditor and receiving large sums in future audit fees for the same firm. Unfortunately, since this is largely a human factor it is difficult to control, regulate, or legislate.
In fact, it is believed that there is an additional set of factors that affect the degree of ethical financial reporting especially pertaining to going concern uncertainty reporting (Carson, E, Fargher, N, Geiger, M, Lennox, C, Raghunandan, K, & Willekens, M 2013); as follows:
• Auditor rotation
Studies show that the services of an external auditing firm are likely to be terminated by the audited company directly the year following its issuing of a
going concern uncertainty opinion; however, further research shows that this does not affect succeeding going concern uncertainty reporting. This means that both former and new auditors are likely to produce similar results.
On the other hand, it is recommended that in order to maintain ethical integrity any company (including those whose disclosed financial statements appear healthy) rotate auditors periodically despite the high cost of switching from an old to a new auditor. The reason for this is being certain that financial perspective is accurate and financial reports are higher in quality when reviewed by different auditing parties.
• Personal relationships between auditors and clients
This is defined as one or more individuals from any or both parties having previously worked as an employee at the other party. Statistics show that when personal relationships do exist, reporting going concern uncertainly dramatically decreased. Evidently, this poses an ethical irregularity since social and personal factors were favored over honest financial reporting.
This point is more relevant in the United States of America; following Enron’s collapse, the US government has set laws and regulations for reducing the risk of lawsuits towards auditors that issue going concern...