Discuss possible reasons why the Andersen partners allegedly allowed Waste Management executives to avoid recording the identified accounting errors. How could accounting firms ensure that auditors do not succumb to similar pressures on other audit engagements?

Question

What will be an ideal response?

Answer 1

Students’ responses will reflect a wide variety of ideas, which should allow for a creative and stimulating
in-class discussion. However, some of the key points that should be raised include the following.
Public accounting is a highly competitive service-oriented business. As is the case with most
other service-offering enterprises, public accounting firms have a vital interest in pleasing their clients
by providing value and excellent customer service. In order to provide excellent customer service
and please the client, partners may sometimes feel pressure to avoid taking tough stands on a client’s
accounting choices. Otherwise, partners may run the risk of losing clients to other accounting firms.
That kind of pressure likely led to the auditor’s decision to accept the “Summary of Action Steps,” given
management’s pressure for them to do so.
To justify their acceptance of the 32 “must do” steps, the auditors likely convinced themselves
that the underlying effects of the misstatements would not be deemed as significantly material to
affect decisions of the users of the financial statements. Perhaps, the auditors focused primarily on
quantitative assessments of materiality thresholds and ignored the qualitative implications associated
with management’s unwillingness to correct known accounting misstatements.
In order to eliminate these obstacles, auditors need to be reminded of the importance of
exercising professional skepticism to ensure that they question on an ongoing basis whether the
information and evidence obtained suggests that a material misstatement has occurred and that they
do not become satisfied with less than persuasive evidence. Additionally, public accounting firms need
to emphasize to their personnel the need to be committed to putting the public’s interest first. Auditors
need to be up-front with each client by affirming that even though the accounting firm desires to
add value to the client’s business, difficult decisions that are contrary to management’s position on
certain issues may have to be made to protect the interests of the investing public. By laying this foundation, difficult decisions will be easier to make when such circumstances arise. Firms may need
to reformulate their performance evaluation and compensation practices to determine whether they
provide incentives for local partners to take aggressive stances that may not be in the best interests of
the firm as a whole. In addition, most large accounting firms require national approval for local office

partners to sign off on certain complex or aggressive accounting positions, mitigating the sometimes-
strong individual pressures on local partners to please the client.

Finally, changes resulting from the issuance of the Sarbanes-Oxley Act and related corporate
governance requirements have re-defined the auditor’s view of who represents “the client.” Stricter
requirements and higher expectations for audit committee oversight of the hiring and firing of the
external auditor reinforce the view that the audit committee, not management, represents the client.
The shift from viewing management as the client to viewing the audit committee as the client has helped
reduce some of the incentives auditors might face to please management as “the client.” Additionally,
AU-C Section 260, “The Auditor’s Communication with Those Charged with Governance,” requires
auditors to communicate to those charged with governance (for example, the audit committee) the
auditor’s view about qualitative aspects of the entity’s significant accounting estimates, significant
difficulties encountered during the audit, disagreements with management, corrected misstatements
that were brought to the attention of management as the result of audit procedures, and uncorrected
misstatements, if any. These required communications are designed to ensure that audit committees
(or others charged with governance) are informed of matters similar to those highlighted in the Waste
Management case.