Page 17 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Self Assessment

Fill in the blanks:

11. An audit of an organization performed by a body that is independent of the organization
being audited is called ...........................
12. The ........................... object of auditing is to detect and prevent errors and frauds in the
books of accounts.
13. ........................... audit is performed to know the corporate social responsibility.
14. ........................... is an audit to ensure you’re in compliance with relevant specifications,
contract, or regulation.
15. Qualifications of the statutory auditor are prescribed in the ...........................

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Case Study Cap Gemini and Ernst & Young, Potential
Self-Dealing

uditors have their own codes of ethics. Where there is no code of ethics, or where
the code of ethics permits a degree of conflict of interest, the auditors tread at
Atheir own risk. The following case study underscores the traditional common
law obligations of auditors as fiduciaries, even before the adoption of the Sarbanes-Oxley
Act of 2002. This section covers some basic issues in auditing standards. Responding to
SEC criticism of ostensible conflicts of interest, some major accounting firms, such as
KPMG and Arthur Andersen, have spun off their consulting arms as independently owned
and managed entities. Ernst & Young LLP chose another route. The story of E&Y and its
alliance with Cap Gemini leads from a regulatory no-action letter to a court case alleging
breach of the accountant’s fiduciary duty. The tale leads to lessons learned.
Independence of Auditors
SEC No-Action Letter to Ernst & Young LLP on Alliance with Cap Gemini Ernst & Young
LLC. By no-action letter dated May 25, 2000, the SEC’s Chief Accountant advised Ernst &
Young LLP that it would consider E&Y to maintain its independence even though Cap
Gemini Ernst & Young were to provide IT services to E&Y audit clients. The no-action
letter imposed a number of conditions that (1) limit at the outset and within five years end
E&Y’s equity interest in Cap Gemini; (2) impose limitations on Cap Gemini’s use of the
E&Y name; (3) require a strict separation of E&Y and Cap Gemini’s corporate governance;
(4) forbid any revenue sharing between E&Y and Cap Gemini; (5) forbid any joint marketing
agreements between E&Y and Cap Gemini; and (6) restrict any shared services between
E&Y and Cap Gemini. Letter of Lynn E. Turner, Chief Accountant of SEC, to Kathryn A.
Oberly, Esq., Ernst & Young, May 25, 2000. Litigation Alleging Breach of Accountant’s
Fiduciary Duty; Liability for Systems Integrator’s Non-performance. Unfortunately, an
SEC no-action letter is not a vaccine against client lawsuits. Accountants engaged in
management consulting should pay careful attention to a ruling against Ernst & Young,
LLP (“E&Y”) and its successor in interest (by sale of consulting business), Cap Gemini
Ernst & Young, U.S. LLC (“CGEY”). This case is instructive to anyone in a licensed
professional capacity engaged in ancillary or multidisciplinary consulting practice.

Contd....

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