CHAPTER 1

The Role of the
Public Accountant in the
American Economy

Review Questions

1-1 The “crisis of credibility” largely arose from the number of companies that restated their previously issued financial statements as a result of accounting irregularities and fraud. Especially responsible were the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest companies in American history to do so. The extent of the accounting irregularities and fraud being investigated and disclosed brought into question the effectiveness of financial statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
However, internal auditors are not independent in the same sense as a public accounting firm. The public accounting firm serves many clients and the revenue obtained from any one client is only a small part of the revenue of the firm. Internal auditors, on the other hand, are employees of one company, and are subject to the restraints inherent in the employer-¬employee relationship. Internal auditors can achieve a great deal of independence by reporting to the audit committee of the board of directors, but they cannot achieve the same degree of independence as is possessed by the external public accounting firm.

1-12 The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate management. The public accounting firm is independent of the company and is in a better position to take positions opposed to those of company management. The work of the internal audit staff emphasizes measurement of the efficiency and effectiveness of various operating units of the company and compliance with all types of controls, whereas the public accounting firm is primarily concerned with determining the fairness of Spacecraft's financial statements.

1-13 The Government Accountability Office (GAO) is a staff of professional auditors which reports to Congress. Its function is to determine that programs carried out by federal