Reference no: EM133043693

Question - According to reports, Enron paid AA USD52 million in 2000. More than 50% (USD27 million) came from consulting services. As such, traditional auditing services became less and less profitable when compared to consulting. Audit services have become less and less important to AA.

In relation to the multi-billion bankruptcy of Enron, AA was accused of not fully disclosing Enron's financial position to investors. In the process of being investigated, AA destroyed (by shredding) a significant number of documents relating to the Enron audit.

In June 2002, AA was convicted of obstruction of justice for shredding documents related to the Enron audit. It lost its right to practice as an accounting firm. AA's greatest enemy was not the courts, but the market forces and public perceptions. This has resulted in termination of merger talks between AA and another major accounting firm. In addition, clients terminated relationship with AA. Many employees resigned. The market and public imposed its ultimate penalty on AA, causing it to collapse in 2001.

Required -

(a) Explain why the provision of non-auditing services to an audit client may compromise the auditor's independence. You are to provide relevant examples how independence can be adversely affected.

(b) List the safeguards that AA might have used to reduce the threats of independence to an acceptable level.

(c) Explain how AA failed to act in accordance to the public interest principle.