The word “audit” means to examine something critically or can refer to a report generated from

such critical examination. Thus, auditors both internal and external scrutinize the activity of a firm and
create reports expressing their reasonable assurance that financial statements and disclosures are free
from material misstatement, apart from that, audit is also an instrument and a tool of financial control,
employed to safeguard itself against fraud, extravagance and more importantly to bring credibility to
the audited entity. It determines whether an organization is providing a true and fair view of its financial
performance and position, which on its own is something any organization wants to achieve, in addition
to that, it also provides comfort over the accuracy of management accounts and revealing systematic
errors occurring throughout the year. A year end audit is critical to decision making for an organization
placing reliance on management information. Audit basically acts as the last line of defense from
accounting and financial risks the firm has yet to overcome and that neglecting such risks could possibly
cause the downfall of an entity.

KPMG (Klynveld Peat Marwick Goerdeler ) is part of the “big four” which are the four largest
accounting firms in the world that provides beyond par quality range of audit, tax and advisory services.
Businesses turn to KPMG for a better understanding of market dynamics and help them improve
business performance, leverage investments, protect financial assets, manage risks, and boost market
confidence. At some point in time, a company may go through a rough patch triggered by negligence
and actions that are not contingent with the company’s professional standards and regulatory
requirements. Unfortunately in the year 2008 KPMG got involved in a dispute with New Century
Financial and was sued for $1 billion over the company’s collapse saying that “KPMG failed its public
watchdog duty”. A court examiner concluded that New Century was engaged in a number of significant
improper and imprudent practices related to its loan originations, operations, and financial reporting. It
was also stated in the report by the said court examiner that KPMG contributed to some of these
accounting and financial errors “by enabling them to persist and, in some instances, precipitating the
company’s departures from applicable accounting standards.” Thus, urging New Century to increase
their loans and extend them to borrowers who are unlikely to pay, as well as using improper accounting
practices most of which were not in accordance with generally accepted accounting principles in the
industry which resulted to the company reporting a profit of $63.5 million in the third quarter of 2006
when it should have reported a loss. KPMG auditors basically made the financial statements look good
when it’s actually not and used a new method of calculating New Century’s reserves to cover defaulting
loans leading to the company’s downfall as New Century was led to believe that this “method” (which
violates accounting industry’s principles) would help the company to flourish.

As professionals, it is imperative for auditors/accountants to line their work in accordance with

the generally accepted accounting principles and report honest financial and nonfinancial information to
primary users so as to avoid consequences that does not only held them liable but as well as the
company they work for. It is not only their responsibility as an employee to practice integrity but as a
human being, they also have a responsibility to do what is right. Especially in the post-Enron era, one of
the lessons should have been that accountants need to be skeptical, strong, and independent – all of
which were not present in their auditor’s performance. Our group would like to shed light as to how
Strict Internal control in an organization is crucial for one to avoid grave consequences no firm would
like to go through. In line with the corporate governance issues that happened in PSE, Enron and KPMG,
it is imperative for the company to develop a code of conduct that addresses ethical and legal issues in
the workplace because it is not only the employee who will face the consequence of their negligence but
the company’s reputation could also be in jeopardy. Financial reports and statements should be reliable
and not made to “look pretty” because if not, it can damage the integrity of financial reporting, that is
the very foundation of the capital markets. Financial and nonfinancial reports should be timely, accurate
and faithfully represented and are in accordance with the industry’s principles and standards to help
investors make informed business decisions that is likely to enable them to make better decisions about
with whom and how much they should invest or to whom and how much should they lend. Our group
learned how internal control plays an integral role in a company’s success and how it reduces
information risks and limiting the extent to which public companies issue materially misstated and
blatantly falsified financial information.

Auditors/accountants should cement Sophocles’ principle of “rather fail with honor than
succeed by fraud” in their field of work. An awful lot of people would say that it doesn't matter what
method is used, as long as it would help one to reach their goal but we beg to disagree, To us, to
succeed by fraud is about the same as failing because you reached your goal by using the wrong
methods, meaning you did not gain any of the knowledge and experience that you should have gained.
If you failed, well at least you know your limits; at least you know you tried. And gaining some
experience along the way is better than nothing but above all, auditors should learn to think and
internalize the grave consequence of their actions not only to themselves but as well as the organization
they belong to and organizations should initiate strict Internal control management for it is critical in the
process of setting and achieving operational, strategic and compliance objectives. In addition to that,
organizations should religiously practice and apply these standards in their outputs so as not to find
themselves in the same page with the events that unfolded in entities like Enron and New Century.