Audit Reasons For The Failure And Its Preventive Measures

Financial scandals of listed companies and auditing failures not only caused enormous financial losses to investors, but also seriously affected the healthy development of the capital market of a country, especially the capital market of China. Therefore, it is vitally important for us to study the reasons and precautionary measures of auditing failures.Three typical auditing failure cases of American listed companies, such as Enron, WorldCom and Xerox, were analyzed to find the intrinsic reasons or extrinsic ones of auditing failures. The intrinsic reasons include the lack of CPAs independence, the lack of due professional care and suspicion, and professional ethics; the lack of effective internal control and ignorance of integrity education in the accounting firm, etc. The extrinsic reasons include defects in the present system of auditing engagement, unbalance in governance mechanism of listed companies, defects in the way of drafting accounting standards and drawbacks of the supervision model of American CPA practice, etc. Based on the case of Yin Guangxia auditing failure, the article analyzed the reasons of auditing failure of Chinese CPAs. Compared with U.S.A., the CPAs are lacking in professional skills and risk consciousness, which are the important intrinsic reasons in China. Compared with the auditing circumstances of U.S.A., the ones of our country are more abominable, because of the faulty governance mechanism of Chinese listed companies, the function distortion of supply and demand in auditing market and the defective civil legal obligation system concerning Chinese CPAs. On the basis of analysis of the reasons of auditing failure, a series of precautionary measures were put forward to preventing auditing failures, which include internal precautionary measures such as improving the professional level of Chinese CPAs, etc., and external precautionary measures, such as perfecting the present systems of auditing engagement, governance structure of listed companies, accounting standards, civil legal obligation concerning Chinese CPAs, and the supervision model of CPA practice in our country, etc.