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Report questions auditors’ ethics

AUDITORS make unethical decisions that favour the interests of their clients, a study in Gujarat India has revealed.

Researchers from Harvard and the Massachusetts Institute of Technology argues in its paper that the relationship between companies and their auditors are littered with conflicts of interest and “poor incentives to tell the truth”, the Financial Times reports.

The study looks at the state of Gujarat in India and found that auditors would often bend to senior management’s wishes to keep clients on board. It also revealed that in many cases auditors may suppress information that could damage a company’s reputation. 

Michael Greenstone, co-author of the study and MIT economist, said that lessons from Enron and Arthur Andersen had not been learned.

Enron collapsed amid a cloud of fraudulent activity, while it’s auditors, the fifth largest global firm Arthur Andersen, collapsed shortly after following reputational damage.

However, Greenstone added that the problem of conflict was a global one that needed to be addressed.

“Every single third-party auditing market in the world has a fundamental conflict at its core. The person being audited is paying the auditor,” said Greenstone.

The UK competition regulator made similar conclusions that auditors were prioritising management satisfaction ahead of the interests of investors.

By focusing on management interests over those of shareholders, auditors have created a “static market” in which too often audits fail to fulfil their intended purpose and meet the needs of shareholders, the report said.

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