There were several main red flags that were ignored or handled leniently by E&Y auditors in the audit of Health South. The most important were materiality in ledgers of fixed assets that were adjusted by including false entries and fictitious assets that did not appear in real. Another red flag related to the reality was noticed and ignored by the auditors that company’s officials were interested in increasing the share price of HealthSouth in the stock market anyhow. There should have been awareness of the fact that was avoided by auditors was an unusual increase in the net profits (500 percent) of the company while revenue showed a slight growth (5 percent) in three years.
It is one of the major responsibilities of auditors to understand the procedure of consolidation as they do such work while reviewing and inspecting purchases, payroll, sales, etc. They are hired or appointed to audit and control all the accounts of the company including that occurs during consolidation and auditors cannot move away from this responsibility. Auditors can easily tackle the fraud or misrepresentation by controlling the changes occurs during the consolidation of the company. They have enough experienced and ideas to do this work. Auditors are entitled to check adjusting entries, consolidation entries and control all the accounts to ensure that the management has not overridden them (Louwers, Ramsay, Sinason, & Strawser, 2006).
Auditors start their investigation by conducting an inquiry into upper management, key employees, and members of internal audit committee. The tone can be determined by seeking if managers (other than that of financing and accounting) are interested in accounting issues. Other indications of fraud are illegitimate actions to increase the earnings, showing unethical behavior in dealing with potential stakeholders of the business, and conflict or debate on accounting issues between company’s top management and auditors. These indicators will provide a clue to further investigate in that specific area (Louwers, Ramsay, Sinason, & Strawser, 2006).
It is the duty of an auditor to notice the accusation provided by whistleblowers whether they are the employees of an audited company or not. However, they should not consider it true until it found to be true that is the auditor should keep on investigating without showing his consent similar or opposite to that of the whistleblower. If the information provided also seems to be true after the investigation, then this is to be conveyed to the upper management of the auditing company and internal audit committee of the audited committee. On the other hand, if the information found to ineffective or irrelevant then it should be addressed as the malfunctioning statement by the whistleblower (Louwers, Ramsay, Sinason, & Strawser, 2006).
E&Y should improve its sampling practices by enhancing their technique from large items that is it should consider small items that may result in the misstatement of various assets and liabilities. The company should not solely depend on stratified sampling but also use other sampling techniques such as classical variables sampling, monetary unit sampling, and non-statistical sampling. All these sampling techniques are effective in identifying any fraud or misstatement in the financial records of the company. The sampling should be the representative of the overall population as any fraud in any of them is malfunctioned or misstated that resulted in the big fraud in the end.
Reference
Louwers, T. J., Ramsay, R. J., Sinason, D., & Strawser, J. (2006). Auditing & Assurance Services. New York: McGraw-Hill Education.
