Auditors Should Evaluate the Soundness of a Client’s Business Model

Nextcard, Inc

I don’t think auditors should evaluate the soundness of a client’s business model.

As I learned in the textbook, the reason is that the responsibility of professional auditors is performing the audit with appropriate competence and capabilities. Such as, auditors needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement. At the same time, they need to comply with ethical requirements and maintain professional skepticism throughout the audit. So evaluating the soundness of a client’s business model is not necessary.

There are three components of the fraud risk triangle, which is attitude, pressure or incentive, and opportunities. The fist one is attitude. In this case, one example is the management of Nextcard wanted to make its profit the highest in the credit service business, the other one is Nextcard revise and changed the original working paper of year 2000. The second one is pressure or incentive. The pressure Nextcard faced is it reported an unexpectedly large loss for fiscal year 2000. Besides, due to the bursting of the Internet bubble in the stock market, the stock price of Nextcard rapid declined and could not raise additional debt or equity capital. The last one is opportunities. The Internet bubble created a huge demand for the services of public accounting firms, which gave Flanagan the opportunities rehired by E&Y. Meanwhile, E&Y in San Francisco have the greatest need for auditors.

Attitude, pressure or incentive, and opportunities all can affect the planning and execution of that engagement. In addition, on one hand, auditors have responsibility to make sure statements are free of material misstatement caused by error or fraud. So first of all, they need to figure out the errors and fraud that can happen. In this case, auditor lost basic ethical standard. On the other hand, Nextcard has poor internal control, which gives employees the opportunities to subject to fraud and error. The company should implement some research and detective process to prevent it.