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Auditors independence and accountability
Auditors independence and accountability
The importance of ethics in auditing
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The expansion of investment driven businesses has raised the need of assuring the credibility of the financial information that is presented to the shareholders and other users involve in the process. The periodic financial statements prepared by the management of an organization and audited by the auditors are the main source that investors rely upon, therefore; the auditors are expected assure whether the financial statements presented are free from any material misstatements and represent the true and fair view of the company (Ruhnke & Schmidt 2014, p. 572). The corporate collapse cases such as Enron and Pamalat raised the concerns about auditor’s responsibility and the auditor’s service was criticised by the public due to the disparity …show more content…
The existence of ‘reasonableness gap’ which is the gap between what society expect in relation to the auditor’s role in detecting and preventing corporate frauds and what auditors reasonably could be expected to achieve is one of the causes for questioning an auditor’s role (Sidani 2007, p. 289). This raises the concerns related to the capacity of auditors and audit procedures used to detect major frauds and financial distress. Since the corporate collapses and frauds mostly relate to management’s unethical behaviors such as forgery and collusion, which are in non-systematic nature, the auditors may not able to systematically uncover frauds based on the standard auditing procedures (Gracia-Benauand & Humphrey 1992, p. 322). As a result, the auditor may not be responsible for not detecting frauds that resulted in corporate failures (Hassink et al. 2009, p.86) that the society expects them to …show more content…
2009, p.87). This inadequate performance of an auditor may occur due to consideration of auditor as an essential party in corporate oversight, the ineffective corporate governance structure that could detect any fraudulent acts may reflect on the perceived function of the auditor. Also, this interspersed with the auditor’s long-term relationship with the audit client will pose a threat to the independence status of an auditor causing them to perform lower than the expectations of the society (Hassink et al. 2009, p.86). Raghunandan & Rama (1995, p. 51) states that some companies that faced corporate collapses did not receive going-concern modified reports prior to the failure and these circumstances may not bode well for the auditing profession as it indicates the sub-standard performance by the
In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Market crashes are nearly as old as the invention of money itself. But, as Gillian Tett underlines in Fool’s Gold, “the latest financial crisis stands out due to its sheer size”. Economists estimate total losses could sum up to $2000 to $4000 billion, a number surprisingly not dissimilar to the British Gross Domestic Product. In its post-mortem, the self-inflicted disaster has commonly brought to light the question: “Did bankers, regulators and rating agencies fail to see the flaws, or did they fail to care?” Importantly, it has also created a hunt for scapegoats and quick fixes.
Also, if there is a large number of employees fired or laid off, the bottom levels of the control system are not likely to run smoothly and errors can occur during various control activities. In conclusion, the decline of the economy has a significant influence on the company’s financial standing portrayed to the public, as well as the internal risks faced by the company. Employees and managers have a significant amount of pressure placed upon them to keep the company healthy and still thriving in difficult economic times. These pressures generate an increase in inherent risk and control risk, which results in an increase in audit risk. Auditors should always be aware of how the economy has affected a client and keep an attitude of professional skepticism at all times in order to plan an audit to detect the heightened risk of fraudulent activity occurring.
Going concern issues in financial reporting, as discussed in Australian Auditing Standard ASA 570 , applies to all audits performed on a set of financial report in accordance with the Corporations Act 2001. A
In conclusion, a company’s financial statements regarding its financial position are critical to all concerned. First and foremost, these financial statements provide critical tools for companies to make decisions to improve its share value in the global market of fierce competition. Secondly, they provide accountability to shareholders and stakeholders in the company providing better stability in its business practices and requirements regarding the Securities Exchange Commission (SEC) and General Accepted Accounting Principles (GAAP). Lastly, financial statements paint a picture that gives a measurable to the success of a dream once birthed long ago by an entrepreneur to get an idea to the marketplace with great expectations of striking it rich.
Financial statement fraud is one of the biggest types of fraud in today’s business world. The complexity and mechanism of financial statement fraud brought the attention of auditors and regulators. Financial scandals of Enron, WorldCom, Xerox, Tyco, Parmalat, Qwest, and Satam Computers increased the auditors’ responsibility in detecting and preventing fraudulent transactions. Corporate financial fraud had negative consequences for the market capitalization due to gigantic losses of investors. In addition, accounting scandals of early 2000th ruined auditors’ reputation and the public trust.
led to the demise of the company. There will be an analysis of the auditor’s role in
Auditing as a profession as evolved drastically over decades and as time has passed auditing activities has expanded from performing specific assurance activities for management, to assisting and advising management with their specific business activities. The Institute of Internal Auditors define internal auditing as ‘”…an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.’ (Institute of Internal Auditors, 2013) Through this definition it can be explained why auditors can be seen as the ‘eyes and ears’ of management. Concentrating specifically on the principles of Governance, the usage of Internal Auditing Standards, the Current Role of Internal Auditing in SA, reviewing current crisis, the importance of Internal Auditing to management is evident.
While the responsibility to stand behind these statements lies with management, auditors are charged with independently investigating and examining those documents and producing an opinion founded on that audit. Auditors produce an opinion on whether a company’s financial statements are presented properly in all material respects, in compliance with GAAP. Furthermore, for companies impacted by Sarbanes-Oxley requirements, auditors are obligated to, as part of their larger financial audit, audit and issue an opinion on management’s internal controls and the overall effectiveness of a firm’s internal control over financial reporting. 3M’s “Report on Internal Control Over Financial Reporting” discloses that public accounting firm, PricewaterhouseCooper LLP, conducted such an audit of the company and issued an unqualified opinion on the effectiveness of 3M’s internal control over financial accounting (Gibson, 2013). An unqualified opinion is the best possible outcome of an audit and signifies compliance with GAAP and fair representation of financial information. For better or worse, the accountants behind audits are often included as defendants in lawsuits pertaining to financial statements. If 3M’s earnings were falsified in their annual report, for instance, an investor who relied on the false information to make financial decisions might sue both 3M and their auditors who overlooked the deceptive earnings figures. Accountants and auditors are seen as responsible for the financial statements they create or audit. After all, these are the professionals that are licensed to handle and certify critical information produced by corporations. Just as a disgruntled patient may sue a doctor for medical malpractice after a botched surgery, so too might a user of financial statements who incurred a loss based on dishonest or incorrect information place blame on
The main role in relation to fraud prevention is the operation of appropriate systems of internal controls, with proper segregation of duties and good corporate governance (this reflects the culture and practices of the organisation). The auditor has to assess and report on the adequacy of these systems of internal controls and segregation of duties. This gives confidence to the users of the financial statements of how the organisation operates on a daily basis. Auditors are in a way act as eyes and ears for users of financial statements into an organisation. They offer both an insight into an organisation and are supposed to act as protector of the law ensuring proper accounting standards
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
ABSTRACT: The quantity of accounting fraud cases keeps on rising. Fraud is a consistent thing that will reliably be around, and in a bigger number of routes than just a single. An extensive apportionment of organizations out there fighting fraud, either from within the organization, or from outside the organization. Knowing how to manage this is essential for an organization to be productive over an extended period of time. The investigation regarding the matter of accounting fraud will utilize sources from the web and the DeVry School Library.
Auditing has become quite a challenge in recent years due to all the fraud scandals that has been going on. Such is the case that government was required to intervene and created the Sarbanes-Oxley Act; one of most significant reforms related to public companies since 1934. Modern corporations aren’t ran by their sole proprietors anymore but by managers whose job is to protect their interest. Particularly this is one of the reasons why the demand of auditing arose due to the natural conflict of interest between the owner and the manager. Both of these individuals will naturally look out for their best interest and will forget about the other. The owner wishes to see his company grow while the manager wishes to grow his pockets; their interests
(i) Judgement and materiality play a significant role in helping to ensure that the selection of accounting policies in presenting the financial statements for a true and fair picture of the company’s financials. This means that entities should provide the financial statements with comparability, consistency and clarity to users of these statements. Entities must follow accounting policies required by IFRS and AASB should be relevant to particular circumstance.