2.3.5. Ensuring Risk Management Process Is Comprehensive And On-going
Risk management refers to an activity that integrates the identification of risk, its assessment, developing various strategies to manage risk, and the mitigation of various risk through the use of managerial resources (Galorath, 2006). Financial risk management is done by auditor and the audit committee focuses on risks that can be managed using various financial instruments (ISO, 2008). Objective of risk management activity is to decrease various risks related to financial records in companies (SBP, 2003). These risks are as result of numerous types of threats caused by technology, environment, politics, humans, and organizations. Risk is unavoidable element that is present
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The users of financial statement require that they be truthful so that they do not make bad decision as a result of poor information. Accounting and financial information is should provide financial statements that are useful in the making of informed economic decisions. The main objective for the preparation of financial statements is which show the real financial position and performance (IASB, 2001). It is the duty of the audit committee to see that the financial information in the financial reporting accurately presents the true financial position of the company. A study done by Al-Shammari et al. (2008) looked into the way companies that operate in the six Gulf member states such as Qatar, Oman, Kuwait, Saudi Arabia Bahrain and United Arab Emirates are able to comply with the set Financial Reporting and disclosure Standards. The study showed that the financial information and disclosure was poor and it led to poor decision by the investors. In Kuwait financial disclosure is governed by the commercial company law these is the primary legislation used to regulate standard that governs financial reporting (Al-Qahtani, 2005). Investors and others stake holders have in the past strongly criticized this law, stating that it weak on financial reporting (Borsuly, 2007). In 2001 the Kuwait enforcement body which oversees the financial …show more content…
The committee ensures that investors are protected from fraudulent and faulty financial reporting. Some times this committee lacks to reach a consensus on how to go about the task of ensuring there is no fraud risk and oversight (Beasley, Carcello, Hermanson, & Neal, 2009). Stakeholders and Regulators place high expectations of audit committee’s abilities to meet their responsibilities of ensuring proper financial reporting (Bédard & Gendron, 2010). Audit committee connection to the board members and management raises question of the degree of professionalism to ensure they produce transparency and truthful accounting (Beasley et al., 2009). This was also asserted by Cohen, Gaynor, Krishnamoorthy, & Wright (2011) who say the management ties to the audit committee would make them compromised. The committee’s ability to provide statements without interference has been identified by empirical researches as a major challenge to audit committees being able to achieve their
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).
The audit committee a part of the board of directors plays an important role in preventing fraud. They are directly responsible for overseeing the work of any public accounting firm, such as PwC, employed by the company. They also must preapprove all audit services provided by the auditors.
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
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.
No firm can be a success without some form of risk management. Risk are the uncertainty in investments requiring an assessment. Risk assessment is a structured and systematic procedure, which is dependent upon the correct identification of hazards and an appropriate assessment of risks arising from them, with a view to making inter-risk comparisons for purposes of their control and avoidance (Nikolić and Ružić-Dimitrijevi, 2009). ERM is a practice that firms implement to manage risks and provide opportunities. ERM is a framework of identifying, evaluating, responding, and monitoring risks that hinder a firm’s objectives. The following paper is a comparison and evaluation to recommended practices for risk manage using article “Risk Leverage
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor
Conflict of interest is a big problem between Enron and its auditing firms. It is believes that Enron’s auditors was hide many information and external auditors never aware or hide the losses in Enron. From audit committees to transparency committees would increase the likelihood that a firm’s key business ricks are transparent to investors (Healy & Palepu 2003, p. 21). Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader.
The oversight responsibilities of the board, the CAE lacking of expertise or broad understanding of financial controls and responsibilities, and the understaffed internal audit functions lacking of independence and direct access to the board of directors contributed to the absence of internal controls. To begin with, the board should be retrained to achieve financial literacy to review financial reporting. Other than attending formal meetings, the board of directors should be more involved with the management. For the Audit Committee, the two members who were recruited as acquaintances to Brennahan need be replaced with experts who are more sufficiently knowledgeable about accounting rules beyond merely “financially literate”. Furthermore, the internal audit functions need to expand with different expertise commensurate with the expanded activities of the organization, testing financial reporting rather than internal controls from an operational perspective. The CAE should be more independent and proactive to execute audit plans, instead of following orders from the CFO, and initiate a direct and efficient communication between internal audit and audit
Preparation of financial information is a critical role of the management of all public companies. For instance, access to accurate and timely information enhances the ability to manage the business of the company effectively. Moreover, it makes investors to put confidence in financial reports of the company if the company needs to increase its capital in the public securities market.
Identify the potential risks which affect the company and manage these risks within its risk appetite;
Norman marks on governance, Risk management and Audit, KPMG reports major problems on how risk management is understood, accessed from: http://normanmarks.wordpress.com/2011/05/27/kpmg-reports-major-problems-in-how-risk-management-is-understood-and-practiced/
As has been discussed before, risk identification plays an important part in the risk such as unique, subjective, complex and uncertainly. There are no two identical leaves in the world; similar, there are no two exactly the same risk either. Hence the best risk manger could not identify risk completely. Besides, risk identification assessment is done by risk analysts. As the different level of risk management knowledge, practical experience and other aspects between individuals, the result of risk identification may be difference. Furthermore, the process of identifying risk is still risky. Once risks have been identified, corporations have to take actions on limiting risky actions to reduce the frequency and severity of risky. They have to think about any lost profit from limiting distribution of risky action. So reducing risk identification risk is one of assessments in the risk
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.
According to me, if I want to achieve something I might face some risks so, risks are natural phenomenon that will come in each and every phase of personal and professional life. Everything comes with its cost so, we should be ready to take some risks in our lives to attain something good in our personal and professional life. Risk in ethics is the circumstances where the outcome of possible course is not known. In life there are many decisions automatically taken under risk while sometime I think many times before taking a risk. Sometimes due to lack of knowledge, decisions may take us to greater extent of risk. It’s my personal opinion, that every person on this earth aspects the risk but probability varies.