HI6026 Audit, Assurance And Compliance Key Method : Essay Fountain

Question:

When sub-standard audits are performed and reasonable assurance cannot be reliably ascertained, there are consequential risks for key stakeholders, including auditors. In light of this, perform the following key assignment tasks:
 
1.Perform a key stakeholder analysis for an ASX listed company. Explain how the key stakeholders would be affected if material misstatements are not properly identified, disclosed or adjusted for in the finalised financial statements. What are the key risks posed to each key stakeholder you have identified?
 
2.Consider the concepts of independence and “whistleblowing” in relation to auditors. How do these concepts relate to the public interest requirements mentioned in the APES 110 Code of Ethics for Professional Accountants document?
 
3.What lessons can auditors learn from the Enron scandal and in particular from the behaviour of Arthur Andersen?
 
4.With reference to the APES 110 Code of Ethics for Professional Accountants document and the ASIC website, research “audit quality” and discuss what auditors need to do to address the “warning” noted in the statement made by Greg Medcraft above.
 
 

Answer:

Introduction

Auditing can be considered as a special process where the auditors apply different kinds of analytical procedures for the analysis and inspection of their clients’ financial statements and the aim is to find out whether there is any material misstatements in them or not (Chan & Vasarhelyi, 2018). The key stakeholders of the business organizations consider the report of the auditors as a proof of the presence or absence of material misstatements in them. It puts the obligation on the auditors to conduct the audit procedures as per the required standards and principles. For the same purpose, the auditors can take essential lessons from the large corporate collapses all over the world like Enron and others (Reding et al., 2013). This particular report has certain aims. The first aim of this report is the analysis of the presence of material misstatements on the key stakeholders of Coca-Cola Amatil, an ASX listed company. The next part of the report puts focus on the concepts of auditor independence and whistleblowing in auditing. The next parts sheds light on the auditing lessons learned from the collapse of Enron. The focus of the last part is to suggest the needed steps to be taken for improving the audit quality.

Effects of Material Missstaments on the Key Stakeholders of Coca-Cola Amatil

It affects the key stakeholders of the companies in major way when the auditor fails in properly identify the material misstatements in the financial statements and it is also applicable for the key stakeholders of Coca-Cola Amatil. The effects are shows in below discussion:

Shareholders: Shareholders in Coca-Cola Amatil include the persons and companies that invest in the company for getting higher return (coca-colacompany.com, 2019). On the other hand, Coca-Cola Amatil fulfil their capital need from their invested money. This stakeholder group depends on the financial statements of the company in order to make correct investment decision. Hence, improper identification of material misstatements can create the risk of incorrect investment decision by them as materially misstated financial statements do not provide the correct financial information about the financial performance and position of the firms (Henczel, 2013).  

Analysts: This particular stakeholder group in Coca-Cola Amatil represents the equity analysts and other analysts that analyse and evaluate the financial performance and financial position of the company for the interested stakeholder group (coca-colacompany.com, 2019). For this reason, they rely on the financial information of the company through various financial statements. Hence, incorrect identification of material misstatements can affect the analysis of these analysts as they will not be able in correct analyse the company in the presence of incorrect financial information.

Peer and Suppliers: This stakeholder group of Coca-Cola Amatil includes the local, national and international suppliers who provide the company with the required goods for the purpose of production (coca-colacompany.com, 2019). This stakeholder group analyses the financial statements of the company for the analysis of liquidity position, efficiency position and profitability position in order to make decision related to credit decisions. Hence, the presence of material misstatements can manipulate the assets and liability position of the company and it can affect the credit decision of this stakeholders (Khan, Muttakin, & Siddiqui, 2015).

Lenders: In Coca-Cola Amatil, lenders include the person and organizations that provide the company with the required capital for their business operations (coca-colacompany.com, 2019). For this purpose, it is needed for these stakeholders to analyse the financial stability of the company to repay the loan amount and the required information from the financial statements. Hence, in the presence of improper identification of material misstatements, this stakeholder group will not be able in acquiring the correct financial ability of the company from the financial statements (Knechel & Salterio, 2016).

 

Auditor Independence and Whistleblowing

Auditor Independence: The primary responsibility of the auditors is to provide the shareholders of the companies with the independent and expert opinion on whether the financial statements reflect the true and fair view of the financial position (Tepalagul & Lin, 2015). Auditor independence is considered as the mean that assists the auditors in demonstrating the fact that they can perform the task in the most objective manner. Hence, the need for the auditor is to stay independent from the client company so that the audit opinion is not influenced by the relationship between them. As per the principles of audit independence, the auditors are expected to provide unbiased and honest professional opinion on the financial statements to the shareholders (Fiolleau et al., 2013).

Whistleblowing: Whistleblowing is considered when an employees, supplier or contractor of the company goes outside of the normal channel of management for reporting suspected wrongdoing in the workplace (Zhang, Pany & Reckers, 2013). Whistleblowing can be done through internal processes of the companies or the external bodies like regulator and others. Hence, whistleblowing can be considered as the act to reveal inappropriate business activities, often secretly, to the parties within or outside the organizations with the purpose to alert the individual or authority who can take the correct actions. In the process of auditing, a positive connation can be seen between the whistleblowing process and auditor independence (Gold, Gronewold & Salterio, 2013).

The APES 110 Code of Ethics for Professional Accountants consists of all the needed standards and regulations that the auditors are needed to comply with while conducting the audit procedures (Martinov-Bennie & Mladenovic, 2015). Section 210.11.1 of APES 110 states that the auditors are needed to obtain the permission from the audit client to contact the previous auditors for more information. APES 110 states to reject the audit nomination due to the rejection of this request (apesb.org.au, 2018). In the presence of the acceptance of the request, the requirement for the auditors is to write to the previous auditors for the information related to the decision of nomination. To provide the required safeguards to the whistle-blowers in the companies, the above regulation has been introduced and this particular safeguard has contributed towards the freedom of speech to the employees, suppliers and contractors. According to Section 100.1 of APES 110, it is the right of the whistle-blowers to file complaints related to the violation of organizational ethical principles in the presence of the required evidences like gross mismanagement, abuse of authority, waste of funds and many others (apesb.org.au, 2018).

 

Lessons from Enron Scandal and Arthur Andersons’s Behaviours

All over the world, the collapse of Enron is considered as one of the biggest collapses of all time and it has provided certain lessons to the auditors. They are discussed below:

Uncooking the Books: It can be seen from the collapse of Enron that the auditors, Arthur Anderson, were involved in the collapse as the management of Enron appointed them for fulfilling their personal interest. This aspect indicates towards the lesson that the government agencies should have the auditing responsibilities instead of the private firms. At the same time, the collapse of Enron has pointed out towards the need of strict regulatory framework in audit profession that will restrict the audit firms from providing consulting as well as non-audit services to the audit firms in exchange of huge fees (da Silveira, 2013).  

Better Auditing Standards: It can also be seen from the Enron collapse that there were some major issue in the accounting and auditing standards that were major reasons for the collapse of Enron. This aspect provides the auditors with the lesson that there is a need for the introduction of robust accounting standards that will ensure sound accounting and auditing principles within the companies. Hence, the need is to comply with the globally acceptable accounting principles by the accounting and the auditors (Hosseini & Mahesh, 2016).

Independent Oversight Strengthen Auditing: The collapse of Enron indicates towards the aspect that the independent oversight of the auditors helps in strengthening the overall auditing profession. Hence, it is needed to inspect the knowledge of the auditors that the auditors apply on every audit engagement. It also encourages better documentation. At the same time, it needs to be mentioned that there is a need for an inspection program that will consider the inspection of the significant audit judgments due to the act that the audit procedures are heavily based on the professional judgements in certain circumstances in the audit profession (pcaobus.org, 2018).

Supervisory Approach – Incentive to Improve: Another major lesson that can be learned from the Enron scandal is that the quality of audit can better be improved by proving incentives, instead of threatening punishments. It is because the vast majority of the auditors as well as accounting companies are intensely committed towards professionalism and integrity. For this reason, auditing oversight can be considered as the promoter to help the companies in identifying strengths and weaknesses in the audit practices. An example of this can be seen in the Sarbanes-Oxley Act as it contains the example of this kind of incentive where the board has prohibited the firms to make public disclosure of the inspection report critic of quality control of a firm (nytimes.com, 2018).

Internal Control Auditing: Another major lesson from the case of Enron is to strengthen the internal control auditing. One major way for restoring the confidence of the investors was to require both the management and auditors in reporting on the effectiveness of their internal control over the process of financial reporting. In order to work this new responsibility, the need is to issue an auditing standard on this new aspect of the responsibilities of the auditors. Thus, the important lesson is to maintain the desired balance between costs and benefits in this particular area (Brandt, 2018). 

 

The Relationship between the Auditor and Audit Committee: Another crucial lesson that the auditors can learn from the collapse of Enron that the oversight of external auditors cannot be fully effective in case the companies itself does not have any commitment towards fair and accurate disclosure. In this process, the key aspect is the relationship between the company’s auditor and its independent audit committee. It is needed to have a cordial relationship between the auditors and the audit committee with the aim to make the audit a success. Hence, the need is to arrange periodic educational forums for the audit committee members. At the same time, it needs to interview the external auditors for the same purpose (Hays & Ariail, 2013).

Auditing As a Global Profession: The final as well as major lesson that can be learnt from the collapse of Enron that auditing is a global profession. Hence, it is needed for the respective audit boards to work with the other auditors. Hence, it is needed for the auditors all over the world to comply with the global auditing principles with the aim to avoid any kinds of breach of the auditing standards and principles (pcaobus.org, 2018).

Behaviours from Arthur Anderson

It can be seen from the collapse of Enron that Arthur Anderson was the audit partner of the company at the time of collapse and was the second oldest auditing firm that time. Arthur Anderson was majorly accountable for ensuring the accuracy of the company’s financial statements along with the internal bookkeeping. The investors of Enron had faith on the report of Arthur Anderson for the purpose of investment decisions as they considered the reports accurate and free from conflict of interest. Later, it was disclosed that Arthur Anderson was the business partner of Enron and some of the audit executives of the companies accepted jobs from Enron (Ghafran & O’Sullivan, 2013). In the presence of all these personal benefits, Arthur Anderson did not feel it necessary to ask for partnership clarification while verifying the financial statements. It was the acquisition on the auditors of Arthur Anderson that they destroyed the crucial audit documents of the company. All these aspects indicate towards the fact that Arthur Anderson did not adhere to the required audit regulations and standards while auditing the financial statements of Enron (Swanquist & Whited, 2015).

Audit Quality and Needed Steps by the Auditors

In auditing, the absence of globally recognized definition of audit quality can be seen. However, when the auditors have the needed professional scepticism and conduct the audit operations as per the required standards and regulations, it can be considered that the quality audit has been conducted. There are certain other requirements of quality audit such as knowledge about the industry of the audit client, nature as well as degree of audit and others (Gul, Wu & Yang, 2013).

It can be seen from the statement of Greg Medcraft that there are chances where Australia might meet the collapses like Enron in case there is not any initiative for enhancing the auditing standard by the big four auditing firms; they are PwC, Deloitte, KPMG and E&Y. He has warned Australia to encounter the danger of another financial crisis in case these firms do not conduct proper audit of the corporate accounts (abc.net.au, 2019).

In case the auditors of these big four audit firms fail to address the above-discussed issues o urged basis, Australia might witness corporate collapse like Enron. Hence, the most urgent requirement for the auditors is to perform the necessary audit procedure on efficient basis after acquiring sufficient assurance on the fact that the financial statements are free from material misstatements. According to Section 2 of APES 110, it is needed for the auditors to provide sufficient assurance that the financial statements provide true and fair overview of the company’s financial standing (apesb.org.au, 2018). According to the statements of Greg Medcraft, auditing failure at the time of financial crisis contributed towards the collapse of Enron. For this reason, it is needed for the auditors to be responsible at the time to conduct the audit of the financial reports with the aim to provide the key stakeholders with the needed financial information (abc.net.au, 2019).

 

The news article shows the collection of key audit samples of the big four audit firms for the 18 months until December by ASIC (abc.net.au, 2019). The inspection of ASIC shows the failure of the big four audit companies to provide sufficient assurance in 23% cases on the fact that the financial reports do not have material misstatements. The main reason for this failure is the lack of scepticism from the auditors and lack of ability to deal with the puzzling audit situations. This aspect has the potential to turn out to be worse in the future (Glover & Prawitt, 2014).

For example, accounting fraud was majorly responsible for the collapse of Enron in 2002 and it contributed towards the deterioration of Arthur Anderson due to their immense involvement in the whole corporate scandal. In Australia, after ASIC raised their disquiet related to the asset valuation in financial reports, certain companies like Seven West Media and Nine Entertainment did write down their asset value in the year 2016 (abc.net.au, 2019).

Greg Medcraft mentioned the fact that ASIC conducted 7000 observation along with several investigations like more than thousand (abc.net.au, 2019). After these inspections, they restricted 600 companies from operation, provided order to imprisonment to more than 80 company staffs and $1.3 million was returned to the investors with six years. In addition, the federal government of Australia ordered the company individuals to complete their unfinished tasks. They forced criminal charges in the place of civil charges; and both the government and financial regulatory board supported these recommendations. Hence, it is needed to maintain the audit quality for the mitigation of audit independence threat or bring them down under the danger level with the help of required safeguards (Wolfe, Christensen & Vandervelde, 2014).

The statement of Greg Medcraft has made it clear that when the business organizations have very few individuals with the needed knowledge, skills and experience to conduct audit procedures, the rotation of audit staffs and firms might not provide enough safeguard and this rule can be observed in the Section 290.155 of APES 110 (apesb.org.au, 2018). However, in case the sovereign controllers have provided an immunity to the audit partners for the rotation of audit staffs and firms, it becomes possible for the audit firms to remain as a key audit partner for more than seven years. However, the necessity of alternative safeguards like independent external review need to be there.

In addition, according to Section 100.1 of APES 110, it is needed for an auditor to conduct audit in such a manner so that the best interest of the public can be guaranteed. In addition, Section 100.2(c) of APES 110 states that it is needed to have safeguards for the eradication or minimization of the audit threat to the safe level (apesb.org.au, 2018). More specifically, the application of safeguard can be seen when the audit threats cross the safe level due to the breach of fundamental and ethical principles of auditing.

On the basis of the statement of Greg Medcraft, it can be observed that it is promising for avoiding another major financial crisis in case the Australian auditors become responsible in maintaining professional competence and due care (abc.net.au, 2019). For this purpose, it is needed for the auditors to possess the required skills, knowledge and experience that would provide them with major backing to hold capable relationship between the audit firms and audit clients. Section 100.5(d) of APES 110 indicates towards the responsibility of the auditors to maintain privacy of the clients’ business information obtained at the time of providing the professional services (apesb.org.au, 2018). Finally, the auditors are needed to comply with the required regulations and standards of auditing at the time to provide the auditing services.

Conclusion

In conclusion, it can be said that Coca-Cola Amatil has different groups of key stakeholders who use the financial information of the company for various decision-making purposes and hence, the presence of material misstatements lead to improper decision-making of those stakeholder groups. After that, the consideration of the concepts of auditor independence and whistleblowing states that both these requirements are needed for the companies in maintaining the ethical adherence of the companies. Various codes of APES 110 are crucial aspects in this case. As per the discussion of the report, the Australian auditors can learn many lessons from the Enron Scandal like the use of independent oversight for strengthening auditing, incentives for improvements in auditing, internal control auditing, cordial relationship between audit committee and auditors and others. Lastly, in reply of the warning of Greg Medcraft related to the occurrence of financial crisis and Enron scandal, the report states that the auditors are needed to comply with the required ethical and auditing standards to avoid these aspects.

 

References

ABC News., 2017. Poor auditing could be ‘canary in the coal mine’ for financial crisis: ASIC. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-poor-auditing/9114490 [Accessed 3 Jan. 2019].

APESB. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 3 January 2019, from https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf

Brandt, T. (2018). Lessons Learned the Hard Way: Enterprise Risk Management, Public Trust and the IRS. The Journal of Government Financial Management, 67(3), 26.

Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

da Silveira, A. D. M. (2013). The Enron scandal a decade later: lessons learned?.

Fiolleau, K., Hoang, K., Jamal, K., & Sunder, S. (2013). How do regulatory reforms to enhance auditor independence work in practice?. Contemporary Accounting Research, 30(3), 864-890.

Ghafran, C., & O’Sullivan, N. (2013). The governance role of audit committees: reviewing a decade of evidence. International Journal of Management Reviews, 15(4), 381-407.

Glover, S. M., & Prawitt, D. F. (2014). Enhancing auditor professional skepticism: The professional skepticism continuum. Current Issues in Auditing, 8(2), P1-P10.

Gold, A., Gronewold, U., & Salterio, S. E. (2013). Error management in audit firms: Error climate, type, and originator. The Accounting Review, 89(1), 303-330.

Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), 1993-2023.

Hays, J. B., & Ariail, D. L. (2013). Enron Should Not Have Been a Surprise and the Next Major Fraud Should Not Be Either. Journal of Accounting and Finance, 13(3), 134-145.

Henczel, S. (2013). The information audit: A practical guide. Walter de Gruyter.

Hosseini, S. B., & Mahesh, R. (2016). THE LESSON FROM ENRON CASE. Journal of Current Research, 8(08), 37451-37460.

Khan, A., Muttakin, M. B., & Siddiqui, J. (2015). Audit fees, auditor choice and stakeholder influence: Evidence from a family-firm dominated economy. The British Accounting Review, 47(3), 304-320.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Lessons from Enron: The Importance of Proper Accounting Oversight. (2019). Pcaobus.org. Retrieved 3 January 2019, from https://pcaobus.org/News/Speech/Pages/07262006_GoelzerTokyoAmericanCenter.aspx

Martinov-Bennie, N., & Mladenovic, R. (2015). Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment. Journal of Business Ethics, 127(1), 189-203.

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Swanquist, Q. T., & Whited, R. L. (2015). Do clients avoid “contaminated” offices? The economic consequences of low-quality audits. The Accounting Review, 90(6), 2537-2570.

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Wolfe, C. J., Christensen, B. E., & Vandervelde, S. D. (2014). Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism.

Zhang, J., Pany, K., & Reckers, P. M. (2013). Under which conditions are whistleblowing “best practices” best?. Auditing: A Journal of Practice & Theory, 32(3), 171-181.

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