Throughout the years, banks, shareholders, possible investors and creditors always relied on the financial statements produced by a company. Since the management of a company is producing these documents it has been assumed that the managers may act dishonestly so that their performance looks better. To monitor the company’s performance better the directors along with the shareholders employ external auditors to check all these financial statements for both intentional and unintentional errors.
Therefore, external auditors have no motivation to produce dishonest reports, hence they are regarded as being truly independent. But can they actually be independent when their current and probably future fees are determined by the board of directors and knowing that a negative report may reduce or completely cease their future income flow? What if there is built-up loyalty or some personal relationships between the auditors and the audited company? What is the primal role of external auditors?
Before proceeding further, it is important to note that an audit has any value to the financial statements’ readers, so long as the auditor is both technically competent (qualified enough to uncover significant errors) and truthful (All mistakes are corrected and presented to the public).
For all the further contemplation, auditors are assumed technically competent. First of all, the primal role of an audit body is monitoring and examining financial statements. It is to serve to all financial statements readers as a reassurance on the truthfulness and reliability of these documents.
The Business plan on Report on Financial Statement Fraud Scheme
Crazy Eddie Electronics Stores a chattered company, traded under the symbol CRXY on the New York Stock Exchange. The company was under management of Eddie Antar family from 1971 until 1987 when Oppenheimer-Palmieri Fund (OPF) took over the company as a result of proxy bid (Sanburn, 2012). After a very short time; however, Oppenheimer-Palmieri Fund management decided to suspend the entire board of ...
Hence the external auditor has to act in an independent honest fashion. But even if he is economically independent, why should the auditor act honestly? Independence is an attitude of mind, it is the person’s independent viewpoint that protects him from being influenced and pressured by his clients. There are two groups of auditors, concerning ethical reasoning: These who take into consideration the consequences of their actions (consequentialists) and these who analyse the moral quality of the action, no matter how dreadful the consequences can be (deontologists).
The latter will always be honest, while the consequentialists may occasionally produce dishonest reports. However, when economic dependence is taken into consideration (since the clients are the one who pay) the consequentialist becomes rational self-interested auditor, who tries to maximize his own economic wealth and minimize the risk related to this future income (there is a risk of being sued for negligence if the report is found to consist any significant errors).
What is interesting here is that to avoid risk from being sued, the auditor may undertake additional work, hence better quality of the report.
Another point worth mentioning is that different audit firms have different quality reputations- some are paid more, some less. To go further the auditing as a profession has the benefits of self-regulating monopoly, since all the regulations are made by recognised supervisory bodies (organisations whose members are all auditors or accountants) with little interference from the Government. Therefore all auditors are connected and their decisions affect the whole industry.
An auditor should be independent because not only does he expose himself to risk of being sued and reducing his firm reputation but also bears responsibility to the whole audit profession. Besides auditors, the one who pays the price of fraud are shareholders, employees and sometimes even the society. There are many examples when dependent auditors concealed fraud, and the results are always disastrous, examples such as WorldCom, Enron, Rita Aid and Tyco. But let’s see what happened in the 6th largest cable operator in US- Adelphia. In the beginning of the 2002 Adelphia Communications Corporation was found guilty for fraud, amounting to 2.
The Term Paper on Audit Firm Size And Going-Concern Reporting Accuracy
This study examines the association between measures of going-concern reporting accuracy and audit firm size of the companies listed in Tehran Stock Exchange. Prior works have examined the association between auditor size and audit quality, using various proxies for audit quality. Recent work has hypothesized that going- concern reporting accuracy can also measure audit quality. Furthermore, Prior ...
3 billion dollars of concealed liabilities. The SEC (The Securities and Exchange Commission) distinguished 3 types of fraud- Hiding debt, misleading information concerning the performance of the corporation and many deceitful omissions. Deloitte was providing Adelphia with external Audit for more than 15 years, but suddenly (in the end of 2001) they stopped working, claiming that the information provided by Adelphia was unreliable. After the criminal investigation conducted by the SEC, Deloitte was accused of negligence, deception and failure to reveal fraud.
According to the SEC (2005), the results are “Deloitte & Touche LLP has agreed to pay $50 million to settle charges stemming from its audit of Adelphia Communications Corporation’s fiscal year 2000 financial statements. ” Although Deloitte wasn’t pronounced guilty, it is obvious that they could have easily detected and disclosed the omissions and fraud that they could have found. If that had happened, probably the scale of this catastrophe would have been smaller and Adelphia wouldn’t have gone totally bankrupt. This case inevitably shows us the importance of independent auditing.
Another threat to the independence of the auditors is a phenomenon which took place around 3 or 4 decades ago. During that time the number of firms which required audits stopped expanding, the codes that prohibited advertising accounting firms were abolished, which enabled all these firms to steal market from each other. Furthermore, a lot of audit bodies engaged into consulting, bookkeeping assistance, investigation and tax advices. This trend resulted in accounting firms gaining more revenue from consulting practices than from their main role in the society- monitoring and overseeing financial statements.
Thus this led to a great conflict of interests, since consulting firms are supposed to be dependent and in good relationships with their clients but on the other hand audits should be carried in an independent manner. However, ‘money makes the world go round’ and auditors were reluctant to perform strict audits because they risk losing sufficiently more income than before, so they lost their independence to a great scale. Typically, this loss of independence was followed by the Enron and Arthur Andersen great failures. Not surprisingly, the public’s trust and confidence in accounting firms started to vanish in a fast pace.
The Term Paper on Beginning The Audit Report 4
As you know, our firm has been selected to perform the Apollo Shoes audit. The planning process has been the most delicate stage as we want to ensure we have a solid audit approach. The team I select will be dedicated in meeting the objectives and strategies for completing the audit. I will briefly explain to you how I plan to begin the audit process. Now that Apollo Shoes has selected our firm, ...
Fortunately, The Sarbanes-Oxley Act of 2002 forbid audit companies to offer both consulting and auditing services to the same firm, which helped improving the independence. Nowadays, the act is still in power and audit providing firms have the choice whether to provide auditing or consulting to publicly held companies. An interesting, really recent example of playing with fire, with regards to The Sarbanes-Oxley Act of 2002, is the business alliance between PwC and Thomson Reunters in China. While according to U. K. regulations and U. S.
law business coalitions between and auditor receiving company and the auditor itself are forbidden, it has just been announced that Thomson Reunters (audited by PwC) has already signed a contract with PwC to provide PwC with corporate tax technology in China. Apart from that, Thomson Reunters provides PwC U. K. with software for dealing with tax clients. According to Francine McKenna (2012), Forbes, “It’s not known if PwC receives any financial incentives or special considerations for its exclusive use of Thomson Reuters software to provide tax services to its clients in China and the U.
K. PwC did provide a significant amount of tax services to Thomson Reuters as part of its audit. ” In this case it is not sure if there are any distinct violations. Maybe there is a slight chance that this will be the next big failure, maybe not. What is for sure is that close business relationships tend to have negative influence on independence. In summary, the primal role of an external auditor is to provide an independent assessment of a company’s financial statements.
His assessment is an assurance to the readers of the financial statements, that these statements are fair and true, free of significant errors and misleading information. It is of utmost importance that the audit performer is truly independent, to have an independent attitude of mind, because, otherwise, under the pressure and influence of his clients, the auditor may act in a dishonest fashion. Every disclosure of fraudulence has detrimental effect not only on the auditing company or the auditor who produced the report, but on the audit profession, as a whole.
The Business plan on Percieved Value of Mandatory Audits to Small Companies
|Perceived value of mandatory audits of small companies | | |Author(s): |Shifei Chung, (Assistant Professor, Department of Accounting & Finance, Rowan University, Glassboro, New | | |Jersey, USA), Ramesh Narasimhan, (Associate Professor, Department of Accounting, Law & Taxation, Montclair | | |State University, Montclair, New Jersey, USA) | |Citation: |Shifei Chung, Ramesh Narasimhan, ( ...
The auditor’s economic interest reduces his independence and can cause conflict of interests, which can result in dreadful failures and catastrophes. There are many regulations that try to protect auditor independence by limiting and decreasing the auditor’s economic interest. So it is important for an external auditor to be independent because in the end, the cost of fraudulent report is paid by all people engaged to the examined company, sometimes it is even paid by the society.
