Comparison Of 'Big 4' And 'Non-Big 4' Audit Firms, Arthur Andersen/Enron Case - An Essay.

Comparison of Audit Firms

Research on ‘Big 4’ and ‘non-Big 4’ audit firms.

1. Audit firms are categorized in a number of ways; the two most common being the international ‘Big 4’ audit firms and the ‘non-Big 4’ (or mid-tier) audit firms.

The Big 4 audit firms are;

1. Price Waterhouse Coopers (PwC),
2. Ernst and Young (EY),
3. KPMG, and
4. Deloitte.

Most audit firms maintain a website that explains the services offered by the firm and provides resources to their clients and other interested parties. The services offered by most firms include both audit and non-audit services. Required Find the websites for:

(a) a ‘Big 4’ audit firm and

(b) a ‘non-Big 4/mid-tier’ audit firm.

2. Present a ‘business report’ that addresses the following two requirements; (a) Compares your two audit firms on the following ten characteristics:

1. Range of services provided.
2. Geographic coverage (i.e. where their offices are located).
3. Number of staff and special skills offered.
4. Industries in which they claim specialisation/expertise.
5. Publications and other materials provided to their clients or the general public.
6. Key marketing message(s).
7. A topic of your choice No. 1.
8. A topic of your choice No. 2.
9. A topic of your choice No. 3.
10. A topic of your choice No. 4.

Note, to find four ‘topics of your choice’, you will need to look-up (at least) four articles published in ‘professional’ and/or ‘academic’ accounting/auditing journals that have examined differences between ‘Big 4’ and ‘non-Big 4’ audit firms. These articles (reference sources) must be cited in your responses, and listed appropriately at the end in a reference list using APA referencing style. (b) Makes a recommendation on which audit firm your group would prefer to work for and why.

2. Research on Arthur Andersen/Enron. In 2002, the audit firm Arthur Andersen (one of the then ‘Big 5’ audit firms!) collapsed following charges brought against it in the United States relating to the failure of its client, Enron. Some other clients announced that they would be dismissing Arthur Andersen as their auditor even before it was clear that Arthur Andersen would not survive. Required

(a) Using any two of the three theories outlined in Gay and Simnett (2015, Chapter 1, pages 20-21)) (i.e., the prescribed textbook) on the demand for assurance

(i) Agency Theory, (ii) Information hypothesis, and (iii) Insurance hypothesis),

Explain some reasons why these clients took this action.

(b) Present an argument of why a similar event is not likely to happen again. Your discussion should be

(i) in context of what went wrong with Arthur Anderson/Enron and

(ii) make specific references to how regulations and auditing standards have changed since the collapse of Arthur Andersen. 

3. Format and presentation quality. As mentioned above, Part 1 (a) and Part 1(b) should be presented in a ‘business report’ format. A key aspect in your group’s choice of format/layout should be to ensure you impart your key messages effectively (i.e., complete the requirements) and efficiently. As per the Guidelines, the report also should be coherent, and so consistency is expected throughout (e.g., formatting, language style, and linkages between the parts).

The study intends to compare Deloitte a company founded by William Welch Deloitte in 1845 in the UK. The company is considered to be leading among the “Big 4” audit companies in the world as the reports presented by Statista in 2017. Additionally, Deloitte provides huge service network of professionals in the world (Statista, 2017a). On the other hand, Lodha & Co a “non-Big 4” was established in the year 1941 in India and its offices are in various parts of India. The firm includes total of 16 partners and has employed experienced chartered accountant, company secretaries, management graduates, and cost accountants (Lodha & Co, 2008).

Services Range

Deloitte with an experience of more than 150 years provides its services in 150 countries along with regions. This helps the company in making a real difference with their commitment in services. It is observed that approximately 245,000 individuals are employed by the company for providing the services related to tax, financial advisory, legal, and audit. The financial services of Deloitte include securities and banking, investment management as well as insurance (Deloitte, 2018). On the other hand Lodha and Co has an experience of 76 years. Additionally, the range of services it provides is such as Assurance, tax, management consultancy and corporate advisory. In case of assurance, the services provided are tax audit, statutory audit, investigative audit, compliance audit, concurrent audit, due diligence reviews, internal management of audit advisory services, and Adaptation of financial report in arrangement with US GAAP / IFRS. Furthermore, in case of corporate advisory, the range of services covered are valuations, joint ventures, debt restructuring, project advisory, corporate restructuring, and M&A advisory(Lodha & Co, 2013).

Geographical Coverage

Deloitte was the first professional audit firm, which was established in Middle-East and is successfully running after 1926. In 15 countries, Deloitte has 26 offices and is associated with minimum of 3000 directors, partners, and staff. It operates on a worldwide basis and operates in over 150 countries namely Australia, Algeria, Austria, Bahrain, and Belgium among others. Headquarter of Deloitte is located in London, UK. It has various offices in different parts of the world. This includes Oslo, Mexico City, Copenhagen, Vienna, Los Angeles, Budapest, Parramatta, and Seoul. Deloitte offices are also in India’s major cities such as Bangalore, Chennai, Delhi, and Hyderabad among others (Deloitte, 2018a). On the contrary, the geographical area served by Lodha & Co at a domestic level includes i.e. India includes cities such as Kolkata, Hyderabad, Chennai, Jaipur, Mumbai, and New Delhi. In addition, the company also has expanded its business in countries such as Dubai, Shanghai, Singapore, and the US (Lodha, 2017).

Deloitte

Total Staff and employees

According to Statista (2017), the total staff and employees of Deloitte was recorded to be263,900 at the end of 2017, which increased as compared to the previous year of 2016, accounting for 244,400 (Statista, 2017). In case of Lodha & Co, the total number of staff of included over 3700 direct associates along with more than 1600 engineers over. The company further comprise experienced management professional, which is accounted to be more than 200 and has more than 140 architects as well as designers. In addition, the company has 700 employees with respect to its sales and marketing. Furthermore, Lodha & Co has 300 representatives for customer care services (Lodha, 2017).

Industries in which they operate

Deloitte is a leading auditing company in the world with respect to its services such as global business tax, insurance, audit, legal & financial advice, consulting services, and operations related to cyber risks. It provides services to the world’s most famous brands, which includes 85% of fortunate 500 companies. The company also offers its services to over 6,000 middle markets and private companies (Deloitte, 2018). Considering Lodha & Co, the company has16 partners along with experienced Chartered Accountant, company secretaries, cost accounts & management graduates, who are engaged in providing various range of services to the corporate clients. This includes providing services to the banks, public sector, insurance companies, central bank, and public corporation sectors among others domestically as well as on a global level (Lodha & Co, 2008).

Publications as well as other materials delivered to their customers or the overall public

Deloitte wants to be the priority of the potential clients whenever they want to take a calculated action for transformative outcome or while facing challenges to identify deep knowledge on tax issues. The company focuses on ensuring to provide high quality and distinctive services by strengthening its network and innovation by making the lead client well equipped with the pattern of resources that the company o requires. This helps the company to be successful with the support of hyper collaboration” to deliver exceptional results (Deloitte Touche Tohmatsu Limited, 2015). Lodha & Co on the other hand focuses on maintaining its consistency for interacting with the clients and assists them in sale process and even after-sale service. This provides the clients of the Lodha to interface for any requirement as well as grievance (Lodha, 2017).

Marketing Strategies

The important marketing strategy that Deloitte implement is making the clients a priority and facilitates them with innovation, talent, alliance, and solutions. They believe cognitive computing, global capabilities, and audit innovation will attribute to the marketing strategies (Deloitte Touche Tohmatsu Limited, 2015). While, the key strategy of Lodha & Co’ is that the company strongly believes in the brand name in the market, as it leads to gain customers confidence, thus influences their decision making process when it comes to buying. The company focuses on marketing as a “brand” rather than mere commodity or a service (Lodha, 2017).

Penalty

From tax period of 2016-2017 onwards, penalty is given in case of any misreporting as well as under-reporting of income during the audit sessions that the accountant or the auditor is liable to pay. This is to be paid due to under reporting or any wrong reporting of income (Deloitte Touche Tohmatsu India LLP, 2016). On the other hand the penalty amount to be paid in case of any misreporting during auditing of the company by Lodha & Co is a sum of rupees 10,000 by the merchant banker or the accountant associated in making the report (Lodha & Co, 2017).

Tax rate in case of Provision for Doubtful Debt

The standard tax reduction related to provision for doubtful debt is 50%, whereas for MFI, it is 30% of Microfinance Institution (MFI) (Deloitte, 2017). On the contrary, with respect to the bad debt provision, the limit of deduction by banks was 7.5% earlier, which is now increased to 8.5%. This is calculated on the total amount of income (Lodha & Co, 2017).

The Number of Companies to be Audited by the Company after the Implementation of the Auditor Rotation

After auditor’s rotation was made mandatory by law, the ranking listed by NSE was positioned Deloitte in the third place. The company audited 162 companies in the year 2016-2017 and the estimated number of companies that Deloitte is to audit is 121 companies in 2017-2018. Cements Ltd   On the other hand, Lodha & Co on the other hand was mentioned in ninth position in the year 2016-2017. The company audited 31 companies in total. By the end of fiscal year 2017-2018, Lodha & Co has estimated to audit 15 companies as listed by the NSE (Prime Database Group, 2017).

Audit fees

The total audit fee that was paid to Deloitte by different companies accounted to $3426.8 million in 2015-2016 and was $3167.9 million in the year 2016-2017. Hence, the company was ranked in first place (Prime Database Group, 2017). Whereas in case of Lodha & Co, the total resources that was transferred to union territories and states with legislature was $617789635864.868 million in the year 2015-2016, which in the financial year 2016-2017 was reduced to $541129608056.819 million (Lodha & Co, 2017).

Conclusion and Recommendations

A company can opt for Deloitte for the auditing process because it has established and proved itself by successfully positioning the company in the first place within the respective filed and has gained more experience than Lodha & Co. Auditing process is highly benefitted by the professional development acquired with the experience, which can depict the quality of the audit. As Deloitte has marked itself as the best auditor in the world, it is advisable and reliable to choose Deloitte over Lodha & co (Statista, 2017a; Lodha & Co, 2008). Delolitte for maintaining it global position should focus on its motto, which is to be the best and not just good. The objective of the company is to bring success within the society by helping clients to achieve it (Deloitte, 2018). On the other hand the Lodha & Co can focus on expanding its business domestically as well as on other parts of the globe. The company also needs to analyze the needs of each different company in relation to tax, audit, and financial advice in order to meet them. In addition, it also needs to address the needs along with requirements of the company, which will help them grow, as the company has tagged itself with the message grow with us (Lodha & Co, 2013).

Marketing Strategies

An agency relationship is created when a company hires another person as an agent to act as well as perform on their behalf (Institute of Chartered Accountants in England & Wales, 2005). Contextually, agency theory focuses on explaining the differences in information and self –interest of the company owner, who lacks in trusting their agent and seeks to provide solution. By analyzing this theory, it can be stated that the clients took the step of announcing about dismissing their auditor Arthur Anderson prior to the results of its survival (Eisenberg & Macey, 2004). This is because the audit firms are known for its important economic purpose in serving the client interest, help them enhance their economic property, and encourage confidence along with trust. A difference in the information asymmetries and motivation influences the trust level of the clients towards the auditor. Audits were developed so that it can protect the interest of their shareholders so that it can be viewed trustworthy by the clients. Therefore, after the news of Enron charges, the unworthiness and trust issue prevailed in the market (Institute of Chartered Accountants in England & Wales, 2005).

Insurance Hypothesis

Researchers identified theories that helped the audit companies to retain its clients. In this context, the theory of insurance hypothesis states that in order to gain the trust and reliability of the clients by the firm. This hypothesis was implemented that would recover incase if any financial loss is incurred by the investors due to any kind of misinterpretation (Hillison & Pacini, 2004). Insurance hypothesis is an essential part of audit, as it encompasses two values that are insurance and assurance. Contextually, assurance is the basic purpose of an audit that is to reduce loss of information between the firm management and stakeholders. Insurance hypothesis play a major role. This includes providing investors the ability to sue the auditors for recovering loss due to the wrong statement in the financial report. In this regard, it can be stated that the clients took such steps so that they can sue the auditor and avoid losses (Brown, Shu, Soo & Trompeter, 2013; Gray & Manson, 2007).

The Reason for the Failure of Arthur Anderson

According to Cohen (2004), two persons, who were then in the leadership position of the Arthur Andersen mentioned that corporate structure focused on earning more. It also included the negligence of the board of directors, which resulted to company’s failure (Cohen, 2004). On a contrary, Chicago Tribune (2002) stated that the Andersen’s leaders felt that the company was an innocent victim of the client Enron, which contributed to causing scandal to the company (Chicago Tribune, 2002).

Penalties and Deductions

Investors announced about dismissing Arthur Anderson, when the listed company being operated became doubtful. The doubt related to trust the auditor was included in decision making process during any credit loss, as they are considered to be a liable indemnifier to recover it. The risk such as making wrong decision due to failure in risk detection emerged due to the lack in finding misstatement. This also includes control risk when the auditor fails to detect the internal risk of the company along with inheriting prior to solving of the internal risks (Granberg & Höglund, 2011).

The Change in the Auditing Standard

The government sued Enron $500,000 fine and five years of probation. On the other hand, Anderson was shut down, when St. Louis telecommunication also filed for the bankruptcy. The government should take necessary actions to ensure the continuous flow of accurate information to the investors (Miller, 2004). Government has stated that the auditor should undertake the revenue reorganization at the right time. The auditor can assist the guidance, which is provided by the American Institute of Certified Public Accountants (AICPA) that ensures the clarity of making the standards understandable, easier to read, and apply. The format presents introduction, objective, definition, requirement, and application which have now further developed to effectively serve the interest of the public in enhancing along with communicating the standards to facilitate them with high quality audit (Cullinan, Earley & Roush, 2013). International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) also presents guidelines, which helps in making sure that they recognize the client’s appropriate earned revenue and avoid misinterpretation (Johnstone, Gramling & Rittenberg, 2013; Cullinan, Earley & Roush, 2013).

Conclusion

Based on the study findings, it can be inferred that trust enhances the motivational level among the clients in the market that helps them to choose their auditor. Providing the clients with the insurance facilities helps the auditor to retain their clients for a longer period of time by assuring them. In order to monitor the workings that the government has enforced various laws and standards for controlling the audit miss happenings. With the rise in the issue of audit frauds, the government enacted the “Public Company Accounting Reform and Investor Protection Act” or the Sarbanes Oxley. This has significantly helped in governing the accounting firms to avoid such ground breaking scandals and protect the investors

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