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Financial Crisis

Describe about the Auditing and Assurance Services for Companies Business Shareholders.

Role of auditors is important to varify the accunting records and financial statements of the companies based on which shareholders, investors, banks and other stakeholders make several decisions.In the situations like the finanical crisis that happened in 2007; the role of auditors and their liabilities also came under the close scrutiny.The period of financial crisis is one of the most difficult and critical time for both organisations as well as auditors. It is because in this period of time, the customer lowering their purchasing until the economy improve, which negatively impacts on the organisations and their market position. At the same time, the global financial crisis also imposes various liabilities on auditors that affect their working practices. During the financial crisis period, many organisations and committees blamed on auditors that the financial crisis is came due to unethical practices of auditors and audit firms (Gordon, 2015). In this way, this paper discusses anayses the liabilities that may be imposed upon the auditors aftemath of the global financial crisis. Along with this, this report also provides some recommendations to improve the auditors’ liabilities during the global financial crisis situation.

In 2007, there was a huge financial crisis that erupted due to sub prime loans in the US and other developed economies with the credit crunch.The crisis started in the US but very soon, it snowballed to become a world financial crisis and that also, one of the worst crises of all time. In this situation, many organisation, committees, and individuals believed that global financial crisis had come due to trust deficit and fear of US investors in the value of sub-prime loans and other related mortagage based securities, which caused a liquidity crisis. After this, the federal bank introduced huge capital sums into the financial markets, which also worsened the crisis in terms of crashing the stock markets around the globe. The purchasing power of customer has also reduced that also negatively impacted on the financial positions of the organisations. It is also found that economic crisis is come due to the difficult conditions of economic activities and a change in their elements in the slowdown and decline in the economic activities (Davies, 2014). It also called as a disorder of financial and stock market and market mechanisms.  

In the global financial crisis, the collapse of Lehman Brothers, a leading financial institution, also developed a new phase. It is because the main reason behind the collapse of Lehman Brother was the bankruptcy that was occurred due to collapse of the housing market and stock market in the country. The global financial crisis of 2007 was one of the biggest financial crises with the total estimated fiscal implications of US$ 11.9 trillion (Jones, 2011). This global financial crisis mainly impacted upon the global banking industry as their abilitiy to give loans and overall sentiment was deeply impacted upon.

Liabilities under the Law

At the same time, it is found that the global financial crisis started the period of recession that caused lots of issues in Europe. Due to global financial crisis, 24 EU countries out of 27 had huge debt levels and significant budget deficits that generated instability as well as negatively affected their growth in the world market. It is also found that global financial crisis created a difficult situation for the accounting and auditing firms like KPMG and PwC as there were some liabilities arising for them as well due to failure of several firms whom these firms were auditing. During the financial crisis, many companies faced issues of securing sufficient loans to make continuous operations, which created an increased pressure on the audit firms to present on-going opinions (Plessis, Hargovan and Bagaric, 2010). During the period of global financial crisis, the companies also faced business risks that also increased the risk of auditors in terms of issuing audit opinions incorrectly and unethically.

An auditor shares a contractual relationship with the client or organisation and third party. It is because auditor is one of the important individuals that control the financial inclusion of the business and provide financial stability. But, due to fraud, breach of contracts and negligence raise the liabilities of auditors or audit firm. These liabilities are also developed due to unethical behaviour and statutory legality obligations on the auditors. In this negligence liability is one of the leading liabilities that arises due to negligence behaviour of auditor at the time of auditing the financial statements of the firm. In this liability, the auditor is unable to use auditing skills and knowledge to handle the business accounts (Gramling, Johnstone and Rittenberg, 2012). In this, the auditor is liable for the loss of the firm’s financial position as the auditor misunderstands his/her duties.

On the other hand, the auditor is also liable for the criminal and civil offences. In this, if the auditor breach the government imposed law, it will be liable for the criminal offensive. But, on the other hand, civil offences occurred due to disputes between individuals and organisations. According to the contract law, auditors are liable to perform the roles and responsibilities that are discussed in the contract and if the auditor fails to perform these roles and liabilities, the firm has the right to sue the auditor or auditor firm. In this, the innocent party also has the right to seek for the damages (Byrnes and Munro, 2016). At the same time, under the law, the auditor is also liable towards the misrepresentation of financial statement. In this, auditors have the duties and liabilities to provide clear and real picture of the organisations so that investors and stakeholders can take better and effective decisions related to the business. At the time of misrepresenting the financial statements and position of the firm, the auditors are also liable to pay the damages of different stakeholders and investors (Zack, 2012).

Auditing in Global Financial Crisis

The period of financial crisis created lots of criticism of auditors and working practices because they failed to provide going-concern opinion or modified audit opinion for banks and other organisations. Due to this, the banks and other financial institutions faced serious financial issues that negatively impacted on their market position. For example, the Lehman Brothers that received an unmodified audit opinion for the quarterly report before the bank declared bankruptcy (Leung, Coram and Cooper, 2012).  In this, it is also found that many organisations and committees believed that during the period of financial crisis, Lehman Brothers discouraged auditors to issue a modified audit report for not exposing high leverage level and risk business practices.

At the same time, many companies increased the fees of auditors and audit companies, which raised the questions regarding the auditor independence and their ability to stand up to management’s interest. It negatively affected the auditors’ ability to properly audit the financial statements of the firm and understand the modern and complex financial instruments significantly. It is also found that before the global financial crisis, bank auditors and regulators were not shared more information with each other on an informal basis, which enabled the auditors to provide their modified audit opinion to the banks and other companies (Hoogenboom, Pheijffer and Karssing, 2013).

The auditors were also criticised for their role during the period of financial crisis. It is found that one of the auditor company PwC were criticised because it not draw attention to the riskiness of business model of organisation, which also developed questions related to the role of auditors in the financial crisis situation (Grant and Wilson, 2012).

As the result of global financial crisis, the auditors and audit firm face various liabilities. In this, duty of care is one such issue. It is because due to the possibilities of financial crisis, auditors are pressurised to follow all the rules and regulations provided by the governments as well as auditors committee. It is helpful in developing duty of care sense among the independent auditors or auditing firms effectively (Firer, 2016). The auditors are also pressurised to work on the basis of regulations and develop the reports accordingly in order to reduce the market volatility when the market condition worsened.

At the same time, as a result of global financial crisis, the potential liability of an auditor also includes strengthen the auditing process with accordance of procedures and legal and professional standards. In this, it is compulsory to sign and send the auditor’s report by owners and other stakeholders of the firm. The main reason behind this is to improve the validity and reliability of the auditors’ report. Through this, the auditors also enable to develop the understanding and ensure that the report is communicated throughout the firm (Byrnes and Munro, 2016). At the same time, during the auditing process, there is an liability of the auditor that he/she exercises the professional scepticism in order to recognise that the financial statements are free from material misstatement due to fraud and errors. It is because the main reason behind the global financial crisis was the material misstatement by the banking firms.

Potential Liability Face Auditors

Along with this, there is the potential liability of an auditor that he/she provides opinion on the financial statements in order to confirm that the financial statements are correct and fair in all material aspects and transactions of the relevant financial year. As a result of global financial crisis, the liability of auditors and audit firms also includes that they should improve the audit quality after the financial crisis. In this, the use of audit quality framework is effective to restore trust of investors and stakeholders in auditing profession. It is also effective to make auditors and audit firm liable to move from the self-regulation to regulation by independent bodies (Wise, Armijo and Katada, 2015). Through this, the auditors and auditing firms are also liable to improve the auditing process that harmed by the global financial crisis.

The Sarbanes-Oxley Act also defines the potential liabilities of an auditor as a result of global financial crisis. It is found that there is a strong relationship between a company and its external auditors, requiring auditors to report to company’s audit committee rather than its management. The act also limited the liability of an auditor and auditor firm as this act prohibits public accounting firms to provide non-audit services such as book keeping, information system design and implementation, valuation and rang of other consultancy services to the company that they audit (Gobat, Yanase and Maloney, 2014). At the same time, it is the liability of an auditor or auditing firm that it improves the quality and credibility of accounting data by limiting the firm’s liability to modify the financial statement to suit its own purpose.

In Australia, the CLERP 9 audit reforms also provide some liabilities and responsibilities to the auditors and auditing firms in order to promote their independency. It is because auditors’ independence plays a critical role in improving the credibility and reliability of an auditor’s report. In this independent auditor is liable to add values in the financial statement, add value in the financial markets through improving the credibility of the accounting and financial statements of the firm.Futher, this shall also improve the ability of the share markets to judiciously distribute the valuable resources by improving the decisions of users based on the financial statements. Also, improved transperency and credibility will lead to lower the cost of capital to those using audited financial statements by decreasing the risk of misinformation (Plessis, Hargovan and Bagaric, 2010).

It is found that many of the organisations specially banks, which collapsed as a result of global financial crisis did not record their assets and liabilities in the financial statements. At the same time, many of the organisations showed their assets at higher price as compared to their actual values due to failure of internal auditors to perform their liabilities and duties. In this, it is the liability of the auditor or audit firm to ensure that the firm should show all its assets in the financial statement. Under the Australian Accounting Standard, if the organisation misrepresents the assets and liabilities in the financial accounts, then it will consider as a fraud activity. In this, it is expected to the auditor that she/she should present this fraud to the relevant authority (Leung, Coram and Cooper, 2012). But, in the case, when the auditor is unable to detect the fraud activities in financial statements, then the auditor is liable for negligence.  

On the basis of above discussion, it can be recommended to the auditors that they should work according to the rules and regulation provided by the government and authorities. Due to this, the auditors can effectively analyse the financial statement and also eliminate the possibility of misrepresentation of financial statements. Along with this, it is also recommended that internal control system of auditing should also be managed effectively (Park and Patrick, 2013). Through this, the auditors and auditing firms can effectively prepare and analyse the financial statements in detailed ways, which can reduce the possibilities of any fraud in the financial statements. Auditing firms shall diligently follow all the rules and procedures as required to carry out the audits. All auditors shall be regularly trained and keep themselve updated of the changes in their roles and responsiblities.

At the same time, it can also be recommended that auditors and auditing firms should effectively analyse the risks in the business. In this, auditors can use different risk analysis and mitigation techniques so that risk in the business can be identified. Along with this, it is also recommended that businesses should improve the auditing standards and force the auditors and auditing firms to use these standards to analyse the financial statements (Leung, Coram and Cooper, 2012). It is because the quality and effectiveness of auditors’ report depend on the extent to which the standards followed by the auditors and auditing firm.

At the same time, it can also be recommended that government should make reforms in the proportionate liability of auditors. It is because, through this reform, the auditors can enable to control the damages within the firm effectively. It can also be effective for the auditors and auditing firms in developing better reports related to the financial statements.

References

Byrnes, W.H. and Munro, R.J., 2016. Money Laundering, Asset Forfeiture and Recovery and Compliance – A Global Guide. USA: LexisNexis.

Davies, J., 2014. Global Financial Crisis – What caused it and how the world responded. [Online]. Available at https://www.canstar.com.au/home-loans/global-financial-crisis/ [Accessed: 16 September 2016].

Firer, S., 2016. The Limitation of an Auditior's Liability in South Africa. Germany: GRIN Verlag.

Gobat, J., Yanase, M. and Maloney, J., 2014. The Net Stable Funding Ratio: Impact and Issues for Consideration. USA: International Monetary Fund.

Gordon, C.E., 2015. Behavioural Approaches to Corporate Governance. UK: Routledge.

Gramling, A.A., Johnstone, K.M. and Rittenberg, L.E., 2012. Auditing. USA: Cengage Learning.

Grant, W. and Wilson, G.K., 2012. The Consequences of the Global Financial Crisis: The Rhetoric of Reform and Regulation. USA: OUP Oxford.

Hoogenboom, B., Pheijffer, M. and Karssing, E., 2013. Gorillas, markets and the search for economic values: Rethinking Lehman Brothers and the Global Financial Crises. A Nyenrode Perspective. Germany: Uitgeverij Van Gorcum.

Jones, A., 2011. Auditors criticised for role in financial crisis. [Online]. Available athttps://www.ft.com/content/358b366e-59fa-11e0-ba8d-00144feab49a [Accessed: 16 September 2016].

Leung, P., Coram, P. and Cooper, B.J., 2012. Modern Auditing and Assurance Services, Google eBook. USA: John Wiley & Sons.

Park, Y.C. and Patrick, H., 2013. How Finance Is Shaping the Economies of China, Japan, and Korea. USA: Columbia University Press.

Plessis, J.J.D., Hargovan, A. and Bagaric, M., 2010. Principles of Contemporary Corporate Governance. USA: Cambridge University Press.

Wise, C., Armijo, L.E. and Katada, S.N., 2015. Unexpected Outcomes: How Emerging Economies Survived the Global Financial Crisis. USA: Brookings Institution Press.

Zack, G.M., 2012. Financial Statement Fraud: Strategies for Detection and Investigation. USA: John Wiley & Sons.

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