Auditing For Global Environmental Politics: Risks And Challenges Essay.

Introduction:

Discuss about the Auditing for Global Environmental Politics.

Due to extreme competition in business activities, various kinds of risks are faced by businesses. Inherent risk is a kind of threat that explains potential pitfalls or losses that prevail before mitigating factors or internal security controls are implemented. Inherent risks are present in the business automatically and no amount of safeguard can keep it at bay. It is inherent in the system. Moreover, it measures the auditor’s evaluation of the likelihood that there are material misstatements because of fraud or error in segment before considering the efficiency of internal control. In other words, an inherent risk cannot be suppressed by an auditor’s presence or internal control policies. Whenever a business decides to expand its business activities, it becomes prone to inherent risks. In short, the businesses need to tackle various challenges and risks from the proposed planning of expansion (Geoffrey et. al, 2016). The assessment procedures of risk comprises of various internal and external factors that includes inappropriate transactions, fraud or thefts, misstatements in financial statements etc. However, there are many risks that are already identified by the management while the business develops and this highly relies upon control and measurement factor and other line of action strategies. It must be noted that a business can be assessed taking into account several macro as well as micro factors that are very crucial from the starting point till the collection of revenues, allocation of revenues and payment of taxes etc (Geoffrey et. al, 2016). With the assistance of such measures and controls, effective assessment of business risks can be initiated and every ineffective area can be identified so that management can take proper steps in relation to the same. But there is a usual proclivity among the business enterprises that unearthing of misstatements, frauds or errors in the financial statements cannot be done until and unless these transform into a bigger mess (Brown et. al, 2006). Moreover, even the accountants often ignore these problems because these are petty but these factors are the major reasons behind the creation of inherent risks.

Therefore, both internal and external audit processes must be conducted so that any weak spots can be unearthed easily. Furthermore, these petty factors can merge and transform into a bigger problem that can impact the company’s performance. This is evident in the case of OneTel, where the management ignored these petty factors and it resulted in a serious problem. Other factors like poor management, inadequate terms, conditions, inappropriate diligence measures, etc also facilitated in the downfall of the company (Goodstein, 2011). It was observed that the management of OneTel failed to take proper actions so as to evaluate the risks prevalent in its business. Assessment of risk is a vital process that failed in the case of OneTel thereby leading to a fall. Not only this, even the founder and managing director of the company made false misstatements that clearly indicated fraud on the part of the company in order to gain more profits. This signifies the importance of risk evaluation in the business activities of a company but as OneTel failed to take such actions, the risks and complexities prevailing in its activities could not be unearthed and resulted in the company’s downfall. Moreover, it has been observed that detecting problems in a business activity becomes observable to the management only when it takes a form of a huge mess. Hence, if these factors combined collectively, it can be understood how OneTel crumbled because of inappropriate risk evaluation measures. When risk evaluation process of the business is unable to provide backup then the business is sure to face obstacles. Moreover, it leads to difficulty in terms of operation and the same witnessed in OneTel.

Inherent Risks in Business Activities: Challenges and Control Measures

As mentioned-above, the first factor that leads to the creation of inherent risks in a business activity is the ignorance of management and the accountants in relation to the financial statements. This factor is further amalgamated by various other factors that include mismanagement in relation to ageing creditors and debtors, unclear cheques etc. Therefore, ineffectiveness by the management in relation to these can depict inappropriate and inaccurate account balance (Matthew, 2015). Not only did the management of OneTel failed to introduce effective steps for risk evaluation but the accounting policies were altered that made the complete risk evaluation procedure very topsy-turvy and therefore ascertainment of accurate account balance became possible, thereby creating risks. The accounting procedures must be continuous and regular as it facilitates in effective presentation and assists in offering significant information that can be easily understood by related parties (Matthew, 2015). At the starting stage, OneTel did not make accounting policies for the intangibles but taking into account the deferred expenses, it altered the policy.

This alteration did not go well for the company as it was a very rapid one. This indicates the limitations prevalent in the company. Furthermore, the inefficacies in the financial reporting methods of the company were also questionable as the account balances were completely inaccurate and this is the reason why the new auditors of the company issued a qualified opinion in respect of its financial statements. There were major problems in the system and the management failed to provide a productive result. However, in contrast to this, the previous auditors of the company issued an unqualified opinion that signifies fraud in the company. Hence, when the financial statements of the company were submitted to the ASIC, the account balances were clearly found to be inaccurate and therefore, several concealed losses and expenses provided by the company was exposed. These infinite factors led to the creation of inherent risks for the company and thereby leading to its downfall. It is the responsibility of the management to depict the exact balances and if it does not reveal, it results in suppression of material facts that can dissatisfy the investors and shareholders of the company. The most significant cause of the problem can be attributed towards the neglect of accounts by the accounts department. Even the reporting methods of the company were ineffective because it failed to identify inaccuracies in the account balances of the company. This was because of gross management and poor internal control policies within the company (Vause, 2009). As a result, the company had to suffer from disintegration because inherent risks surrounded the company as a whole.

Petty Factors Can Lead to Bigger Problems: Lessons from the OneTel Debacle

Hence, it is clear from the above-discussion that reporting procedures must be free from errors because it can increase the exposure towards inherent risks, thereby leading to downfall. Even the auditors of a company are strictly liable to make use of significant tools and mechanisms to detect any errors whether intentional or unintentional on the part of company. But in this case, the company’s auditors failed to take such effective measures and deviated from their duties. It is the duty of the auditors to consider every point and provide an independent decision (Wood, 2011). The auditors that help to provide an effective result that was lacking in OneTel should ensure the compliance system.

The going concern concept is the main reason that states that an organization will be operative in the upcoming future and there does not remain any reason for its wind up. According to the balance sheet assessment, it can be observed that the current assets, non-current assets and liabilities have significantly enhanced. But, it is a matter of questionable doubt that despite a decrease in the profits of the company, it can be seen that the share capital has enhanced. Moreover, even a decrease in profits of the company is not a good sign because it indicates a slow progress towards development and loss of stakeholder’s confidence upon the company’s activities. The accumulated losses of the company portrayed in the last year reports above 200% in contrast to the figures of last year. The EBITD depicted in the income statement of the company is in negative figures that clearly indicate that the losses of the company were increased on a very high note because there were huge expenses reported in the P/L account of the company. This also states that the company can either reduce its debt obligations or increase its revenues so that the losses can be wiped off. However, considering the amount or figures of loss, it is very difficult for the company to clear all of these in just one or two pears (Monem, 2009).

Therefore, it is the duty of management to focus on such matters effectively so that the company can be safeguarded from upcoming dangers. As the flaws of the company were exposed and reporting conducted by the agencies, it was observe that the Finance Director of the company had miserably failed to take proper steps to authenticate the books of accounts that include ledgers, journals, trial balances etc (Gilbert & terry, 2005). This indicates an inefficacy on the management’s part because the company executives did not perform their duties as expected of them. The ageing reports of creditors and debtors were prone to several loopholes because of ignorance by the accounts department. Therefore, if the company continues to be ineffective in such processes, an opening gap will be established between the profit and loss where the loss amounts will be massive. Furthermore, the company will tend to lose trust among its stakeholders and it will fail to function in an effective manner (Douglas et. al, 2015).

Importance of Proper Risk Evaluation for Effective Assessment of Business Risks

Hence, the going concern concept is at massive risk and as per the circumstances, it can be observed that factors like poor internal control mechanisms, ineffective management etc can negatively impact the going concern concept. According to the going concern concept, a business can operate for an infinite period but these situations can be tolerated upto an extent and if massive losses are incur in future, it will not be able to repay its debt obligations and thereby cannot invest towards its growth (Cook, 2001). It is well-established that only those companies can prosper in the business world that has a continuous flow back of money so that it can carry out its activities in a simple and flexible manner. However, once a crisis like this affects the company, it will become very difficult to get out of such a situation and again be efficient in conducting normal activities will be more of a dream for the company (Douglas et. al, 2015). Therefore, it is highly required that the company must strike this concept of going concern so that the inefficacies and irregularities prevalent in the company because of factors like mismanagement and ignorance can be mitigated, thereby safeguarding the company from being wind up.

References

Brown, J.W., Chasek, P. & Downie, D.L 2006,  Global Environmental Politics,  Boulder, CO:Westview Press.

Cook, T 2001, Collapse of Australia's fourth largest telco adds to growing list of corporate failures viewed 16 September 2016,  https://www.wsws.org/en/articles/2001/06/onte-j08.html

Douglas M.B, Todd, D.F &  Hermanson, D.R 2015, ‘The Effects of Internal Audit Report Type and Reporting Relationship on Internal Auditors' Risk’, Judgments.Accounting Horizons, vol. 29, no. 3, pp. 695-718.

Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016,  ‘Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting Horizons, vol.  30, no. 1, pp. 143-156. 

Gilbert, W. J & Terry J. E 2005, ‘ The Use of Control Self-Assessment by Independent Auditors’, The CPA Journal, vol. 3, pp. 66-92

Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley

Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management Misconduct?’, The Accounting Review, vol. 90, no. 2, pp. 495-527

Monem, R 2009,  The Life and Death of OneTel, Griffith University.

Vause, B 2009, Guide to Analysing Companies, Bloomberg Press

Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision,’ The Accounting Review, vol. 86. No. 6