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Auditing Principle: Audit Scandals

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Question:

Discuss about the Auditing Principle for Audit Scandals.

 

Answer:

Introduction

Scandals in the corporate world, regardless of whether revolved around defilement, pay off, misrepresentation or other covetousness has a tendency to significantly affect the economy all at all and keeping in mind that most organizations are bound to fall flat eventually, there are a couple that does as such in such a fabulously degenerate way, to the point that they stand out as truly newsworthy. Defining the accounting scandal, in a layman language, bookkeeping misrepresentation is deliberate control of money related articulations to make a veneer of an organization's monetary well being. It includes a worker, account or the association itself and is deceiving to financial specialists and shareholders. (Black, 2010) Such manipulation of the records and the information leads to greater outrage and prompts the question of how to trust the auditing companies which fail to detect the inherited issue lied within the records of the company and who sign off those records without qualifying the same.

 

The Dozing Watchdogs

The Economist accurately focuses at irreconcilable circumstance as being centered to the disappointment of review, yet deploring self-direction or looking for better outside control is not the appropriate response. On the off chance that there was to be more direction, that insight would come perforce from the evaluators themselves. They would not modify anything but to their own advantage. Or maybe this is an issue of motivating forces and input. Regardless of whether the examiner is more guard dog and less a hound dog, “they are a member of the enterprise”. It is been observed over the years that the major audit firms of the world, consisting of the Big Four, who has taken over the 80% of it’s the corporate under its umbrella are being regarded as the imprudent manipulator of the data and the information (Accounting scandals, 2014). Most of the accounting scandals of the world have an involvement of the famous auditing firms who claim to be holding the majority stake. This scenario has sprouted the thought that how accurate are these auditing firms who sign off these audited financial statements and vouch for the reliability of the said statements. The investor's funds are washed away in those stocks where decisions have been taken on the basis of those financial statements. This has outrightly put the major auditing firms under the pretext of unreliable and guards of the big corporations who help them to hide their misappropriations and misrepresentations (Manoharan, 2011). However, another thing that has been objectified is that the major giants are mostly audited by the Big 4 and although they have been continuously failed to detect a fraud or deception still they stand firm and hardly face the loss of reputation (Accounting scandals, 2014). With such events of accounting scandals been observed in the recent years, the only effective tool to safeguard the interest of stakeholders is the implementation of the regulation. A non-profit body came into existence to overview the Big Four, namely, Public Company Accounting Oversight Board (PCAOB). They are to keep a watch on professionals subjected to those who compromise their independence. This body undertakes the procedure to evaluate the most delicate portion of the perilous audits, qualify the financial reports and don't fail to levy millions of dollars as fines when unsatisfied. With this arrangement, every auditor is under the threat of the PCAOB and no one can escape the scrutiny of it (Accounting scandals, 2014). It rewards the highest quality work, but one has to be ready to bear the consequences of any lapses and hugely compensate.

There are many instances of corporate fraud that eroded immense wealth of the investors. The scandals of Satyam, Enron, and Lehman happened due to weakness in the internal control system and the greed of the managers. The scandal of WorldCom existed due to the weakness in the internal control system and greed fro making a huge return. The board of director underperformed and the weakness in the internal system led to the issue. Further, the weakness in the financial status of Satyam led to the downfall (Caraballo et. al, 2010). The auditor, as well as the CEO,  acted by creating a rosy picture with false assets and liabilities. Fake identities and vouchers were prepared that was revealed later and led to the downfall. Hence, in both the cases, it is seen that either the auditor was involved in the fiasco or was unable to track the deficiencies in the system.

The financial status of the company was weak while a rosy picture was shown with false assets and liabilities.  The auditors acted in company with the CEO and due to this fake identities were established and vouchers were issued that were passed.

 

Auditor’s Role and Responsibilities

Fraud has turned out to be exceptionally confused in this time of innovation, and progressively troublesome to identify, particularly when it is tricky in nature and submitted by the top administration that is fit for covering it. In this regard, reviewers have contended that the discovery of fraud ought not to be their duty (Kranacher & Stern, 2004). Thus, the term fraud in earlier probing norms alluded to inconsistency which consolidated fake monetary detailing as well as representative robbery and theft, we restrain our concentration to administration fraud or fake monetary detailing, which relates fundamentally to management’s deliberate deception in money related proclamations. The current review looks somewhat at monetary articulation frauds by directors as well as workers who have an adequate specialist to supersede an organization’s inner controls. For the most part, such frauds include pondering twisting of bookkeeping records, falsification of exchanges, or misapplication of bookkeeping standards. Notwithstanding how the misrepresentation is showed, it is commonly complicated for auditors to find since the culprits take ventures to purposely hide the subsequent irregularities.

An investor is more of prudent towards the detection of fraud as their funds are invested and are more cautious towards the investments wanting to be assured about the assets of the company and be safeguarded about the same (Guan et. al, 2008). It is likewise vital that auditors are much more cautious in the execution of their duties by guaranteeing that due ingenuity and care is at the front line of their motivation with the goal that misrepresentation can be identified and uncovered. This is fundamentally vital if evaluators are to ensure and protect their expert notoriety and uprightness and stay away from legitimate costs (Cappelleto, 2010). Although, the role of an auditor is not widely discussed since the inception and as claimed the fraud detection is identified as an audit objective. And various arguments over the years have come to support that it’s not the duty of an auditor to critically identify all the frauds in the company as an auditor is to just exercise his skill with care, not expecting him to be an insurer or the guarantor. With the increase in the size of the companies, it became difficult for the auditors to evaluate all the transactions and as such the testing procedures came into implementation which tends to recommend only reasonable assurance of the facts and figures stated in the financial statements (Hoi et. al, 2009). Henceforth, even though the auditors complied with its roles and responsibilities in conducting the audit of the said giants, the fraud threats, unattended transactions and misappropriation remained uncovered from the purview of audit procedures.

Auditor Independence

An auditor imparts the independent credibility for the financial statements being relied upon by the investors, capital marketers and the stakeholders using it to evaluate the capital making decisions. In the eyes of the common public, the statements hold the higher value for the decisive purpose and who offers their opinion being free of any prejudices in an independent manner. The auditor not only appears independent by appearance but by the fact too. The significance of evaluator autonomy gauges that are sensible, but then extensive, thorough, powerful and enforceable have been underlined by a few noteworthy corporate failures in which questions have been raised about the quality of money related revealing and, specifically, the freedom of the auditor (Livne, 2015). Benchmarks of autonomy for auditors of recorded elements should be intended to advance a situation in which the evaluator is free of any influence, intrigue or relationship that may hinder proficient judgment or objectivity or, in the perspective of a sensible financial specialist, may disable professional judgment or objectivity (Elder et. al, 2010). Standard auditing  freedom ought to establish a system of standards, bolstered by a mix of preclusions, restrictions, different strategies and systems and exposures, that address at any rate the following dangers to freedom:

  • self-intrigue;
  • self-audit;
  • promotion;
  • nature; and
  • intimidation.

Henceforth, an auditor is out rightly blunt when it comes to the evaluation of the financial reports and put forth its opinion in an unbiased manner to depart its qualified as well unqualified opinion with respect to its duty as an auditor. (Crawford & Weirich, 2011)

 

Regulations and Deregulation in Auditing

The prime responsibility of the auditor is to uncover any frauds that have been hidden in the financial arrangement of the company; however, they are quoted as only the evaluator for the scrutiny of the provided information and data to them. But when they fail to detect the hidden frauds, disappointments are bound to arise. To such a scenario, few measures can be considered when disappointments are clear and systemic; they should be supplanted, either independently or as a whole (Clarke, 2010). We are presently on the cusp of a bookkeeping transformation. Cryptographic strategies, for example, triple passage block chains enable outside and dependable examination to a phenomenal level. As we move from intra-corporate accounting to between corporate settlements at continuous, the goalposts move significantly (Hoffelder, 2012). On the off chance that there is an advantage to ongoing data, then it will play out in capital expenses. When depending gatherings can work with the real exchanges, and screen wellbeing to the day or the moment, then savers can coordinate venture as indicated by checking by the group. This will end up being the new "hazard free" rate, speculation at the edge of open learning (Bhasin, 2008). With the continual change in the strategies of the auditing firms and their scrutiny purview, a ray of hope is still there that there will be a sure shot way to detect the frauds within the company and take measures to prevent the accounting scams with accuracy.

 

Conclusion

Though there have been various regulations to conduct an audit, many auditors fail to be close to follow the regulations in the course of conducting an audit of the giant MNCs. The process of the audit is a complex task and it involves the auditor’s insight to look into the matter of the process effectively and also requires a mutual co-operation from the top management till the subordinates as the lower level. An effective audit can be concluded only with the power auditing team where the head of such an audit team is free of any biases and is in the state of total independence.

 

References

Accounting scandals 2014, The dozy watchdogs, viewed 27 April 2017 https://www.economist.com/news/briefing/21635978-some-13-years-after-enron-auditors-still-cant-stop-managers-cooking-books-time-some

Bhasin, M. L 2008, ‘Corporate Governance and Role of the Forensic Accountant’, The Chartered Secretary Journal, vol. 38, no. 10, pp. 1361-1368.

Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, Afaanz,

Caraballo, C,  Cheerla, A, & Jafari, O 2010, Satyam: The Brotherly Demise,  The George

Clarke, T 2010, International Corporate Governance, London and New York, Routledge.

Elder, J. R, Beasley S. M.& Arens A. A 2010,  Auditing and Assurance Services, Person Education, New Jersey: USA

Guan, L,  Kaminski, K. A & Wetzel, T. S 2008, ‘Can Investors Detect Fraud Using Financial Statements: An Exploratory Study’,  Advances in Public Interest Accounting vol. 13, pp. 17-34.

Hoffelder, K 2012, New Audit Standard Encourages More Talking, Harvard Press.

Hoi, C. K, Robin, A & Tessoni, D 2009, ‘Sarbanes-Oxley: are audit committees up to the task?, Managerial Auditing Journal vol. 22, no. 3, pp. 255-67.

Livne, G 2015, Threats to Auditor Independence and Possible Remedies, viewed 27 April 2017, https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full.

Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance,  The George Washington University.

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