Risks To Origin Energy's Stakeholders, Audit Independence, Whistleblowing, And Effective Standards Essay.

Assignment Question

When sub-standard audits are performed and reasonable assurance cannot be reliably ascertained, there are consequential risks for key stakeholders, including auditors. In light of this, perform the following key assignment tasks:

1. Perform a key stakeholder analysis for an ASX listed company. Explain how the key stakeholders would be affected if material misstatements are not properly identified, disclosed or adjusted for in the finalised financial statements. What are the key risks posed to each key stakeholder you have identified?

2. Consider the concepts of independence and “whistleblowing” in relation to auditors. How do these concepts relate to the public interest requirements mentioned in the APES 110 Code of Ethics for Professional Accountants document?

3. What lessons can auditors learn from the Enron scandal and in particular from the behaviour of Arthur Andersen?

4. With reference to the APES 110 Code of Ethics for Professional Accountants document and the ASIC website, research “audit quality” and discuss what auditors need to do to address the “warning” noted in the statement made byGreg Medcraft above.

Investors

There are many instances where the auditors have performed below the standards audit and were not able to provide the needed assurance dependably; and this whole aspect creates major risks for the key stakeholders of the companies (Hay 2015). This report takes into consideration the evaluation of Origin Energy’s key stakeholders as it would be helpful in measuring the effects of material misstatements on their decisions. The second part of the report analyses two important concept of auditing; they are audit indepdence and whistleblowing with the aim to take into account the association of these concepts from APES 110 public interest requirements. Discussion on audit quality and the statement of Greg Medcraft is undertaken finally.

Investors: It can be seen from the appendix that the investors of Origin Energy include retail shareholders, debt providers, institutional investors, credit reporting agencies and investment analysts. The commitment of the company is to deliver good performance in the presence of value-creating businesses (originenergy.com.au 2019). It needs to be mentioned that the main interest area of this stakeholder group is the effective financial performance as well strong financial position of the company with the aim to gain the expected return. In this situation, in case the auditors of the company fails in appropriate recognition, disclosure and adjustment of material misstatements, the risk of incorrect investment decisions by the investors is created that reduces the overall return of this stakeholder group (Lobo and Zhao 2013).

Business Partners: According to the appendix, Origin Energy has many investment partners and joint ventures; and the presence of these stakeholders can be seen in the domestic as well as international market. This group also comprises of the goods and services for the projects as well as operations (originenergy.com.au 2019). It is needed for these business partners to ascertain the financial performance as well as financial position of Origin Energy before entering into any kinds of business partnership with the company; for this purpose, they acquire the information about the company’s financial substances from the financial reports and other sources of financial information. Improper recognition, disclosure and adjustment of material misstatements in accounting reports can resulted to business loss of this stakeholder group in the presence of the aspect that this they will not be judge the actual financial performance and position of the organizations suitable for the commencement of any business partnership which is a major risk (Quadackers, Groot and Wright 2014).

Business Partners

Employees: It can be seen from the appendix, Origin Energy has an employee base of 6,700 along with more than thousands of contractors in Australian and outside (originenergy.com.au 2019). The living of all these employee and contractors depends on the ability of Origin Energy to continue the business operations as a going concern. In this situation, the presence of material misstatements can hamper the ability of Origin Energy to operate as a going concern and this creates the risk of losing the jobs of the employees and contractors (Lennox and Li 2014).

Customers: According to the appendix, Origin Energy has a customer base of 4.3 million across Australia and the aim of the company is to create value for these customers (originenergy.com.au 2019). It is not likely to attain this particular target in the presence of material misstatements in the financial statements (Knechel and Salterio 2016).

Auditor’s independence requires auditors to perform audit in the free and objective manner (Ratzinger-Sakel 2013). Significant attribution of auditor’s independence and audit whistleblowing can be seen in the profession for maintaining ethics along with governing the profession. The concept of auditor’s indepdence helps in identifying the fact that the auditors are needed to signify violation and misstatements in the clients’ financial reports in the audit process (Church et al. 2014). For this, auditor’s independence can be considered as a crucial ethical and professional commitment of the auditors.

The commitment of auditor’s independence has direct as well as positive influence on the audit whistleblowing intention by the external auditors due to the fact that the extent of auditor’s independence commitment affects the whistleblowing intention (Taylor and Curtis 2013). Auditor whistleblowing can be considered as the procedures and policies that assist the external auditors to enable the internal staffs of the clients for reporting any unethical or illegal business activities. For this reason, a whistle-blower can be considered as the person who expose the illegal business activities in the presence of proper evidences (Wainberg and Perreault 2015).

The existing auditor of an audit client gains the crucial information about the aspects of audit nomination and new auditor appointment. For this reason, one major responsibility of the auditors is to gain this crucial information from the previous auditors so that the correct decision related to audit nomination can be made (apesb.org.au 2019). The importance of this information can be seen in knowing the fact that whether the management of the audit client is involved in any kind of unethical as well as illegal activities so that the external auditors of the companies are needed to take the help of whistleblowers (apesb.org.au 2019). APESB has introduced this particular ruling for providing necessary safeguards to the whistle-blowers employed by the government with the aim to report ethical misconduct within the organization. This has also provided major assistance to ensure the freedom of speech to the internal staffs of the company in specific types of whistleblowing situations (apesb.org.au 2019).

Employees

Uncooking the Books: Whenever there is a collapse of any large business organizations due to the faults in accounting and auditing, these collapses bring disrespect and discredit to the whole profession; and this is not good for either the accounting or the audit profession as the key stakeholders can lose their faith from them to get the needed assurance on the financial reports. In the collapse of Enron, the auditors of the company were majorly responsible as they incriminated the crucial audit documents before the investigation (da Silveira 2013). As per the rules, the auditors are selected by the company shareholders and thus, the responsibility of the auditor is to report to the shareholders. However, now-a-days, the auditors are selected by the business leader in order to make the auditors their puppets. Now, they auditors provide their clients with major non-assurance as well as consulting services and instances are there of the appointment of external auditors as the internal auditors. This makes the auditors dependable in the audit clients due to the presence of profitable audit contract. This whole aspect affects the audit quality (da Silveira 2013).

As per the audit lesson from Enron, the significant change will be to eliminate the private accounting firms from performing audit responsibilities with the aim to provide them to the government agencies. There is not any certainty that the government audit agencies would be able to escape the conflict of interest and mistakes of the private audit firms. Thus, in the immediate move, the need is ensure that the senior managements of the companies are not responsible for the selection of audit partner. In that place, the government agencies can have the responsibility to select the auditors as per the requirement of the companies (Albeksh 2016).

Another lesson is to introduce and implement strict regulation in the audit profession that includes penalizing powers. The auditors have been successful to hideaway the audit regulations and standards with the help of professional bodies due to their dominance on them. For this, the lesson would be in banning the auditors from offering consultation and non-audit services (Hosseini and Mahesh 2016). After that, the mandatory rotation of audit partner after four years can be implemented in this as a lesson as it would restrict the auditors to become over committed to their clients. Another ill practice is the selection of the internal auditors among the external auditors as external auditors will be responsible for both the development of financial statements and examination of the same which will create huge scope for auditing manipulation and fraud; and thus, this ill practice needs to be stopped (Hosseini and Mahesh 2016).

Customers

Introduction of Effective Standards: The obtained information from the collapse of Enron has showed the whole audit community the fact that the needed accounting standards of United States (US) were not followed by the company, particularly in the accounting treatment of off-balance sheet finances and this materially affected the financial reporting of the company (Peterson 2018). Helplessness of the Financial Accounting Standard Board can be noticed due to the fact that each of their initiatives for making the accounting standards better and accurate has been demolished by major illegal influences. This makes it compulsory for the introduction as well as implementation of more careful accounting standards in the presence of effective principles in the absence of excessively comprehensive rulings. It demands the adherence of the companies to the globally accepted accounting standards and principles (Haswell and Evans 2018).

Over the years, respective authorities have ensured the presence of many initiative so that the senior managements of the companies act in the best interests of the stakeholders (Jones and Stanton 2013). However, the chief executives can always avoid these initiatives as they can hold maximum stock options in the companies. Thus, the lesson is rearrange the whole system for the best interest of the stakeholders. It implies there is need for honest chief executives who will ensure discharging their duties in the honest and independent manner. Effective governance mechanism need to be there (Jones and Stanton 2013).

Arthur Andersen’s Behaviour: The accountability and responsibility of Arthur Andersen was to ensure the accurateness of Enron’s financial reports along with other accounting records as the investors of the company considered the audit report of Arthur Andersen to judge the truthfulness as well as fairness of the financial statements (McLean, B. and Elkind 2013). The reality is that the auditors of Arthur Andersen were get paid with huge amount of audit as well as not audit fees due to their provided assistance in the accounting manipulations like the illegal gains generation, off-balance sheet fraud and many more. For these reason, Arthur Andersen did not obtain the needed clarification in their business partnership before the confirmation of the audit nomination letter. After that, in March 2002, Arthur Andersen was held responsible as they destroyed certain crucial audit documents of the company ahead of the investigation of federal government agency. These state that Arthur Andersen was not ethical as well as profession in the audit of Enron (Ardiana 2014).

Auditor's Independence

It needs to be mentioned that there is not any globally standard definition of audit quality, but audit quality can be considered as the aspects that ensures the occurrence of effective audit in the required compliance with professional scepticism and auditor’s indepdence. In order to perform the quality audit, it is needed for the auditors to ensure acquiring the needed skills, experience and knowledge.

As per the statement of Greg Medcraft, the possibility cannot be ignored when Australian can face the collapse like Enron in case the country’s big four audit firms do ensure enhancing their auditing standards. He also indicates towards the warning that there might the next financial crisis in Australia in case the auditors do not properly audit the financial accounts of the large corporations (abc.net.au 2019).

This situation requires this to be mentioned that the sudden or expected collapse of large business organizations can be stopped when both the accountants of those companies along with the auditors of those companies fulfil their accounting as well as auditing responsibilities in the responsible manner in the presence of the necessary adherence to the accounting and auditing standards, regulations and principles. There are many evidence all over the world that the majority portion of the collapsed companies are the large business organizations in the presence of the fact that the accountants as well as auditors find it easy to manipulate the accounting books of these large companies and the occurrence of the same aspect can be seen in the collapse of Enron (apesb.org.au 2019). Greg Medcraft has highlighted the fact that audit failure was a major contributor of the collapse of Enron and this audit failure also hugely contributed towards the financial crisis. For this reason, it is needed for the auditors to show their responsibility and accountability to provide the various stakeholders with the needed information by conducting the audit in the most responsible manner (Bell, Causholli and Knechel 2015).

The provided news article shows that even the auditors of the large as well as reputed audit firms in Australia have drastically failed in performing the audit of the large business corporation and it can be considered as a major failure for them, especially for the whole audit community as well as profession (abc.net.au 2019). It indicates towards the fact that the auditors are gradually stepping aside from their primary responsibility that is to ensure the fact that whether there is any material misstatements in the financial statements or not in the presence of their personal benefits with the audit clients and becoming the puppet of the clients. It cannot be considered as a good sign for the companies (Christensen et al. 2016). For example, accounting fraud was majorly responsible for the collapse of Enron and the collapse of the company also had negative impact on the audit firm, Arthur Andersen.

Auditor Whistleblowing

It is visible from the statement of Greg Medcraft that 7000 surveillance and more than 1000 investigations were conducted by ASIC due to the fact that these investigations as well as surveillances are majorly helpful in the detection of the errors and the fraudulent activities in the financial statements. The result of these investigations was theprohibition as well as confined numerous number of organizational staffs when refunded more than $1.3 billion to the investors (abc.net.au 2019). The outgoing chairman of ASIC, Greg Medctaft, handed the responsibility to complete the unfinished tasks to the federal government of Australia (abc.net.au 2019). For this, these individuals need to be imposed with criminal as well as civil charges as both the government and the financial system provided the same recommendation. It indicates that it is needed to maintain the audit quality for mitigating the independence threat or to bring it down to the safe level so that safeguards can be applied (Ettredge, Fuerherm and Li 2014).

In this context, it needs to be mentioned that the auditors cannot apply the available safeguards in all situations due to the fact that the particular situation must have the substances or reason for the application of certain safeguards and the auditors must analyse the fact that what could be the obvious situation where they can apply the audit safeguards (apesb.org.au 2019). There are special situations where the independent regulator provides exemptions to the company from audit firm rotation, then it is possible for the auditor to operate as the key audit partner of the firm for more than 7 years (apesb.org.au 2019). Alternate safeguards need to be there in the form of independent external review.These safeguards are needed for the auditors with the aim to avoid the audit independence threat.

For this reason, the need for the auditors is to ensure fulfilling the requirements of audit client, audit employer and the public. According to the principles of “Section 100.2(c) of APES 110”, the responsibility is on the auditors to ensure the fact that the correct inspection as well as examination of certain audit situation have been done where there are threat of audit as the nature and reasons provide the auditors with the insight about the application of specific safeguard for reducing the risk (apesb.org.au 2019). In addition, the auditors need to use the safeguards when the threats surpass the safe zone which can affect the auditing standards and principles (apesb.org.au 2019).

Uncooking the Books

For maintaining this, the auditors are needed to acquire the required skills, knowledge and expertise that would assist them to hold the relationship between the audit client and audit firmand it would also be majorly helpful for them in the expression of the correct audit opinion that whether the opinion would be qualified or unqualified. After that, it is needed for them to maintain the necessary compliance with the auditing rules and regulations so that they can avoid the potential discredit of the addicting profession (Gul, Wu and Yang 2013). Another major need for the auditors is to maintain as well as follow the basic auditing principles of ethics; like integrity, confidentiality, professional competence and due care, objectivity and professional behaviour as these principles assist in keeping the auditors’ behaviour in tracks so that they can maintain the distance from the involvement with the illegal as well as unethical business practices with the audit clients.

6. Conclusion

To include, it can be said that Origin Energy has certain key group of stakeholders with different needs from the company. In this position, in case there is material misstatements in the financial statements can create the risk of incorrect decision of these stakeholders about the financial performance and position of the company. For this reason, the auditors are needed to be careful while auditing the financial statements as it would help them in properly identifying, disclosing and adjusting the material misstatements. The study also states that the aspects of auditor’s independence as well as audit whistleblowing play crucial role to report the unethical and illegal business operations. At the same time, the Enron scandal has provided the auditors with certain crucial lessons such as the introduction as well as implementation of the strict accounting and auditing lessons and others. After that, while addressing the warning note of Greg Medcraft, it can be seen that the auditors are needed to comply with the principles and standards of auditing standards so that they can audit the financial accounts of the large business corporations in the responsible as well as accountable manner. These would help in avoiding the occurrence of Enron like collapses in Australia.

7. References

ABC News. 2017. Poor auditing could be 'canary in the coal mine' for financial crisis: ASIC. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-poor-auditing/9114490 [Accessed 30 Jan. 2019].

Albeksh, H.M.A., 2016. The Crisis of the Ethics of Audit Profession: Collapse of Enron Company and the Lessons Learned. Open Access Library Journal, 3(11), p.1.

Introduction of Effective Standards

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Hosseini, S.B. and Mahesh, R., 2016. THE LESSON FROM ENRON CASE. Journal of Current Research, 8(08), pp.37451-37460.

Jones, M.J. and Stanton, P., 2013, July. Enron Cartoons: Accounting in the Spotlight. In Seventh Asia Pacific Interdisciplinary Research in Accounting Conference (p. 136). Kobe: The APIRA Conference Committee.

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Lennox, C. and Li, B., 2014. Accounting misstatements following lawsuits against auditors. Journal of Accounting and Economics, 57(1), pp.58-75.

Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-1412.

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Originenergy.com.au. 2019.ENGAGING WITH STAKEHOLDERS. [online] Available at: https://www.originenergy.com.au/content/dam/origin/about/our-approach/docs/sustainability-engaging-with-stakeholders.pdf [Accessed 30 Jan. 2019].

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