Key stakeholders of the companies use the reports of the auditors as a major document or tool for verifying the truthfulness as well as fairness of the disclosed financial reports (Ojala et al., 2014). In the process of auditing, the key responsibility of the auditors is to conduct the inspection and analysis of the financial reports of the firms so that any material misstatements can be spotted in them. It is needed for the auditors to make proper identification of the material misstatements in the financial reports due to the fact that the key stakeholders extract the required financial information from them (Farouk & Hassan, 2014). For this reason, this report considers the impact of material misstatements in the financial statements on the key stakeholders of one ASX Listed company that is BHP Billiton. After that, this report sheds light on the concepts of auditor independence and whistleblowing related to the public interest requirements in APES 110. Lastly, this report considers the important lessons learned from the scandal of Enron in the audit profession along with the required doings of the auditors to maintain the quality of the total audit operations.
There are certain stakeholders within BHP Billiton who can be majorly affected with the presence of material misstatements in the financial statements and the effects are shown in the following discussion:
Investment Community: in BHP Billiton, the investment community includes financial analysts, Socially Responsible Investment (SRI) analysts who provides advises the existing and potential shareholders about the performance and corporate governance of the firms and others (bhp.com, 2019). Thus, they follow the financial statements of BHP Billiton for fulfilling the above purpose. Improper identification of the material misstatements can provide them with materially misstated financial information that will lead them to the failure of identifying the financial performance of the company (Brasel et al., 2016).
Shareholders: The shareholders of BHP Billiton are a varied group with crucial representation in Australia, South Africa, Europe and North America; and the main interest area of this stakeholders are to create long-term value in the presence of consistent financial return and high-quality performance (bhp.com, 2019). This stakeholder group analyses the financial statements of BHP Billiton for the purpose of investment decision making. Hence, they will not be able to make the correct investment decision in the presence of incorrect identification of material misstatements in the financial statements.
Business Partners: The business partners of BHP Billiton represent those business organizations with which the company has joint venture agreements. The aim of the company is to ensure the correct delivery of financial return and effective mitigation of financial risks (bhp.com, 2019). Before entering into the joint venture agreements, the companies analyse the financial statements of BHP Billiton for ensuring the effective financial performance of the firm. In this situation, the presence of material misstatements in them can affect the financial standing of the company (Abbott, Brown & Higgs, 2015).
Suppliers: The suppliers of BHP Billiton includes local businesses as well as international suppliers; and the company has the responsibility to ensure correct supply agreements, payment processes and maintenance of the required standards (bhp.com, 2019). Hence, the incorrect identification of material misstatements in the financial reports can affect the company by increasing their assets or liabilities abnormally; and it can affect the relation of the company with their supplies.
Government and Regulators: BHP Billiton engages with the government and regulators at local, regional, national and international level; and the main interest of this group is in national, regional and local regulatory and legislative policy the project life cycle (bhp.com, 2019). Hence, this group will be affected in the presence of material misstatements in the financial statements.
Auditor independence states that the external auditors must be independent from the audit client while conducting the audit procedures. In addition, the auditors are also needed to ensure the roper maintenance of professional integrity and objectivity as per the principles of auditor independence (Sharma, 2014). Another major ethical contributors in the audit profession is the process of whistleblowing that is a major tool in maintaining ethics and governance in the companies. The key principles of auditor independence state that the auditors must disclose any material misstatements in the clients’ financial reports along with the breach of ethical and governance related principles (Broberg et al., 2014).
It is needed for the auditors to show their commitment towards independence through proper conduct of audit as this commitment has both the direct as well as indirect impact on the whistleblowing process by the external auditors. Organizational employees can do whistleblowing in effective manner in case the auditors have effective commitment towards independence (Mintz, 2015). It needs to be mentioned that the process of whistleblowing can be considered as certain effective policies that create scope for the organizational employees in reporting unethical behaviours within the organization. Hence, a whistle-blower is an organizational person who confronts information related to wrong behaviours within the business organizations. Thus, it leads to develop loyalty as well as commitments towards the profession.
Auditors of Australia can access all the required fundamental ethical principles of audit through APES 110 Code of Ethics for Professional Accountants issued by Accounting Professional and Ethical Standards Board (APESB). According to APES 110 Section 210.11.1, the permission of the audit client is needed related to communicate to the previous auditors by the existing auditor (apesb.org.au, 2019). There will not be any audit nomination if the request is rejected as it is necessary to communicate with the previous auditors. In case the audit client grants the permission, the existing auditor needs to gather the required information from the previous audit partner of the client. This criteria provides the desired safeguard to the whistle-blowers and assists in identifying ethical misconduct in the company. At the same time, the employees of the companies can get the needed freedom of speech for raising concern against the unethical issues. It needs to be mentioned that the whistle-blowers have the right for filing complaints against the unethical behaviours in the presence of sufficient evidence according to the principles of APES 110 Section 100.1 (apesb.org.au, 2019).
The Enron Scandal is an important subject to the audit profession as the auditors can learn certain crucial lessons from this collapse and they are discussed below:
Effective Audit Standards: The Enron Scandal highlighted many issues in the accounting standards of the firms. It can be observed from the whole case of Enron that the company did not feel the necessity to follow the principles of United States (US) accounting standards for the accounting reporting of certain off-balance sheet substances; and they used narrow as well as improper accounting standards that contributed to the accounting standard problems. The Financial Accounting Standard Board was unable to improve the accounting standards in the presence of colossal lobbying (da Silveira, 2013). In order to avoid this issue, it is needed for the accounting standard setters to introduce and implement effective accounting principles and standards. The recommendation is the compliance with globally accepted accounting standards.
It is evident from the Enron scandal that the company lacked effective corporate governance appliance. One of the major reasons for the implementation of corporate governance within the organizations is to convert the higher-level management as the agents of the company shareholders. However, one major reason for the breach of corporate governance is the power of the company chief executives to hold maximum stock options (Nguyen, 2014). It indicates to the needs to improve the whole corporate governance situation. The way is to include honest non-executive directors who will ensure certain aspects like the correct distribution of remuneration to the senior executives, effective internal control and others. Hence, it can be said that strong corporate governance can lead to effective audit procedures as it strengthens the internal control.
Avoid Manipulation of the Financial Statements: Capital markets of the countries can be boosted with the correct financial reporting of the firms. As per the actions of Arthur Anderson, the auditors of Enron, the collapse of Enron was also the collapse of the audit profession as the auditor had major guild in the falsification of Enron’s accounts. In addition, some of the crucial staffs of Enron were involve in conflict of interest and unnatural business incentives and these also contributed to the Enron collapse. In general, the authority to appoint the auditors lies in the hands of the shareholders; and it puts the obligation on the auditors to work as the agents of the shareholders. It can be seen in the case of Enron that the management of the company appointed Arthur Anderson as the auditors due to fulfil their dishonest desires. For this reason, Arthur Anderson provided different consulting and non-assurance services to Enron for earning huge fees (Aydin, 2014). There are instances where the external auditors had been appointed as internal auditors. This aspect creates the opportunity for the senior managers to falsify the firms’ accounts that leads to the decline in audit quality.
In the presence of all the above aspects, it is needed to seize the audit responsibilities from the private companies with the aim to transfer them to the government agencies, but there must be the requirement for the same. However, this process involves inherent risk of auditing due to the absence of the guarantee that the government agencies would be able to manage the audit mistakes that the previous companies did. At the same time, it requires to mention that the managements of the companies do not have the right to appoint the auditors as it would be better that the government agencies appoint the auditors with appropriate audit fees as per the requirements of the firms (Hosseini & Mahesh, 2016).
Moreover, the needs for strict legal regulation cannot be ignored in the overall audit procedures. It can be seen that the auditors of the companies have been successful to escape the audit regulations with the assistance of peer review and professional bodies that are under the control of the auditors. At the same time, there is an immense need to restrict the rights of the auditors to provide consulting and non-audit services. After that, for avoiding the aspect of over commitment of the auditors to the audit clients, there is a need for the rotation of audit firms on the basis of every five years. The ideas are immensely helpful in improving the audit quality. In this context, it is required for the Australian Securities and Investment Commission (ASIC) to restrict the practice of the appointment of internal auditors and audit managers by the managements of the companies (Kizil & Ka?ba??, 2018).
Behaviour of Arthur Anderson: Arthur Anderson was the second largest audit firm at the time of the collapse of Enron. It was the responsibility of Arthur Anderson to ensure the accurateness of the financial reporting as well as bookkeeping process. In addition, the investors had full faith on the audit report of Arthur Anderson and they used them for the purpose of investment decision making (McLean & Elkind, 2013). It needs to be mentioned that Arthur Anderson was the business partner of Enron that contributed towards the development of conflict of interest. In addition, some of the employees of Arthur Anderson were employed in Enron. In the presence of these benefit, Arthur Anderson did ignore verifying the required financial statements that led to material misstatements. Moreover, the auditor of Arthur Anderson was held accountable for destroying some of the crucial documents in audit process. In spite of this, the audit firm received millions of dollars as audit fees. All these aspects are indicators that Arthur Anderson was highly unethical in the audit of Enron (McLean & Elkind, 2013).
There is not any globally recognized definition for audit quality. However, a quality audit is occurred when the auditors carry out the necessary audit procedures according to the correct degree of professional scepticism as per the audit standards (Peytcheva, 2013). In addition, for the occurrence of quality audit, the auditors need to have required knowledge as well as skills, required audit insight and others. Greg Medcraft puts emphasis on the fact that there can be many corporate collapses in Australia like Enron if the big four audit firms do not conduct quality audit for enhancing audit standards (abc.net.au, 2019). It can be seen from the same source of information that improper auditing of the financial accounts of the big corporations can lead to the occurrence of financial crisis in Australia.
The respective Australian authorise need to be active in solving the above-mentioned issues with the aim to avoid the further corporate collapses like Enron and others. It is needed to mention that the auditors of Australia have the option to avoid the collapses like Enron by efficient audit where they are needed to acquire sufficient audit evidences on the fact that the financial statements are free from material misstatements. APES 110 Section 2 states that it is the responsibility of the auditors for providing enough assurance on the fact that the financial statements of the companies reflect the true and fair financial position of the company (apesb.org.au, 2019). Greg Medcraft mentioned in the article that one major reasons for the collapse of Enron was the audit failure at the time of financial crisis (abc.net.au, 2019). It indicates towards the responsibility of the auditors to show their responsibility as well as accountability at the time of audit so that the key stakeholders can judge the true and fair financial standings of the companies.
The top four audit firms in Australia are Deloitte, PwC, KPMG and E&Y. As per the news article, ASIC did collect the key audit samples of these four audit firms for eighteen months until December 2016; and ASIC has found that these audit companies were unsuccessful in providing the required audit assurance in 23 percent cases where it was not confirmed that the financial statements were free from material misstatements. This situation shows the lack of ability of the auditors of these four companies as they do not possess the needed professional scepticism; and it is a hindrance in maintaining the desired audit quality. It can be mentioned as an example that the presence of accounting fraud was responsible for the collapse of Enron that also has negative impact on the audit firm, Arthur Anderson, in the presence of their full involvement in the whole scandal (Ettredge, Fuerherm & Li, 2014).
According to Greg Medcraft, ASIC did ban more than 600 business organizations and did imprison more than 80 staffs of the companies after they conducted 7000 surveillance and more than thousand investigations on the audit processes (abc.net.au, 2019). Due to this, ASIC was successful in returning more than $1.3 billion to the investors within six years. Moreover, ASIC did not forget to impose criminal charges on the employees and auditors involved in unethical accounting practices. At the same time, the quality of audit needs to be effectively maintained with the aim to lower the threat to audit independence to safe level (Eshleman & Guo, 2013). According to Greg Medcraft, it is not possible for audit rotation to provide safeguard to the threat of audit independence when the number of auditors having the required audit knowledge and expertise is few in the companies and this regulation can be seen in APES 110 Section 290.155. In addition, as per the exemption of regulation in certain jurisdiction, it is possible for the auditors to stay as a key audit partner for more than seven years (apesb.org.au, 2019). However, review of the external stakeholders’ independence can be considered as a safeguard in here.
APES 110 Section 100.1 puts the obligation on the auditors to perform audit for ensuring the best interest of the public (apesb.org.au, 2019). Thus, an auditor needs to fulfil the needs of the public by conducting audit in accordance with the provided regulations and standards. According to APES 110 Section 100 2(c) it is the requirement for the application of safeguards in order to diminish or minimize the audit threats to the acceptable level (apesb.org.au, 2019). It implies that the auditors should apply the needed safeguards when the audit threats exceed the safe level. Hence, an important lesson can be obtained from the statement of Greg Medcraft that it is possible for Australia to avoid another financial crisis in case the auditors conduct the audit works as per professional competence and due care (abc.net.au, 2019).
For fulfilling the above-mentioned objective, the auditors of the companies must have the needed audit skills, knowledge and experience so that they can continue the audit procedures as per the required rules and regulations. According to APES 110 Section 100.5(d), maintaining the confidentiality of information is a crucial aspect for the auditors as it is the restriction on the auditors to disclose the confidential information of the clients when there is not any proper approval (apesb.org.au, 2019). In a nutshell, it can be said that the important requirement for the auditors is to follows the required principles, standards and regulations in order to avoid bringing disrespect to the audit profession (Christensen et al., 2016).
The above discussion indicates towards the crucial fact that the presence of material misstatements can affect the key stakeholders of the companies in the presence of the fact that they rely in the financial statements for extracting crucial information for making investment decision. The same aspect can be seen in case of BHP Billiton. After that, as per the report, auditors need to be honest and straightforward in their profession as per their commitment towards independence. Moreover, the whistle-blowers can disclose the unethical business practices within the organisations through the whistleblowing process. This report states that the Enron scandal is crucial for the auditors as it has provided the auditors with certain audit lessons like not to manipulate the financial accounts of the companies for personal benefits, to comply with the required audit regulations and others. It also shows that Arthur Anderson was majorly unethical in the audit practice of Enron that contribute towards the collapse of the company. As per the suggestion of the report, it is utmost important for the auditors to maintain professional scepticism along with the adherence to the audit regulation for avoiding such collapses.
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