When there is performance of sub-standard audits and adequate assurance could not be determined reliably, the key stakeholders are prone to consequential risks and they include the auditors as well. This report would intend to perform the stakeholder analysis of an ASX listed organisation. For this, Wesfarmers Limited is taken into consideration, which is the giant retailer in Australia with workforce around 217,000 employees (Wesfarmers.com.au 2018). Based on the stakeholder analysis, the impact on each group would be evaluated, if the material misstatements are not identified or disclosed properly. The second section would lay stress on the concepts of independence and whistleblowing in relation to the auditors and the association of these concepts with the public interest requirements of APES 110. The third section would emphasise on the lessons that the auditors could learn from the Enron scandal and the behaviour of Arthur Andersen. Finally, the report would shed light on researching audit quality and steps to be taken by the auditor after analysing the statement of G. Medcraft.
Wesfarmers Limited has the following groups of stakeholders and their detailed analysis in relation to material misstatements is elucidated briefly as follows:
In 2018, Wesfarmers has liaised with state and federal government with respect to a number of issues affecting its business operations. The resources and time needed for contributing to the inquiries of state and federal government for participation are significant and it is troublesome for the organisation to respond to all issues. If there is presence of material misstatements in the financial reports of Wesfarmers Limited, the tax expense calculation might not be accurate and this poses a significant threat to the government.
The goal of the organisation is to ensure long-term outcomes, which would be beneficial for the suppliers by realising that robust negotiations would ensure sustainability of both parties. If the organisation experiences any financing loss or falling conditions affecting the retail sector of Australia, it could affect its ability of settling due obligations. Hence, the impact would be on the risk of material misstatement like categorisation of long-term liabilities or valuation of non-current assets, which would be a key concern for the suppliers (Abbott, Brown and Higgs 2015).
The organisation conducts annual general meetings for communicating with its shareholders. The share register of the organisation is handled by Computershare Investors Service Private Limited (Wesfarmers.com.au 2018). The organisation holds a number of investor briefings every year related to half-year and full-year outcomes. The shareholders of Wesfarmers Limited are primarily interested to know about competition in Australian retail sector, demerger of Coles and approach of capital allocation. If material misstatements are not detected in financial reports, the shareholders might undertake wrong investment decisions, which would minimise their overall return on investment (Andon, Free and O'Dwyer 2015).
The customers of Wesfarmers communicate via mails, websites, letters, in person and telephone calls. The customer feedback is attended every working day and accordingly, responses are provided. On the other hand, the organisation has 217,000 staffs and they participate in business decisions through staff surveys, personal contact, e-mail and whistleblower process. If the financial reports are overstated due to material misstatements, it would affect the decision-making process of both customers and employees of the organisation.
Auditor independence denotes the independence of the external auditor. It is characterised by objective approach and integrity to the audit procedure (Arens et al. 2015). This concept needs the auditors to conduct their work freely and in an objective fashion. The auditor independence and whistleblowing concepts are significant attributes of the profession and inevitable parts of accounting ethics, which govern the profession of accounting. From the auditor independence concept, it could be identified that an auditor would represent breaches and misstatements in the financial statements at the time of discovery. Therefore, a crucial feature of ethical and professional commitment in audit is denoted as independence commitment.
There would be direct and positive impact of independence commitment on whistleblowing intentions among the external auditors. The extent of independence commitment possessed by an auditor usually affects the whistleblowing intentions. In this context, Knechel and Salterio (2016) mentioned that whistleblowing could be termed as policies, which enable the employees in reporting unethical violations, if they find or discover within the organisation. A whistleblower is deemed as an individual exposing any information or activity observed to be incorrect, illegal or unethical within a public or private organisation. This assists in developing loyalty and sense of commitment to the organisation as well as job description.
The “Accounting Professional and Ethical Standards Board (APESB)” has issued the document of “APES 110 Code of Ethics for Professional Accountants”. According to “Section 210.11.1 of APES 110”, the nominated accounting auditor is needed to request the permission of the client in order to communicate with the previous auditor (Apesb.org.au 2018). If permission is denied by the client, the nomination is to be declined normally. In case, the client grants the permission, the nominated auditor could ask the last auditor in writing for all the required information so that decision regarding nomination could be undertaken. This has been introduced to safeguard the whistleblowers working for the government and reporting misconduct related to the agency. This has assisted in assuring the freedom of speech for the workers and contractors in specific situations. The whistleblowers have the right of filing complaints, which they believe are considerable evidences of breaches of the following, in accordance with “Section 100.1 of APES 110”:
The collapse of Enron has been considered as one of the biggest corporate global collapses. There are several lessons for the auditors to learn from this collapse and they are enumerated briefly as follows:
In the words of Andon, Free and O'Dwyer (2015), correct company accounts are significant for any effective capital market. The auditor of Enron, Andersen, stated that its downfalls are representative of the entire profession. In fact, the auditor is viewed to have been unusually culpable over Enron, which is shedding incriminating documents ahead of the investigators. This audit failure has been due to the set of business associations, which have been bedevilled by conflicts of interest and perverse incentives. Theoretically, the shareholders of an organisation appoint the auditors and the latter is liable to report to the former. However, in reality, the leaders of the organisation select the auditors and the latter becomes beholden to them (Tanyi and Smith 2014). The accounting organisations are involved in frequent selling of consulting services to the audit clients and sometimes, the external auditors are recruited in top management positions or internal auditors. Therefore, it becomes easy for the organisation to play on the fear of the individual audit partner of losing a profitable audit assignment. In contrast to such a background, the audit quality is likely to suffer (Barr-Pulliam, Brown-Liburd and Sanderson 2017).
In this case, the most noteworthy change would be to snatch audit responsibilities away from private accounting organisations and provide the same to the government. However, such change might yet become essential. In such case, risk would be inherent in terms of auditors’ quality and it is not certain that the government agency would manage in escaping the mistakes and conflicts to which the private organisations have fallen prey (Bédard et al. 2016). As an intermediate move, it is necessary to ensure that the selection of auditors does not lie in the hands of the leaders of the organisation. Instead, the government agency would recruit the auditors based on the list provided by the organisation, which would carry on incurring the audit fee.
Moreover, there needs to be stringent statutory regulation of the audit profession constituting of disciplinary powers. The auditors have succeeded in getting away with the self-regulation fiction through peer review and professional bodies, which they have dominated. Moreover, a ban needs to be imposed on the accounting organisations offering consulting as well as other services to the audit clients (Bowlin, Hobson and Piercey 2015). Another idea is compulsory rotation in every four years of the audit partners in order to avoid the auditors becoming over committed to their clients. The most feasible peer review takes place when an organisation comes in to view at the books of a predecessor (Lennox 2015). The Australian Securities and Investments Commission needs to ban the practice of the organisations appointing internal auditors and managers from external audit organisations.
In search of better standards:
Another issue that the auditors need to take into consideration from the Enron scandal is the issue related to accounting standards. The behaviour of the organisation has ensured that in few areas, especially the treatment of off-balance sheet dodges, the US accounting standards are highly negligent and they are too prescriptive resulting in loss of sight of wider principles (Fuhrmann et al. 2017). The previous attempts that the Financial Accounting Standards Board has undertaken in improving standards have been suppressed due to vociferous lobbying. This mandates the need for the regulatory authority to implement more meticulous standards by ensuring sound principles, instead of overly detailed rules. It would be better to adhere to the globally agreed standards.
The fiasco of Enron has revealed that there is absence of effective governance in big multinational organisations. Over the periods, all kinds of balances and checks have been developed for ensuring that the leaders of the organisations acting as agents for the shareholders are actually doing the same. However, the Chief Executives have the power to set such checks aside by holding maximum stock options (He et al. 2017).
Thus, there is need of realigning the system to function more in the interests of the shareholders. The organisations need stronger non-executive directors, ensure adequate payment by devoting necessary attention to the job, genuinely independent remuneration and audit committees along with string internal auditors and segregation of the jobs of chief executive and chairperson. Therefore, the auditors as well as the organisations need to provide better governance and audit for conducting sound business operations.
Behaviour of Arthur Andersen:
Arthur Andersen has been the second oldest accounting organisations during the time it conducted the audit operations of Enron. It was accountable to ensure accuracy of the financial statements of the organisation as well as internal bookkeeping. The investors used the reports of Andersen to undertake investment decisions, as they believed the reports were accurate and free from conflicts of interest. However, there was a conflict of interest, as Andersen was a significant business partner of Enron and some of its executives accepted jobs from Enron. However, Andersen ignored to ask Enron for clarifying their partnerships before the verification of the financial statements of the latter. In addition, in March 2002, Andersen was accused guilty of obstruction by destroying the audit documents of Enron (Hines et al. 2015). This shows that the auditor had not acted ethically and professionally, as it received millions as audit and consulting fees.
Even though there is no globally recognised definition of audit quality, quality external audit service would take into consideration a rigorous audit having an effective degree of professional scepticism carried out in accordance with the relevant standards. The other necessary elements might include insight of sector knowledge, nature and degree of valuable insights as well as observations occurring from the auditing procedure or ability to coordinate services appropriately from different global locations (Knechel 2016).
According to Greg Medcraft, there are chances where Australia might be encountering incidents like Enron unless the big four accounting organisations considerably enhance their auditing standards (ABC News 2017). The individual has stated that if the corporate accounts are not audited properly, there is advanced warning of danger for the next financial crisis.
In case, the above-mentioned issue is not addressed immediately, there might be incidents of corporate collapses like Enron in Australia as well. In order to ensure the same, the auditors are needed to perform their jobs efficiently by obtaining assurance that the financial reports are free from material misstatements. As mentioned in “Section 2 of APES 110”, the auditors need to assure that the financial statements provide true and fair overview in all material aspects. Medcraft has emphasised on the fact that the main reason behind the collapse of Enron was the audit failure resulting in financial crisis. Thus, for providing accurate financial information to the various stakeholders of the business organisations, the auditors have to be responsible while conducting their audits on the financial statements (Gay and Simnett 2017).
From the news article, it has been identified that ASIC has collected key audit samples for 18 months until December 2016 made by Deloitte, PwC, Ernst and Young and KPMG, out of which 23% failed to provide adequate assurance regarding the accuracy of the financial statements or that they do not contain material misstatements. This implies that the auditors have lack of professional scepticism and they fail to deal with the challenging situations. As a result, it is not a good sign and the situation might turn out to be worse in future.
For instance, the collapse of Enron in 2002 was due to the accounting fraud and such decline had led to the decline of its auditor, Arthur Andersen as well due to its involvement in the fraud. In Australia, asset value was written down by Seven West Media and Nine Entertainment Company after concerns have been raised by ASIC regarding valuations in 2016 financial reports.
According to Medcraft, ASIC has carried out 7,000 surveillances, numerous investigations above thousands, banned above 600 organisations, imprisoned above 80 individuals and returned $1.3 billion to the investors in the last six years. Moreover, the individual has handed over a list of unfinished business to the federal government. Therefore, criminal charges need to be imposed on them rather than civil charges (Liao and Radhakrishnan 2015). This recommendation has been recognised by both the government and financial system inquiry. Therefore, maintaining the audit quality is crucial to mitigate the threat of independence or lower the same through implementation of the safeguards (Louwers et al. 2015).
From the statement of Medcraft, it is clear that when the organisations contain only few individuals possessing the required experience and knowledge to perform the duties of the audit partner, rotating them might not assure adequate safeguard, as mentioned in “Section 290.155 of APES 110”. In case, the independent regulator has given an exemption from partner rotation in the pertinent jurisdiction, it becomes possible for an individual to stay as a key audit partner for above seven years. However, there needs to be the presence of alternate safeguards like independent external review (Malsch and Salterio 2015).
Moreover, “Section 100.1 of APES 110” cites that an auditor is required to work so that the best interests of the public could be assured. Hence, the accountability of a member is to fulfil the requirements of an employer, client as well as compliance with the code for assuring the best interests of the public. In accordance with “Section 100.2(c) of APES 110”, safeguards are necessary to be applied so that the threats could be eradicated or they could be minimised to an acceptable degree. In particular, safeguards are applied when it is analysed that the threats are above the desired level when there is no compromise made with the major auditing principles (Martínez-Ferrero and García-Sánchez 2018).
Based on the statement of Medcraft, it could be said that it is possible to avoid another financial crisis, if the auditors in Australia maintain professional competence and due care. For such maintenance, the auditors are needed to have the desired level of skills and knowledge that would assist in holding competent associations between the clients and the audit firms (Rahmina and Agoes 2014). According to “Section 100.5(d) of APES 110”, the auditors are required to maintain the confidentiality of information arising out of business and professional relationships. More precisely, the auditors need not disclose such confidential information to the third parties without seeking proper approval from the relevant party, unless necessary. Finally, they are needed to adhere to the pertinent regulations and guidelines for avoiding such actions having the potential of discrediting the profession (Simnett, Carson and Vanstraelen 2016).
To infer, it could be stated that Wesfarmers Limited has different groups of stakeholders with varying needs from the organisation. However, any material misstatement in the financial reports of the organisation would have adverse influence on all stakeholders, since they might not be able to undertake accurate decisions. Hence, the auditors of Wesfarmers Limited need to exercise utmost care while auditing its financial statements in order to ensure the accuracy of the financial reports. It has been found that both auditor independence and whistleblowing are fundamental aspects of the auditing profession to avoid unethical behaviour undertaken by the business organisations. Moreover, the scandal of Enron provides a number of lessons to the auditors and such scandal requires stringent enforcement of rules on the auditors to avoid conflicts of interest and independence threat. Finally, it has been analysed that Greg Medcraft has expressed the fear that Australia might face incidents like Enron, if the auditors do not exercise considerable judgements in their audit processes. This is because such scandal has shifted the focus from corporations to auditors. Hence, the auditors are required to maintain adequate safeguards, maintain adherence to the relevant regulations along with exercising utmost care and due diligence in their audit work.
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