Auditors’ Responsibilities

1. Accounting standards are now awash with principles of ‘fair value’ and tiers of determining how to calculate such. Auditors sign off that the accounts comply with the appropriate accounting standards. Where should auditors (who are accountants) draw the line in terms of their responsibilities to shareholders and to their profession. Discuss.

2. Are auditors overly relying on manager’s explanations? Are there firm and manager characteristics and attributes that lead auditors to perform fewer tests and pursue less reliable types of audits? Does manager confidence sway auditor opinion?

3. Auditing the auditor.  Has ‘self-regulation’ in auditing completely failed in the 21st century.

4. The Cadbury Report (1992) concerning corporate governance was considered the forerunner of what is now commonly considered as ‘comply-or-explain’ codes. Discuss and explain – include a discussion on ‘When is comply or explain the right approach?’ 

In this paper, different aspects in relation to the auditing professional and corporate governance (CG) are discussed. Auditing professional in terms of ethics and self-regulation is detailed and discussed to understand this practice within the current business scenario. Additionally, auditors overly relay on the explanation of managers is also accessed in terms of audit quality and effectiveness. Along with this, comply or explain regulation is also accessed in this paper.

Auditing includes audit of financial statements for protecting the interest of shareholders. Auditing is performed by the accountancy firms in which accountants review compliance of organisation in developing and reporting financial transactions of business. Auditors provide reasonable assurance regarding “true and fair view” of firm’s of financial statement. They are accountable to ensure that financial reports of the firm are free from data manuapltion and misstatement (Albu et al., 2013). Audit report is highly valuable for the shareholders as on the basis of auditors’ comment they make their investment decision to sell and buy a share. Individual and institutional shareholders expect that auditor should provide “absolute assurance” for the fairness of firm’s financial firm. But, the auditors believe that their responsibility is to only provide reasonable assurance as it is quite difficult for them to review the each financial transaction of the business as it creates huge cost for the firms (Danescu and Spatacean, 2011).

Apart from this, it is difficult for auditors to determine omit of any financial transactions as directors of the firm are responsible for developing the financial statements. In order to draw line in terms of responsibility to the shareholders and the profession, auditor should focus on their independent work. Through interdependence, auditors can access the financial statements of firm with objectivity and integrity. This helps to eliminate the influence of interested parties on the audit process (Kim et al., 2012). It would be effective for auditors to carry out duty to exercise reasonable skill and care and to maintain professional integrity.

Auditors’ Overreliance on Managers’ Explanations

In terms of professional conduct, auditors are responsible for their profession. By following auditing standards within high level of integrity and transparency, auditors should fulfill responsibilities towards shareholders and profession. Auditors should review the financial statement of the firm to ensure compliance of accounting standards and acts with duty of care. This would be effective to fulfill responsibility towards professional and shareholders. Similarly, accountants should also perform their duties with high level of care and attention (Abbas and Iqbal, 2012). This could allow accountants to obtain enough evidences for ensuring true and fair value of the firm’s accounts.

Apart from this, accountants should focus on considering two duties for the effective auditing such as duty of care and duty of loyalty. Through this, accountants can ensure that they audit the financial statement of firm with extreme integrity and fairness. This would be crucial to take reasonable actions for fulfilling responsibilities towards profession and shareholders. By disclosing the actual financial condition of the business, accountants should justify their reasonable actions for maintaining professional integrity and protecting the interest of shareholders. There are certain liabilities, duties and right of the auditors that may allow them to segregate their responsibilities for shareholders and profession (Albu et al., 2013). In this way, professional ethics may allow the auditors to justify their role in terms of professionalism and shareholders. 

The managers’ explanation influences the auditors in significant manner. Due to absence of relevant accounting skills and experience, auditors may face difficulties in asking right and relevant questions to the managers and it could affect their ability to access the quality and accuracy of the responses. Due to this, auditors can lose interdependence that affects the auditing quality and results. Accounting and auditing skills and experience is critical for auditors to reduce their reliance on the managers’ explanations (Bowlin et al., 2015). This may help auditors to take required actions for reviewing the quality of recorded financial information rather than considering manages’ expectations.

In the words of Jeo (2015), auditor overly relay on the mangers’ explanations mainly in high risky companies.  Managers’ explanations, confidence, attributes and charetertiscs influence the auditor’s actions in significant manner. In this research, ironic process theory indicates role of psychological process in increasing influence of managers on the actions and behaviour of accountants throughout the auditing process. In accordance to this theory, auditors’ efforts to discount confidence of managers subconsciously tend them to emphasis more. This influences auditors’ ability to conducts audit without relying on managers’ expectations.

Self-Regulation in Accounting Profession

In addition to this, confidence characteristic and attribute of managers influence the selection of auditing methods and processes. High level of managers’ confidence has considerable impact on the quality of audit. Due to confidence attribute, auditors are more likely to believe on the explanations of the manager and this makes them to perform less number of test and less reliable audit types. Although auditors try to eliminate the influence of confidence from the auditing process but due to the psychological process, it is quite effective for them to reduce reliance over managerial explanations (Bik, 2010). Thus, management confidence is major a factor to cause auditors’ overreliance of auditors on the managers’ explanation that create potential of audit failure.

The detection of managerial level fraud is quite difficult to detect as auditors relay on the explanation and assurance of managers. Managers may lie confidently to the auditors by concealing things and misleading deliberately. This influences the quality of audits in the significant manner. This creates considerable difficulties for audit to detect the fraud. Absence of defined and detailed plan as well as audit procedures for searching fraud indicators is the main cause due to which managers’ confidence influence the opinions of auditors (Jeo, 2015). 

Confident managers are more likely to persuade auditors for applying fewer tests and less reliable audits. Due to this, auditors avoid to establish own test to determine value of material asset. It increases possibilities of financial fraud and manuapltion within the organisation. Thus, auditors’ overly on managers’ confident explanation regarding financial information affects quality of audit and assurance services in effective manner (Koonce et al., 2013).

Self-regulation in auditing means that this profession has own rules and regulations to manage the routine activities without regulatory guidelines.  In this profession, volunteer regulations guide the actions and behaviour of auditors. Auditors and accountants are accountable for safeguarding the public interest. In order to serve public interest, code of ethics namely integrity, objectivity, due care, professional behaviour, professional competence and confidentiality should be followed by the auditors and ethics. Professional accounting bodies communicates the code of ethics to its members and regulates their actions (Islam, 2013). These ethics tend accountants and auditors to take decision with the consideration of shareholders interest. But, there are some examples of fraud such as Enron scandal, WorldCom scandal, Satyam Scandal, etc. depict that self-regulation fails to manage the auditing practice in the 21^st century. In these case of fraud, auditing staff avoided self-regulation principles in their practice that created worst results (Schneyer, 2011). This indicated that self-regulation is not working effectively to prevent the frauds in the auditing process.

In the several fraud cases of 21^st century, ignorance of auditors and their staff towards the fundamental ethical principles which is “objectivity”. Auditors ignored to prevent threat of independence from the auditing process. They did not take required actions to maintain objectivity in the auditing process. On the basis of fraud cases, auditors’ negligence towards the ethical principle is found that indicates failure of self-regulations in the auditing profession.  In addition to this, negligence behaviour of auditors also depicted failure of self regulation (Islam, 2013). From the perspective of ethical principles, auditor should conduct their operations with due care and extreme competence. Similarly, personal relationship between the auditor and firm also caused failure of self-regulation as due to this, auditors avoided to disclose all information that may create threat of independence (Onulaka, 2015). They did not disclose the actual situations.             

But at the same time, self-regulation practice is not consistent with the international standards that also cause failure in its success. The development of several new regulatory regime and legislations do not depict the failure of self-regulation. These are developed as the expectations of society from the auditors’ role have increased significantly. Society need better standards to improve quality of the auditing process and to detect and prevent financial frauds. In 21^st century, businesses become highly complex that also raise need of changing and improving risk management process (Islam, 2013). Thus, it is clear that self-regulations has failed in auditing profession at some extent as majority changes in regulations are introduced due to the raise in societal expectations from the auditing profession  and business complexities. 

Comply or explain is the major part of corporate governance (CG) code of UK. This approach includes much of the content of UK code of CG. The effective use of this approach leads to the development of effective corporate governance.  This approach application means to develop market-based solutions of a problem by considering needs of business and shareholders without any legislative interference. Through this, firms gains guidelines to achieve good corporate governance and to ensure transparency. There are five principles of improving quality of CG such as board leadership, accountability, effectiveness, investor relations and remigration process (Iwasaki, 2014).

The major benefit of comply or explain promote innovations in the ways of improving the quality and effectiveness of CG. If a firm perceives irrelevancy of a code of ethics in their business for combating fraud than they simply need to explain the reason of non-compliance. This approach is quite useful in accommodating new ideas, which are more suitable in respect to the actual circumstances of business. This learning helps others to develop good CG (Ahern, 2010). In addition to this, comply or explain is a right approach to introduce different provisions for the small and large firms. This approach identifies that all previsions are not relevant to the small companies. Due to this approach, firms can use other effective ways to improve CG quality and to reduce cost burden (Arcot et al., 2010). It leads to the volunteer application of comply or explain approach within the organisation.

Apart from this, this approach is quite effective to provide firm an opportunity to the understand relevancy of provisions in relation to the business and to reject their application. This could encourage firms to think about the reason of implementing provisions and their role in improving CG. This allows firms to identify different ways of developing good CG and to internalise the principles in their own code of practices.  Comply or explain approach encourages firms to adopt provisions of CG willingly rather than due to regulatory structures and processes (ICAEW, 2016). It influences human behaviour, decision –making and interaction positively, which is most critical to induce ethical behaviour among firms and to the development of good CG.

This is a right approach of developing a good CG in a firm with mutual trust among the companies and shareholders. In presence of trust, it is possible for firms to think about new cost-effective ways of implementing different provisions of CG and to protect the interest of shareholders. The consideration of shareholders towards the organisation’s ways of implementing provisions is critical for the success of this approach. Shared beliefs and institutional arrangements allow a firm to develop mutual trust among the different members of organisation and to implement good CG (Arcot et al., 2010). Thus, comply or explain approach is right approach to develop a good CG by changing the organisational practices internally.

Conclusion

On the basis of above discussion, it can be concluded that auditing profession required adherence of ethical code of ethics and self regulation. Similarly, auditors can discount the influence of manager’s confident from the auditing by developing a detailed plan to consider factors to detect and prevent fraud in financial statements. In addition to this, comply or explain is also effective regulations to encourage firm to adopt different provisions voluntarily that leads to the development of good corporate governance. 

References

Abbas, I. and Iqbal, J. (2012) Internal Control System: Analyzing Theoretical Perspective and Practices. Middle-East Journal of Scientific Research, 12(4), pp.530-538.

 Ahern, D. (2010) Replacing’Comply or Explain’with Legally Binding Corporate Governance Codes: An Appropriate Regulatory Response. In ECPR Standing Group on Regulatory Governance Biennial Conference Regulation in an Age of Crisis, Dublin, June (pp. 17-19).

Albu, C.N., Albu, N. and Alexander, D. (2013) The true and fair view concept in Romania: a case study of concept transferability. Research in Accounting in Emerging Economies, 13, pp.61-90.

Arcot, S., Bruno, V. and Faure-Grimaud, A. (2010) Corporate governance in the UK: Is the comply or explain approach working?. International Review of Law and Economics, 30(2), pp.193-201.

Bik, O.P.G. (2010) The behavior of assurance professionals: A cross-cultural perspective. Eburon Uitgeverij BV.

 Bowlin, K.O., Hobson, J.L. and Piercey, M.D. (2015) The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4), pp.1363-1393.

Danescu, T. and Spatacean, O. (2011) Assessing complience with corporate governance principles in case of Romanian financial investment companies. Annales Universitatis Apulensis: Series Oeconomica, 13(2), p.350.