Auditing environment in United Kingdom and Bulgaria

Auditing for listed companies is one of the areas in financial accounting and management that is complex and does not seem have been comparatively explored. In this case, few literatures discussing sector auditing exist and this is one of the reasons why this research is important. There are many changes happening in different fields or professions in the modern world and these changes have an influence in their effectiveness. Auditing is not exceptional because for instance with changes in information technology, audit professionals have examined and accepted to include technology in their work. This among other developments is helping both the internal and external auditors to work more diligently and faster while finding ways to overcome negative changes.  (Sutton, 2000).

In most countries, auditing for private listed companies is a compulsory requirement to allow transparency to the shareholders and other parties such as tax authorities. This paper will examine the value or the importance of carrying auditing on listed companies in both UK and Bulgaria by discussing different aspects that are related to the topic.

System of auditing plays a very important role in maintenance of economic and financial order and thereby improving the accountability and transparency. The reason why researching on this particular topic has been considered important, is that there are fewer literatures elaborating and discussing on the concept of auditing in the listed companies (Beattie et al. 2015). Around the world, there are several changes that are occurring which influences the auditing as profession. Profession of auditing is being examined because of changes in the technologies and calling for the need to incorporate the concept of technology in the auditing profession. Such development would contribute in effective and diligent workings on part of both internal and external auditors to organization so that any negative changes are overridden. In many countries, it is mandatory on part of listed companies to conduct auditing of their financial matters that would helps in disclosing transparent information to key stakeholders such as tax authorities, credit rating companies and shareholders.

During the last decade, the auditing environment of United Kingdom has witnessed significant changes. There has been a relative shift in the demand and cost parameters concerning market of audit services due to various reasons such as economic recession, introduction of registration and monitoring of auditors, ethical guidelines relaxation relating to solicitation and advertising. Undoubtedly, the structure of audit market services have been impacted by such changes whereas making casual inferences is quite difficult. It is indicated by recent evidence relating to the listed company market in UK that both the client auditor’s relationship instability and concentration of sellers have increased (Hawas and Tse  2016). The UK listed companies have witnessed reforms due to the successive impacts of recession and scandal in late 1980’s and early 1990’s.

Bulgaria is a country that was too backward in terms of business activities with scare larger corporations, poor people and desperate capital. The financial auditing in the country was developed under various stages with distinctive features. A statutory professional organization of independent auditors was developed. The activities of auditing are carried under the professional and state regulations. Some of the globally accepted standards such as ISA (International auditing standard) and IFRS (International financial reporting standard) regulates the accounting and auditing practices in the country regulates the auditing activities requiring entities to comply with their own principles (Ertürk 2016).

Background of study

The objective of this research paper is to provide perspective on the importance of auditing for listed companies by examining the corporate governance and external and internal control mechanisms. It also intends to give discussion on the evolvement of auditing for curbing the corruption, theft and bribery activities in organizations. The study on the importance of auditing in organizations has been deriving from the role in fighting against corruption. In many studies, there has been separate discussion on the motivations and determinants of corruption and governance role of auditing. Meanwhile, fewer attentions have been paid to the role of auditing in curtailing corruption. The importance of conducting and having sound audit has been of a broad consensus and it is increasingly recognized that the accounting actors are at the forefront for fighting against the accounting scandals at global and national levels. Auditing practices has played an important role in preventing and detecting the corruption practices by ensuring that management has effective method in place. The root of profession of auditing has evolved in the private sector where stakeholders are not concerned about the audit against corruption. They are more inclined towards theft or fraud of their assets. In addition to the issues concerning the auditing practices, the concept of government auditing can be illustrated in the next paragraphs. The fundamental purpose of government auditing is to ensure, monitor and appraise the government accountability. It has been indicated by practices of government in many countries that a unique role is played by government in curbing corruption (Campa and Donnelly 2016).

The rationale of the study is to elaborate the concept of auditing by explaining it in terms of various aspects such as corporate governance, corruption, investment decision and taxation. Quality of financial reporting presented by organization is one of the areas of concern with statutory audit being the important element of process of financial reporting where the objective is to provide independent verification of the financial report. Several questions were raised about reliability and quality of audited information because of failure of number of large companies. In addition to this, the study rationale is to conduct whether agency conflicts between controlling and minority shareholders that would affect the decision of firms to purchase non audit services. The appointment of auditors in organization is concerned with the governance aspects. Auditors in an organization are appointed by stakeholders from legal perspective where they are appointed formally by the audit committee or the board (Capodaglio et al. 2015).

The aim of conducting this research is to evaluate the importance of auditing for the listed companies of UK and Bulgaria.  Such evaluation is done because of changing auditing environment and the stakeholders seeking more transparent information due to greater access to technology. The main aim of carrying out this research is to identify and discuss the value of auditing in listed companies in UK and Bulgaria especially because the auditing environment is changing by day due to greater access of information from the internet.  

Rationale of study

The objective is of this research paper is to identify the value and benefits of auditing practices in private and listed companies. It also intends to examine the environment of audit of the entities listed on stock exchange of UK and Bulgaria. For this purpose, one company listed on UK stock exchange and another company listed on Bulgarian stock exchange has been selected. The analysis is one the case study of Royal Bank of Scotland, Max well communication and corporation bank. Moreover, the objective is to identify the ways that helps in improving the auditing practices of listed companies. It also takes into account the advantages and disadvantages of carrying out audit of listed companies in both the countries (Minhat and Abdullah 2016). An investigation into the fraudulent disclosure practices of organization due to lack or improper auditing practices has also been evaluated.

• Can corporate social responsibility be considered as an appropriate strategy for dealing with accounting and financial scandals?
• Should stakeholders be involved in the selection process for each potential stakeholder according to their ranks?
• What are the challenges faced by listing companies of UK and Bulgaria in conducting auditing practices.
• Do the auditing firms charge an audit premium fees to the listed companies in UK compared to its competitors?
• What are the challenges that the listed companies face while carrying out their auditing practices?
• What is the extent of auditing for PLC companies in UK and Bulgaria?
• How can private sector companies in UK and Bulgaria start auditing the value of their financial statements?
• What are the challenges faced during and after auditing of PLC companies in UK and Bulgaria?
• In what ways can the value of auditing be improved?

Ho= A higher level of corporate reporting is associated with high level of practices of fraudulent disclosure.

H₁= A higher level of corporate reporting is not associated with high level of practices of fraudulent disclosure.

The current research paper would help organizations in understanding the importance of relationship between fraudulent disclosure practices and corporate social responsibility. There would be enhanced accounting scandal disclosures if there is an adequate corporate disclosure practice. The importance of government auditing system has also been demonstrated that is deliberated to improve accountability and transparency (Alzeban and Sawan 2015). Organization would be able to understand the requirement of corporate practices in sufficient disclosure of their financial records.

Impact of board ownership and composition on audit quality:

The intensity of auditing process is impacted by the structure of ownership of board. It is suggested that a particular reliance is placed on auditing by the shareholder with diversified ownership and such reliance is placed by way of monitoring the managerial behavior. It is expected that there would be greater reliance on audit by the shareholders as governance mechanisms as direct monitoring has become costly with ownership becoming more diversified. An extensive auditing is encouraged in organization by the mangers with diversified ownership. In event of organization with more concentrated shareholders, managerial behavior is actively monitored by the block shareholders having greater incentives due to their equity size holdings (Akinsoyinu 2015). It is anticipated that the quality of auditing process would be improved in a number of respects by the increased representation of non executive in the board. This is so because all the matters about the auditing process are discussed by the external auditors with the non executive members being free from any managerial influence. Secondly, compared to executive directors, non executive directors are expected to greatly emphasize on the audit extent and quality rather than the cost. In addition to this, in order for non executive directors to complement their own responsibilities leads to favoring of extensive auditing (Ghafran and O’Sullivan 2017). An organization witnesses a reduced requirement of an intensive auditing because ownership managers serve to align with the shareholders and managers interest. Due to this, auditors have a less likelihood of undertaking additional testing’s when a significant portion of equity is owned by managers. Such increased ownership would make them to have less incentive to provide shareholders with misleading information. On other hand, managers have increased incentive to falsify the financial records and disclosures when they have small stakes in the equity (Christensen et al. 2016). However, some of the evidence from some government studies has depicted that the managerial ownership has a non linear impact. It is suggested that a consistent decline in the shareholder returns have been witnessed due to high level of managerial ownership. It is suggested by such findings that there is an inverse relationship between managerial ownership degree and auditing extent and ultimately the associated audit fees (Beattie et al. 2015).

Research aim

Government auditing is an arrangement in the modern government governance for ensuring, monitoring and appraising the government’s accountability. It is indicated by the governance practices in many countries that a unique role is played by government auditing in curbing corruption. The underlying corruption is investigated by the auditors who are effective in detecting frauds in financial reporting (Biolcheva 2016). Making the audit reports to known to individual bureaucrats and public and to the possible bodies can intensify the government auditing deterrent effect. There has been a separate discussion on motivation and determinants of corruption and the governance role in auditing revealed by many studies. However, little attention is given on the finance corruption while corruption focusing on the dealing with power of money and bribery in banking and economic areas. Contrary to this, the main focus of literature concerning government auditing primarily focuses on professionalism, independence and auditing input and how the reputation and efficiency of government departments are affected by such factors (Barakat et al. 2015).

It is stated by the classic audit theory that auditing quality is the probability that the breach in the accounting system of client will be reported and discovered by auditors. A complete characteristics framework is proposed by government audit where the factors impacting government audit quality is divided into independence factors, technical factors and administrative factors. Government auditing plays a very crucial role in listed government companies sector and thereby contributing to auditing process efficiency (Campa and Donnelly 2016). Such auditing contributes by way of reducing wasteful spending and policies transparency. There is improved government governance in terms of control of corruption, accountability establishment and government efficiency promotion (Beisland et al. 2018).

The United Kingdom’s company laws illustrate the rules and regulations that should be followed when it comes to auditing of either private or listed companies. For instance, they outline the powers and roles of auditors in detection and reporting of operational and financial misconducts of management. In this case the laws demand for the independent of the auditors to make sure they carry out their statutory duties without favors or biasness (GOV. Dep of businesss, 2014). As part of corporate governance mechanism, an audit committee is also a requirement in the auditing practice in UK which supports external auditors in their work.  The auditing market in UK is dominated by four big companies which has branches all over the world. These four include Klynveld Peat Marwick Goerdeler (KPMG), Deloitte, these firms are PricewaterhouseCooper (PWC) and Touché and Tohmatsu (DTT) (Beattie & Fearnley,1995). The four among many other smaller auditing companies have been ensuring that the auditing practice stays alive and effective despite that there are consistent corporate accounting scandals.

In Bulgaria, the company laws on auditing advocate for the same principles as other countries in the world especially because accounting and auditing practices are regulated by globally accepted standards such International Financial Reporting Standards (IFRS) and International Standardsof Auditing (ISA). In addition, the independent financial audit act in the country also regulates the profession by ensuring the independence of auditors. Bulgarian institute of certified public accountants however regulates the auditor’s practice and due to harmonization of European legislation and Bulgarian Independent Financial Audit Act, UK and Bulgaria auditing operation for private and listed companies are closely related (Active Consult Ltd, 2013).

Research objectives

Audit in UK is conducted in five main stages and they are as follows:

Planning stage- In this initial stage, client is accepted by the auditors and deciding about the nature of work to be performed and its timing and putting the arrangements into place.

Assessment of risk- Identification and analysis of the risks pertaining to the concerned business are done by the auditors along with targeting considerable amount of work. 

Audit strategy- Risk in this stage is addressed by performing specific test and identification of such areas. 

Evidence gathering- Gathering of evidence is the stage where the actual testing stage is done and identification of any discrepancies are discussed with the management.

Conclusion- In this stage, evidence is gathered and conclusion is made about the absence of material information in the financial statements. 

The process of conducting audit in Bulgaria is done in several stages and they are listed below:

Step 1: Assessment of the gap

Auditing of the target institutions is done by meeting the minimum requirements of EC regulation No 1266/1999. The gaps regarding the different aspects in relation to the selected organization are analyzed. The existing problems in the system are identified. Any weakness in the internal control systems of companies are analyzed and evaluated.

Step 2: Gap plugging

In the next stage, in relation to the weaknesses that have been identified in the stage 1 are dealt with implementing and preparing action plans.

Step 3: Assessment of compliance

Compliance assessment of the organization is done for determining whether they meet the minimum recognition criteria and submission of same should be made to the EDIS.

Step 4: Verification of audit

Verification of the audit program has been conducted whether the material shortcomings have been disclosed or not.

Auditing of the financial information might also come with some flaws and they are listed below:

Misleading clarification- Auditors might to fail to disclose true and actual information and thereby fail to provide assistance to the management.

No correct view and true picture- The true picture of book of accounts might not be presented by auditing in event of manipulation by auditors.

Auditor’s biasness- Fair examination of the financial report might not be done by auditors because of lack of independence.

These companies has a lot to gain when they agree to perform auditing as recommended by the internationally agreed upon principles and standards. One of the benefits of auditing for listed companies is that auditing raises their capital through issue of shares. The fact that the companies are listed and the public can access their audited financial statements easily, can attract many investors who not only buy shares but also invest on hedge funds or mutual funds (Hay &Cordery, 2018). Secondly, as they widen their shareholding in the company, they are spreading their risk of ownership, which means that risk per shareholder is minimized. Thirdly, a company that wants to be publicly listed gets a chance to be join the capital market after fulfilling the audit requirements needed under securities and exchange commission (Li, Dai, Gershberg&Vasarhelyi, 2018).

Research question

Another importance is that auditing leads to reduced costs in terms of lowered cost of capital and avoidance of agency costs. Dealing with agencies costs money and also, they might give wrong information due to conflict of interests. On the other hand when a listed company provides audited financial statements they reduces information risks and creditors may change lower interest rates while investors may accept lower rate of return on investment (Li, Dai, Gershberg&Vasarhelyi, 2018). Public sector is more prone to accounting and financial scandals than private sector and auditing is the only way that will reduce chances of inefficiency and fraud (Hay &Cordery, 2018). Finally, after the auditing is complete the company can benefit from the operational and financial control recommendations provided by the independent auditors and this will improve their efficiencies.

Auditing help in evaluating the effectiveness of internal control of the company as well as enhancing effective systems of internal controls that proves important for attainment of business objectives (Arenset al. 2016). Addition to that, both internal as well as independent auditors need to contribute to audit system of companies in varied ways.

The case of Royal bank of Scotland is presented that failed in October, 2008. The bank was vulnerable to the failure because of the poor decision made by the board and the management of RBS. The bank was set up in early 1700’s and providing customers with the overdraft facilities was one the main overdraft offered by this bank. It was a insurance holding and British banking company that is based in England. There was a wide variety of banking brands through which the group operated that offered private banking, business and personal bank, corporate finance and insurance throughout its operation in North America, Europe and Asia. The government of UK rescued the RBS group in year 2008.

The financial world has been rocked by the corporate scandals of United Kingdom companies. The cases of BCCI, Robert Maxwell group; Polly Peck and GlaxoSmithKline have played a role of catalyst in driving the corporate governance practices in many countries. GlaxoSmithKline is a global health care company of United Kingdom that is well known for its products such as Ventolin and Advair. The organization started in year 1715 as a small apothecary shop in London that evolved through a series of strategic mergers in other countries. The company has faced allegations for its unsafe and unethical business practices and in year 2012, guilty was pleaded by GlaxoSmithKline for conducting federal criminal offenses. Crimes committed by company included their failure to report safety data to Food and Drugs administration about the diabetes drugs along with misbranding of its anti depressants such as Wellbutrin and Paxil (Minhat and Abdullah 2016). In addition to this, they also admitted to illegally promoting of its depression treatment drugs in children.

The Maxwell communication following the acquisition was in deep debts and such borrowings comprised of company as well as personal accounts. The debt was piled up by way of pledging of assets under control. In addition to this, it was also discovered that the same assets have been pledged by Maxwell as collateral for various loans. An acute financial difficulty was experienced by Maxwell and it was only kept afloat by shifting of funds by way of relentless deal making, misappropriating pensioner’s fund and inter locking of private companies. Despite the eroding financial condition of Maxwell with debilitating debt payments and declining cash flow, the annual auditing report was passed by the auditing firm Deloitte which is one of the Big four auditing firms (Willesson 2015). The passing of annual audit made Maxwell to add on more debt. Furthermore, a wave of uncertainty was triggered among creditors and lenders due to untimely death of Maxwell that ultimately led to the collapse of organization.  

The failure of Corp Bank of Bulgaria represents the four largest bank failures. Corp bank of Bulgaria served both as an investment and traditional commercial bank and it was one of the fourth largest banks in terms of net profit, net assets and growth of deposits. The Corporate commercial bank was closed down by the Bulgaria national bank. All the client payments were suspended by when it ran out of liquidity. However, the bank sought support of institution of central bank of Bulgaria for protecting the interest of customers and depositors (Katmon and Al Farooque 2017).

Despite that auditing is important for listed companies there also some limitations attached to it and these include the extra costs incurred. This is so because the auditing services are to be paid for and again the exercise leads to disruption of the company’s operations as the auditor tries to gain attention of the staff. Secondly, the evidence gathered through auditing may lead to negative exposure to the company especially when the auditor can prove some mismanagement of funds (Hogan, Rezaee, Riley, &Velury, 2008). Again, the same evidence may also be pervasive and still cause the damage despite not being conclusive enough. Thirdly, auditing in listed companies can lead to unexpected and unsuitable changes as recommended by the auditors in the verge to help the company improve its effectiveness in financial accounting. Due to ineffectiveness of corporate governance it is possible that an auditor increases chances of fraud happening because the management might harass and force the auditor to report according to their demands (Salehi, 2007). This will affect perception of company performance and end up making wrong investment decisions.

The financial management team in these companies should have a clear and strategic view for the roles of accountants in the company, the internal auditors, and external auditors as well. This will provide a lucid and strategic basis for gaining improved quality and consistency of internal and external audit. The leaders in the accounting and auditing divisions should be empowered so that they can provide professional leadership that is agreement with the strategic view of roles prepared by the management team. They will also be guided on how to maintain professional excellence in their work at all times (Salehi, 2007). Finally, every employee working under financial, accounting, or auditing division in the company must be comprehensively equipped with national and international accounting and auditing standards and ensure they observe them all. This will improve accuracy and transparency, which in turn saves the company the risk of fund mismanagement.  

Corporate social reporting and accounting scandals:

In recent years, the concept of corporate social reporting has emerged to be an important issue across range of agendas. One of the variables of corporate performance in both financial and social aspect is corporate social responsibility. Transparency and accountability are then primary issues leading to the corporate social responsibility notion (Rai et al. 2014). On analysis, corporate governance is one of the system by which companies are properly directed as well as controlled. The system aims at building cordial relationships with the Board of Directors as well as shareholders in order to check over the corporate strategy and level of performance.

For the UK listed companies, it has been evaluated by the financial watchdogs that the growing competition has resulted into debating around audit quality. It has been proposed that the auditing services should be bid in very five years along with promoting the engagement of shareholders in the auditing process. A welcome development regarding the improvement of auditing prices would be there should be more than myriad rules governing services and appointment of auditors. The oversight regarding the auditing can be improved by providing investors with more information and changing the audit partner at proper interval. It is viewed by UK commission that investors should be provided with the regular views on quality of audit. In addition to this, concerns could be prompted by the greater transparency that audit reviews might be bogged down by legal challenges and disarrangements. The policies on the work of audit committee should be dealt with the involvement of investors and any insufficient disclosure on part of audit committee should be dealt by formulating appropriate proposals (Maroua 2015).

The independent financial auditing act in Bulgaria provides the quality assurance system concerning auditing activities. All the statutory audit and auditing enterprises according to this regulation are subjected to quality assurance under the procedures, rules and plans which the commission approves.  There should be employment of the framework of anti corruption audit that incorporate testing of the compliance program relating to effectiveness. Anti corruption internal auditing procedures should be employed by organizations which comprised of pre site planning and procedures, assessment of risk, fieldwork, reporting, follow up and remediation (Magdalena 2016).   

Some of the research paper has found that there is negative relationship between quality of audit and level of tax aggressiveness and such relationship have been found to be more pronounced in the countries where the capital market pressure is higher, auditing environment is better, protection of investor is strong, and risk of auditor litigation is higher. The tax authorities are faced with an important question about the impact of tax audit on the voluntary compliance. Organization is faced with the question that whether they would change their filing behavior for reporting on the liabilities concerning higher tax without conducting the audit (Wojciechowska 2017). It is argued by the tax professionals that when an additional tax liability is incurred on the firms after conducting audit, it might be perceived by them that their activities are closely monitored and any attempt to cancel their revenue would get caught. Therefore, higher sales revenue would be reported by the firms in event of conducting audit.

The good tax policy is widely associated with the effectiveness of taxation system and they are regarded as one of the important attributes of the system of taxation. One of the important factors for non compliance is considered the tax legislation complexities. In such scenario, it is anticipated that the complicated tax legislation would negatively impact the effectiveness of audit (Moutsianas and Kosmidou 2016). During the last decade, it is for this reason that the company is trying to simplify their system of taxation. 

Literature identified less documentation of accountant’s role in covering corruption and fraud which is beyond the auditor’s anecdotal evidence of auditors who are instrumental in misrepresenting and falsifying the financial statements for disguising the illicit activities of the clients.  Due to the nature of relationship between clients and auditors, it can be inferred that profession of auditing is vulnerable to the challenges posed by corruption. Such relationship leads to undermining of auditors independence, conflict of interest and impartiality in auditing the accounts of client (Braggion et al. 2017). Some of the research papers on corporate scandal have ascertained that dubious role that is played by accountants in facilitating the schemes of tax evasion schemes and money laundering. The role of auditing profession to fight against the corruption requires clarifying the auditors on mandating the detection of money laundering and corruption, strengthening profession oversight, training the accountants on aspects of anti corruption, participation of citizens in auditing activities and promoting transparency (Fung et al. 2016). The findings generated from recent developments have confirmed that corruption can be combated by sound external auditing. There is a lack of awareness and knowledge gaps between auditing and corruption.

For conducting research on the importance of audit for listed companies, the failure of Royal bank of Scotland case has been identified and evaluated. There are sic key factors that have been associated with the failure of bank. It was found during the review period that the capital position of bank was significantly weak due to inadequate regulatory capital framework and management decision. For the wholesale funding, the bank over relied on short term risky funding. The quality of assets of bank was uncertain and they were subjected to the fundamental analysis by FSA. The supervisory approach of financial service authority and RBA bank underestimated the loss amount that is associated with the structured credit. RBS was one such bank. The risk of systematic crisis increased because of liquidity regulation and poor capital along with the flawed approach. Liquidity run was one of the major causes of failure of RBS (Katmon and Al Farooque 2017).  However, evidences regarding the breach of minimum capital requirement of regulation were not found. There was extensive reliance by BRS on the wholesale funding when it entered the crisis with such funding being the largest in the per group. There was rapid increase in the leverage and balance sheet of RBS while suffering significant losses related to loan. The trading portfolio of RBS had significant exposures to credit risk. The equity buffers of bank were directly eroded by large losses related to fair value in trading activities.

In year 2008, all the banks were someway affected by the market uncertainties intensification followed by the Lehman brothers collapse. Of which the RBS worst affected because of its poor asset quality, capital and liquidity position. After such collapse, RBS had limited access to such overnights market because the longer term funding requirement was not fulfilled y the market participants. For the assistance of liquidity, RBS became dependant on the Bank of England after such crisis. Some of the reasons associated with the failure of the bank can be attributable to systematic which is common to all banks. Moreover, the quality of decision making within the bank was affected by the governance structure, management and culture of RBS. The supervisory team of financial services authority identified some of the potential areas of concern such as profit, earnings and revenue per share. Liquidity driver was the immediate driver of the failure of the bank rather than the capital inadequacy. The fact that left bank completely reliant on the bank of England was meeting the funding needs by the unwillingness of the providers of the wholesale money market. A considerable role was played by the losses realized from credit trading in eroding the inadequacy of capital levels and further precipitation the confidence collapse. Primary reason for such losses was because of exposure to the leveraged finance and monocline bond insurers.

The hostile acquisition of ABN Amro which was a big bank having international presence could not be saved from the adverse impact of the credit crunch and it was believed that the bank over paid for such deal. The RBS was pushed into the £ 12 billion for the right issue due to worsening economic and financial conditions. In addition to this, some criticisms were also involved in the indecisiveness over some key business decisions. Nevertheless, bank was collapsed despite being tremendously successful and having massive acquisitions with one such acquisition of AMRO being unprofitable and unsuccessful.

It was recognized by the listing rules that the list entity might find it difficult to comply with the listing rules obligations. For the acquisition purpose and the related circumstances, the working capital statement must be published and prepare by the listed entities. For the enlarged capital, working capital statement must be sent to the shareholders if the acquisition is successful. Such statement should be sent in absence of external circumstances of the offer becoming wholly unconditional. RBS relied on such exclusion whereas there was no issuance of enlarged working capital statement within twenty days of the offer. It was required b y RBS to provide justifications on a number of occasion where extended period of delay was unprecedented.  

Cooperative commercial bank was the fourth largest lender of Bulgaria and the folding of bank came after the auditing of such banks depicted that portfolio relating to most of the loans of banks was missing. It was accused by the central bank of Bulgaria that more than $ 136 million of loans were taken by Cooperative commercial bank in cash. An unhealthily closed tie between the politicians and business community was underscored by unexpected collapse of Corporation bank. The bank was initially closed for rehabilitation; however, revoking of the license never let it opened. The business model of banks was riskier and it stood apart from the business models of other banks in Bulgaria (Andreev 2016). Nonetheless, the external auditors of bank, national bank of Bulgaria and the financial supervision commission regarded Corporation bank as relatively stable.

The factors that was responsible for the bank’s failure was attributable to the internal actors of organization. Increasing capital requirements and economic environment of bank were the main factors that imposed the bank facing such failure following the financial crisis. The major source of subsequent difficulties faced by bank was its merger with the Britannia building society. Major concerns of bank were the increasing cost base and lack of scale (Karim et al. 2015). The merger of bank was against the falling assets price and deteriorating economic conditions.

The Cooperative commercial bank that is based in Bulgaria has various key elements relating to the framework of corporate governance. Existence of deficit in the internal control system of organization had contributed to the ineffective auditing functions. During the financial crisis, 2008 when there was drying up of the wholesale market did not adversely impact the operations of Cooperative commercial bank. However, the prolonged issuing period of lower rate of interest, it has been affected like other building societies and banks. The impact of such crisis has resulted in depressing profitability and net profit margin. One of the potential sources of capital for the bank was the retained earnings and the mutual status of its parent. The financial services authority was prompted by the financial crisis for which then banks were required to increase the quality and quantity of the capital. Total capital requirement of bank was increased by the regulator after the immediate merger of Cooperative bank with the Britannia. Such requirement coincided with the reduction in the capital resources of bank that was caused by the significant impairment recognition on its failed information technology replatforming project and commercial real estate lending. The shortfall in the capital of bank was because of the reduction in the availability of capital and their increased requirement (Bell and Hindmoor 2017). Merger of bank with Britannia was the concern of Britannia because of its position and it was believed by them that they cannot survive without the merger. Some of the risks were well acquainted with the board and the future impairment relating to the risky assets for which the stress testing and due diligence was performed by the management. After the merger, carious senior management positions were occupied by the executives of Britannia which had made to turn out in a different manner. The banks priority should be the capital management and equity market could not be accessed that was apparent to the banks and executives. Furthermore, the limitations of own capability of the bank was not acquainted for which the bank was largely unaware. Some of the damaging aspects relating to the culture of bank included a willingness to accept the diffused or confused accountabilities and poor performance, accepting some key assertions, change and risk management. Therefore, organization should have well designed and sound internal control and auditing systems by the internal auditors Institutes. It is required by the external auditors to verify the banking policies compliance.

This particular chapter demonstrates the execution of research in an effective manner by the employment of different techniques and tools. The methodology of research can be considered as the particular process that intends to outline the philosophical and theoretical approach. Researcher intends to evaluate the empirical findings by creating a link between theoretical framework and the methodology chapter.  The method of collecting data and research design has been presented in this chapter for highlighting the importance of auditing on the listed companies of two countries that is Bulgaria and United Kingdom (Beck and Casu 2016). In addition to this, the rationale of conducting research has been enlightened by the qualitative and quantitative methodology and the research paper also deals with effective in depth quantitative analysis.

The information relating to the research topic can be facilitated in an effective way by conducting research design. Research design is a strategy that is implemented by researcher for integrating different components of study in a logical and coherent way that helps in addressing research problems in an effective way. Exploratory, explanatory and descriptive are three different types of research designs that are employed by researcher depending upon their suitability to research work. Several types of incident pertaining to the research topic are facilitated by the explanatory research design. Explanatory research design on other hand helps in accumulation of relevant data relating to research topic. Descriptive research design would help research in solving the research problem. However, the answers cannot be conclusively ascertained by descriptive study. The information concerning the current phenomenon is obtained by conducting descriptive research. Using exploratory research, researcher would be able to generate different insights of the situation. Observational research design is employed in such case where researcher does not have any control over the experiment and conclusion is drawn by comparing subjects against the control group.

In this particular research topic, the importance of auditing using different aspects has been explained by employing observational research design that helps in enhancing the knowledge. Moreover, an effective analysis has been done relating to the importance of auditing on the firm’s performance.

Research philosophy refers to the assumptions and set of beliefs relating to knowledge development. The source, nature and development of research can be facilitates by highlighting it using the research philosophy concept. Realism, positivism and interpretivism are the three types of philosophies relating to research. Research experiments are performed and different hypothesis are tested using the philosophy of positivism research. An accurate and unambiguous knowledge is promised by such research philosophy and it entails working with the social reality that is observable. Interpretivism refers to value bound research that is subjective and the interpretation of researcher is regarded as key to contribution. Such type of research philosophy is typically indicative and there is performance of in depth investigations. On other hand, the chosen method of conducting research under the realism philosophy should fit subject matters.

Under this current research topic, research has employed the approach of positivism that requires performance of analysis on measurable and observable facts.  The contributory factors for research involve prediction and casual explanation relates the concerned topic. In this, objective stance has been maintained by the researcher. Some factual knowledge has been gained by researcher through observations that is trustworthy and measurable.  Researcher has limited his role to the collection of data and its interpretation in an objective way. However, the findings generated from such study are usually quantifiable and observable. Minimal interactions are maintained by the participants of researcher in carrying out research. The units of analysis have been reduced to the simplest terms where generalization is achieved through statistical probability. In addition to this, research work has progressed through deductions and hypothesis.

Deductive and inductive approaches are the two types of research approach that can be employed by researcher. Under deductive approach, assumptions are developed and thereafter research plan is formed and such assumptions are based on the existing theories. In other words, under such approach, results are deduced from the premises. A set of hypothesis is formulated by the researcher using this approach and thereafter hypothesis is tested. It is required by researcher to understand the specific characteristics of deductive reasoning. The conclusions must be necessarily accepted if the deductive reasoning premises are accepted. Arguments presented under the deductive approach can be valid or invalid and there is no validity degree. Inductive approach on other hand begins with specific observations that lead to generalization. In this approach, the conclusions to all the groups can be generalized by correctly selecting the number of observations.

Under the topic concerned, researcher has employed the deductive approach to research where the first step of the auditing concept requires specification of basic knowledge of auditing. The nest step of stating the objectives of auditing is somehow dependent upon the first objective. After then, the deductive reasoning is used for drawing rules, principles and procedures from the principles that are already been established. Furthermore, the next stage requires researcher to demonstrate the application of auditing within organization and how its influences the performance of firms.

The section of research methodology demonstrates the process of data collection that helps in enhancing the researcher knowledge on the impact of auditing system on the performance of listed entities. For conducting the analysis of data in an effective manner, researcher has utilized the employment of different techniques and tools. In order to gain an understanding the research topic and gaining considerable amount of knowledge relating to the topic concerned, researcher has employed the secondary data collection process for gathering secondary data from secondary sources. In addition to this, in order to execute the research topic in an efficient manner, both qualitative and quantitative analysis have been done.

Secondary data have been collected from secondary sources such as prior research papers on the importance of auditing in organization, case study relevance on impact of auditing on listed companies for separate countries such as Bulgaria and United Kingdom. Some of the qualitative information has also been extracted from the annual report of banking organizations. Additional information has been gained from research paper using different sites such as emeraldinsight and sciencedirect.com. Facts and figures relating to the analysis of the topic concerned have been evaluated by researching different research papers relating to the topic.

Primary and secondary data are the two types of data that is collected by researcher to evaluate the topic concerned. Primary data are the data that are collected directly from the field of enquiry while secondary data are the data that are gathered from already published articles and research paper. In addition to this, secondary data is also gathered from other relevant papers and report prepared by organization. In this particular research paper, qualitative and quantitative data analysis has been done whereas qualitative analysis deals with the evaluation of the facts presented in already published research paper. Quantitative data is about the analysis of number and figures presented in the other research paper and report that the organization published presenting their financial performance and its relationship with the auditing system.

The source of secondary data is based on the case study of failure of Cooperative commercial bank of Bulgaria and Royal Bank of Scotland. Data relating to the failure of both the listed banks of United Kingdom and Bulgaria is collected from the paper published by institute of certified public accountants in Bulgaria, Chartered Institute of internal auditors, international journal of financial research, journals of accounting research. Other data has been derived from the information network database and statistical yearbook published by both countries. In addition to this, some other research paper and accounting journal presenting the facts and circumstances leading to the failure of these two banks have also been analyzed.

Quantitative and qualitative analysis are the two categories of data techniques. For quantitative analysis, researcher is required to critically analyze the interpretations of numbers and figures and supporting the generation of findings using proper rationale. Performing quantitative data analysis requires researcher to choose from a set of standard and specialized techniques of data analysis. Both the method of data analysis helps in enhancing the research depth in an effective manner. Quantitative analysis depicts how conducting audit is important in determining the performance of organization. Qualitative analysis on other hand demonstrates the challenge that the organization has faced due to ineffective auditing system. Researcher in the current research paper has employed qualitative data analysis techniques for the evaluation of data that have been gathered from secondary sources.

In order to execute he research in an effective manner, researcher is required to obtain the approval and consent of compliance programmer and audit committee. Managers and other executives of the failed banking organization should not be compelled for providing them with inside information relating to the matters. There would be strict prosecution of some unethical and wrongful acts done while conducting research. It has been said that for several work related to auditing areas and accounting profession, maintaining ethical code of conduct is considered as deemed essential. Moreover, it is indicated by the study conducted that the quality of auditing is positively impacted by the rule of professional conduct and auditors commitment to well known auditing standards.

This particular research project has several limitations. Accomplishment of the project within the stipulated time frame is one of the prime issues faced by researcher. Due to the time shortages, researcher accumulation of the information on the concerned topic is considerably difficult. Difficulties have also been experience by researcher in conducting the qualitative data analysis along with the management of the appointment of managers and executives of banking organization. Execution of the quantitative method was relatively cumbersome because of the absence of experienced executives. One of the reasons that led research working not to get it completed in the given timeframe was the problems associated with arranging for the budget.

Activities related to research	0-4 Weeks	3-7 Weeks	7-11 Weeks	11-15 Weeks	15-19 Weeks	19-23 Weeks
Selection of research project
Secondary data collection
Procedure of making layout
Conducting Literature Review
Research plan proposal
Selected techniques of research
Collected data analysis
Finding of data
Drawing Conclusion
Rough draft
Submission of research work

Evaluation of the data has been done by gathering information that are sourced from several accounting journals, research papers, websites and financial report of the selected organizations. Analysis of data has been done in different contexts such as taxation system, corruption, corporate governance and investment decisions.

Under qualitative data analysis, researcher blends together empirical and abstracts by creating new theory and concepts. It relatively diffuse, imprecise and bases its conclusion on the context. The subsequent data collection is guided by the analysis of qualitative data and it forms the part of less distinct final stage of process of research. Such analysis is a process of making sense from opinion and views of participants of researchers that is corresponding to theories, themes and similarities (Wang 2017). In this particular section of research paper, the qualitative data analysis of the case studies on the failure of two banks of United Kingdom and Bulgaria has been demonstrated.

The failure of the Royal bank of Scotland (RBS) had resulted huge cost imposition on the citizens of United Kingdom. Case study on the bank failure depicted identification of multiple factors that contributed to the failure of RBS. Amid the general financial crisis, the factor that lead to failure of bank judgment and execution errors made by the management and executives of RBS and such decision came with commercial consequences. The likelihood of systematic crisis that occurred during the failure resulted from describing of deficiencies in the overall bank regulation global framework.

One of the factors responsible for failure of the RBS was its poor decision of merger with ABN-AMRO and its significant role in triggering the downfall. The due diligence that formed the basis of merger was clearly inadequate relating to the risks that have been entailed. There was no appropriate heeding to the risks that was involved on part of RBS precedence for merger with AMRO. In addition to this, compared to the peers, RBS chose to be capitalized lightly and there was significant employment of lower quality capital with further weakening the capital position resulting from acquisition along with increasing reliance on short term wholesale funding.  The adequacy of capital of RBS was eroded by the decision of management to fund the acquisition primarily by the usage of debt. Acquisition of AMRO have increased the exposure to assets class and structured credit that took up the large amount of subsequent losses (Roussakis 2016).

The decision made by the management and board of RBS were poor and retrospect and bank ultimately failed due to the risks taken. Such poor decisions had been due to factors such as governance, management style and culture. The judgment and flawed analysis have resulted from individual poor decisions with systematic reason being the unstable entire financial system instability. In addition to this, the attitude of bank towards the growth and risk, arrangement of governance, capabilities of management, mechanism for oversight and challenge and balances and checks suggested a pattern of poor decisions. The chief executive officer of bank received insufficiency challenge from board and was dominant relating to oversight and governance assessment. Control and system along with the decision making of the bank has fallen short of the best practices. It is recalled from the analysis that limited interest was depicted by CEO on the balance sheet towards the strategy. Loan books were further written down due to the hedging funds that ran the loss and profits (Sotirova et al. 2014). Furthermore, the governance, management and culture of the bank due to their judgment matters and nature are difficult to assess precisely even because of contemporaneous documentation.

A significant amount of direct cost was imposed on the tax payers of British due to the failure of RBS. The lessons that have been identified due to the failure concerning the regulation, management and supervision of banks would help in ensuring that the future cost imposed due to failure would not be imposed on the tax payers. The reduction of standard relating to capital measures regulations has been due to the operating loss of ? 8. 1 billion of the ? 40.7 billion. The bank generated consecutive loss due to the failure of amount ? 40667, ? 2595 and ? 399 in year 2008, 2009 and 2010 respectively. A net accounting loss of ? 30.7 billion was generated by RBS that reflected other expenses and income net of tax of amount ? 50.0 billion. The auditing firm Deloitte made no adjustments as they agreed with the assessment made by the Audit committee of the group. It was assessed by the audit committee that in context of total operating profit of ? 10.3 billion, ? 200 million was immaterial and the profit after tax of amount ? 7.7 billion (Kantchev 2014). Therefore, the unadjusted difference of ? 200 million was considered to be immaterial by Deloitte and Group audit committee.

Failure of Cooperative commercial bank of Bulgaria was the fourth largest failure and it was found that the audit that a 4.22 billion was levied that created hole in troubles bank account. Cooperative commercial bank is also known as the KTB that was the fourth largest lender by assets. After the bank ran out of liquidity, all the client payments were suspended by the Corp bank. Since 1990s, it was the first bank to collapse in East European country. The failure of the Commercial bank after it was revealed by the audit work that most of the records relating to the loan portfolio were missing. The bank was accused of taking or borrowing $ 136 million in cash (nytimes.com 2018).

The problems of Bulgarian banking system included foreign criminals and money laundering. The license of the largest lender of Bulgaria was revoked by the central bank of Bulgaria that has moved to open the proceedings o bankruptcy. It halted all the activities of the bank that opened the way of all the payments relating to more than half of the deposits. It was opined by the central bank that the auditing during that particular period has depicted a write off of shortfall of $ 2.4 billion and negative capital of $ 3.75 billion (Ruiz et al. 2016). A meteoric rise was experienced by bank as it became the lender of choice due to corporate establishment and political scenario of country. It was found that the rapid growth experienced by the business was not due to the solid foundations but due to the adoption of corrupt business practices. The main shareholders were engaged in the dubious business deals. Furthermore, it was indicated by the audit work that bank was required to write off almost two third of its assets resulting from bad business practices. It was revealed by audit that the valid collateral loan of Cooperative bank comprised of only thirteen percent of the total amount of loan. The outside exposure of bank was linked with the shareholder as reveled in the preliminary audit (Wilson et al. 2018). Large depositors and bondholders prompted lawsuits resulting from the bankruptcy of Commercial Corporation bank.

Conclusion:

The research paper is mainly prepared for evaluating the impact of auditing system on the performance of organizations. Selected organization involved listed banks of United Kingdom and Bulgaria that is Royal bank of Scotland and Cooperative Commercial bank. For this purpose, evaluation has been done using different aspects such as taxation, corporate governance and investment decisions. There has been adequate presentation of the importance of audit for the listed companies and how the effectiveness of auditing system of listed firms can be enhanced. The section of literature review presents the role played by audit in fraud and corruptions, impacts of board’s composition on quality of audit and taxation system and auditing (Turksen and Ryder 2015). From the analysis of the data extracted from the several reports published by the different bodies presenting the case study of Bulgarian bank and RBS, it was ascertained that the major reason contributed to the failure is the ineffective system of auditing and internal control system.

While aligning the findings generated from the analysis of data and the objectives of research paper, it can be seen that the paper has well addressed that would help in identification of the major causes leading to the failure of chosen organization. It can be seen that the auditing system plays a significant role in maintaining the efficacy of business performance. The analysis of case study has placed the blame for the occurrence of corporate accounting scandals in the individual managers and executive’s hand. Research findings say that one of the significant aides to legitimacy is provided by the corporate social reporting that would help in avoiding accounting frauds (Willesson 2015).

The weakness in conducting the analysis of this research paper is lack of sufficient availability of data and partial responsiveness of different stakeholders to the identified causes. Researcher would have been able to obtain the broad picture of study if the in depth analysis of study is conducted using some other different techniques (Wadhwani 2016). In addition to this, if the research has been conducted based on primary data, some more factual information relating to the topic concerned could have obtained.

The current research addressing the importance of auditing system and its effectiveness in the listed companies can be extended to various directions. An approach that would yield promising results in dealing with the bankruptcy could be implemented by the combination and forming an integrated model. Furthermore, extension of research work can be done for including additional variables that are non financial such as auditing fees, size of auditors, market share of firms and experience of managers. Finally, once the implementation of International accounting standards are done, researcher would be provided with the option of considering country specific variables across several countries having a sampled pool.

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