Corporate Accountability For Social And Ethical Auditing – Importance For Auditors

Financial Crisis and the liability of the auditors

Discuss about the Corporate Accountability for Social and Ethical Auditing.

The present study focuses on different issues associated to the responsibility of the auditor especially during the time of global financial crisis that hits the entire society. During the period of financial crisis, the financial auditors are unable to provide reasonable assurance that the financial reports of the corporation are not tainted and do not contain the material errors. The outcomes from the Australian Auditing Standards, indicates many users rely on financial declarations of firms as the primary source of information. This is because the users of the financial information are incapable of obtaining additional information to meet specific information needs. The present report to the partner of the Chartered Accounting firm, Sally Smith, expounds the auditors’ liability during the global financial crisis to enhance the overall system of audit. The purpose of the current study is to examine the influence of financial crisis and macroeconomic fluctuations on liability of auditors in a comparatively regulatory environment.

The current section carries out a detailed analysis of the financial crisis and the associated liability of the auditors’. The representative times of different financial instability are necessary to comprehend the notions of crisis (Messier Jr 2016). However, there is manifestation of different challenges from the economic, political as well as social environment. The global financial crisis refers to the period of tension, disorder as well as critical testing that is manifested in the society. Therefore, the economic crisis is mainly owing to the difficult state of affairs of different economic actions, a break and an alteration that can exemplify the slowdown, stagnation, stagnation or else the decline in the economic actions (Messier Jr 2016). Therefore, the financial crisis is a state of manifestation of different economic crisis that reflects mistrust in the entire financial system, a significant decline in the transactions on the stock exchange and a disorder of market transactions (Schmidt 2012).

As rightly put forward by Holm and Zaman (2012), the financial crisis might be considered as an opportunity to rectify different aspects of the financial system, mainly the shortcomings that have directed towards the economic slowdown. The government and international institutions can overcome the ill effects of the economic crisis by guiding the system of international financial reform that can help in maintenance of transparency, improvement of regulations on securities account, proper regulation of markets, maintenance of integrity of financial markets that can strengthen the overall cooperation between the financial corporations in the world (Holm and Zaman 2012). The financial system requires increased transparency as regards different aspects. As such, the financial market players play a major role in the process of mediation that is not limited by stringent rules on reporting. Therefore, the establishment of different regulations on different activities and reporting can help in the process of reduction of the volatility at the time when the market condition worsened. The development of different financial instruments is complicated for the purpose of the determination of the price and raises the risk of the investors (Louwers et al. 2013). Furthermore, the possibility of appropriate assessment of the risk and identification of the origin that bear the risk can help in enhancement of the regulation as well as supervision of the financial system.

Continuance of the client association

Under the Auditing Standard “ASA 700” (Forming an Opinion and Reporting on a Financial Report), there is a segment on “Auditor’s Responsibilities for the Audit of the Financial Report” (paragraph 37 to 40 ASA 700) (Louwers et al. 2013). As per the regulation, the responsibility of the auditor includes presentation of the financial statements and the auditor needs to provide approval and agree with the compliance statement of the firm. In addition to financial reports, the auditors need to address other reporting accountabilities along with the financial reporting such as the Report on Other Legal and Regulatory Requirements (Ye and Simunic 2013). Therefore, the objectives as well as general notions that govern the audit of different financial statements are to enable the auditor to express an outlook regarding the extent to which the financial declarations are prepared in different material aspects and in accordance with the applicable framework for financial reporting (Ye and Simunic 2013).

As a professional, the assessor is accountable for issuance of opinion on different financial statements of a business entity. At the time of performance of the audit, the financial assessor needs to assume huge responsibility as per the terms of the audit engagement and the nature of financial services rendered (Allen and Ramanna 2013). The liability of the auditors is essentially the wording of the terms of the audit engagement and with signing the letter of engagement; the assessor agrees to define the terms as well as the type of mission that will be compliant with the auditing standards. The assessor also agrees to establish different objective mission that refers to the identification of different financial reports that needs to be assessed along with the reporting structure (Allen and Ramanna 2013). In addition to this, the auditor needs to exercise the professional scepticism at the time of determination of the nature, duration as well as extent of the audit procedures and evaluation of the evidences of the audit as well as results in order to recognize that the financial statement are free of material misstatement (Koh et al. 2013). 

Generally, the responsibility of the auditor is to review the quality of the financial reporting. The financial audit can help in maintenance of the quality by competing and signing pertinent sections of the audit programs, signing and dating the working documents and analysing as well as synthesizing different elements of balance, profit and loss (Koh et al. 2013). In general, the auditor is also responsible for the maintenance of internal control and detection of the risk arising out of both error and fraud. The detection of error involves identification of the wrong mathematical calculations, misinterpretation of diverse facts and misapplication of the different accounting policies (William et al. 2016). However, detection of fraud refers to the liability of assessor to recognize the diversions as well as thefts of different assets, removal or else omissions of different effects of financial transactions on the financial declarations along with misapplication of different accounting strategies that might mislead the users of the financial information.

Again, the economy is badly affected by the global financial as well as economic crisis that in turn affects both enterprises and regional government budgets. The engines of growth need to send home the members of staff of different organizations and the opportunities of funding are also lower. In periods of economic crisis, the assessors therefore need to undertake different challenging tasks to handle the uncertain and at the same time unstable situations (Fontaine et al. 2013). Subsequently, the liability of the auditor is greatly augmented in different economic situations. The auditors therefore need to deal with great risks presented by an uncertain or else difficult economic environment by maintaining the continuance of the relationship with the client, communications with those having oversight responsibility for financial reporting and communications with management (Fontaine et al. 2013). In addition to this, the assessors also need to take into account different consideration regarding the going concern, planning the audit strategy, comprehending the business entity and its environment, auditing different fair value enumerations, audit considerations for different financial declaration, superannuation plans and disclosures regarding financial reporting and opinions of the auditors (Zadek et al. 2013). 

During the period of economic crisis, the management of different corporations might have made changes to different business practices and internal controls that can in turn reflect the lack of integrity (Zadek et al. 2013). The indications are said to have certain substances that can lead the assessor to raise questions regarding the suitability of the audit engagement. In such state of affairs, the auditor also needs to take into consideration the legal as well as the regulatory obligations for the purpose of continuing or withdrawal of the client relationship (Svanström  2013).

The Board of Directors, the business entity and other equivalent governance body are accountable for different oversight functions of the business entity. The body responsible for governance in compliance with the ASX Listing Regulations establishes different audit committee that can play a critical function in the oversight of the process of financial reporting (Tarr and Mack 2013). This role becomes even more critical during the period of financial crisis as it involves overseeing the process of establishment as well as maintenance of different internal controls that can provide reasonable assurance as regards the dependability of the financial reporting of different business concerns. The global financial crisis has amplified the liability of the auditors of the company (Tarr and Mack 2013). Therefore, the assessors in congruence with the people in the governing units reconsiders the risks that a particular business concern faces that in turn can make it certain that the audit committee has taken into account the influence of the new risks and the pre-existing risks on oversight accountability for the financial reporting procedures. The auditing also includes the reconfirmation with management regarding the reporting in addition to internal control system (Kumar and Mohan 2016). Therefore, the liability of the assessor is to ensure that the functioning of the business entity is carried out properly and the resources are there in place to support the company during difficult times. Again, the business entity also faces heightened risk of liquidity and there is material uncertainty. Therefore, the assessor needs to evaluate the capability of the business entity to keep on working as a going concern. The auditor also needs to understand the judgements of the management with regard to different values of the illiquid assets and support diverse information (De Haas and Van Horen 2012). Again, amplified liability of the assessor during the financial crisis also calls for the need of acquiring assurance from management as regards important accounting strategies and reporting policies and judgements that can be supported by a degree of rigour as well as analysis that is suitable for the circumstances and appropriate documentation (Jones and Presley 2013).

The increased liability of the auditors of the organization calls for the need of maintenance of regular communication and with the governing units of the organization (Mensah 2014). During the times of economic uncertainty, the importance of maintenance of regular communication is even more important for resolving different issues in a timely basis. Therefore, the auditor has the need to be more cognisant regarding increased need for properly communicating with the management of the organization regularly. Again, the auditor can become conscious of the material weaknesses in the process of formulation of the internal controls that might give rise to probable material misstatement in the financial reports (Wiggins et al. 2014). The auditor finds an understanding regarding the business entity, its environment and its environment and the auditor needs to assess different factors. The liability of the auditor directs towards the process of evaluation of the risk concerning the material misstatement in the financial reports owing to fraud (Jones and Presley 2013).  The auditor also needs to identify as well as respond to different risks of fraud in the business entity that includes particular risks of fraud that the management can recognize.

The auditor needs to take into consideration the appropriateness of the use of different assumptions of the going concern in the process of preparation of different financial declarations. Furthermore, the auditor needs to take into account the material uncertainties associated to the capability of the business entity to continue as a going concern (Eilifsen et al. 2013). Again, in uncertain conditions of the global financial crisis, there is reduced availability of credit and at the same time illiquidity during the short-term period. This in turn can indicate different potential problems that can influence the process of continuance of the business entity as a going concern.

The global financial crisis directs towards the need for establishment of a strategy for the financial audit report. The responsibility of the auditor includes up gradation and amendments of different information from the ones available throughout the process of audit (Mueller et al.  2015). The overall policy points out towards the categories and allocation of resources that can be utilized for particular audit zones, timing of different procedures involved in audit and the materiality. The auditor also needs to take into consideration the fair value measurements, calculations on asset impairment, tax asset write-downs, legal issues regarding contracts and regulations, superannuation fund enumeration, fraud risk factors and matters upsetting the capability of the business entity as a going concern (Mueller et al.  2015).

 The auditor also needs to have proper understanding the business entity and the environment in which the business operates. The auditors also need to concentrate on specific areas of financial reporting for detection of the material misstatements (Svanström  2013). The auditors also need to have special considerations for different areas of financial reporting that includes the accounting adjustments, impairments of different recorded value of the asset, changes in the share capital and debt arrangements among many others (Zadek et al.  2013).

Documentation

 In accordance with the Auditing Standard ASA 230 Audit Documentation, the auditor needs to maintain documentation that can make it certain that the auditor has appropriate as well as sufficient records of the performance in order to support the conclusions (Tarr and Mack 2013).

The fall down of the Lehman Brothers, the American Investment Bank disentangles the worst financial crisis during the time of the Great Depression (Mensah 2014). The financial experts have identified the incapability to predict the future government activities, defaults on subprime mortgages as the reason behind the collapse of the Lehman Brothers. As such, the American investment bank had inadequate liquidity although had a massive base of assets. The other banks became worried about the unstable financial condition of the firm and switched over to protect their own interests and started withdrawing the lines credit (Mensah 2014). In addition to this, the Lehman was very much exposed real estate market of United States. Lehman invested huge amount of $60 billion in the commercial real estate market and was considered to be very large in the subprime mortgage. The collapse of the financial goliath Lehman Brothers can be regarded as the official triggering of the economic collapse that brought about the economic recession (Wiggins et al. 2014). The collapse indisputably generated a huge shock to the domestic as well as international trade and still remains the biggest filling of bankruptcy.  The underlying problems of Lehman Brothers had generated over a number of years and are not to be revisited. Nevertheless, the fraudulent actions in the financial reporting implemented by the firm intended to apparently cover up the fundamental problems of the corporation and wanted to “buy time” for the resolution that in turn went unnoticed as well as unacknowledged by the auditor of the corporation over an extended stage (Jones and Presley 2013). This incident of the collapse of the Lehman Brothers therefore needs to serve as an important lesson for the auditors. The incident directs towards the fact that it is the liability of the auditor to examine the financial statements presented by the management of the corporations. Furthermore, it is the duty of the auditors to judge whether the financial declarations have been prepared as well as presented fairly according to the accounting principles stated by different regulatory authorities such as the Australian Accounting Standards Board among many others (Jones and Presley 2013).

In conclusion, it can be said that the auditors therefore need to frame strategies and thereafter gather evidence to uphold all kinds of management’s myriad financial declarations assertions are correct within the limits of materiality. Therefore, in a bid to express such kind of opinions the auditor needs to examine all the available evidences to conclude that all the material financial declarations can be sustained. It is essentially the professional scepticism that can drive the judgements of the auditors concerning the evidences that are required to attain the state. The accounting principles are essentially prescriptive as well as perfunctory in nature and characteristics. On the other hand, the rules for auditing needs to be behavioural in character as the tests and mechanisms are descriptive and depend solely on the judgements of the auditors. The auditors are anticipated to be independent of the clients both in fact as well as appearances. A superior subjective reasoning needs to be implemented in order to conclude whether the standard can be met in a specific circumstance. The auditors therefore need to be objective in the way the auditors need to view the audit evidences. Nevertheless, due care can be exercised in the process of audit.

References

Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in standard setting. Journal of Accounting and Economics,55(1), pp.66-90.

De Haas, R. and Van Horen, N., 2012. International shock transmission after the Lehman Brothers collapse: Evidence from syndicated lending. The American Economic Review, 102(3), pp.231-237.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Fontaine, R., Letaifa, S.B. and Herda, D., 2013. An interview study to understand the reasons clients change audit firms and the client’s perceived value of the audit service. Current Issues in Auditing, 7(1), pp.A1-A14.

Holm, C. and Zaman, M., 2012, March. Regulating audit quality: Restoring trust and legitimacy. In Accounting Forum (Vol. 36, No. 1, pp. 51-61). Elsevier.

Jones, B. and Presley, T., 2013. Law and accounting: did Lehman Brothers use of repo 105 transactions violate accounting and legal rules?. Journal of Legal, Ethical and Regulatory Issues, 16(2), p.55.

Jones, B. and Presley, T., 2013. Law and accounting: did Lehman Brothers use of repo 105 transactions violate accounting and legal rules?. Journal of Legal, Ethical and Regulatory Issues, 16(2), p.55.

Koh, K., Rajgopal, S. and Srinivasan, S., 2013. Non-audit services and financial reporting quality: evidence from 1978 to 1980. Review of Accounting Studies, 18(1), pp.1-33.

Kumar, E.P. and Mohan, B., 2016. Origin And Development of Auditing.PARIPEX-Indian Journal of Research, 4(9).

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.

Mensah, J.M.K., 2014. The Failure of Lehman Brothers: Causes, Preventive Measures and Recommendations. Research Journal of Finance and Accounting, 5(4).

Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education.

Mueller, F., Carter, C. and Whittle, A., 2015. Can audit (still) be trusted?.Organization Studies, p.0170840615585336.

Schmidt, J.J., 2012. Perceived auditor independence and audit litigation: The role of nonaudit services fees. The Accounting Review, 87(3), pp.1033-1065.

Svanström, T., 2013. Non-audit services and audit quality: evidence from private firms. European Accounting Review, 22(2), pp.337-366.

Tarr, J.A. and Mack, J., 2013. Auditor obligations in an evolving legal landscape. Accounting, Auditing & Accountability Journal, 26(6), pp.1009-1026.

Wiggins, R.Z., Piontek, T. and Metrick, A., 2014. The Lehman Brothers Bankruptcy A: Overview. Yale Program on Financial Stability Case Study.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach. Auditing and Assurance Services: A Systematic Approach.

Ye, M. and Simunic, D.A., 2013. The economics of setting auditing standards. Contemporary Accounting Research, 30(3), pp.1191-1215.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.