Over the years, there are many instances all over the world where the large business organizations faced brutal collapse or unexpected liquidation due to several disputes, mistakes and errors in accounting and auditing practices; and the collapse of Enron can be considered as the greatest among all of them (Johnstone, Gramling & Rittenberg, 2013). In most of the case, the involvement of the auditors can be found in providing the smoothness to the accounting frauds or manipulations; and this aspect raises question about the public interest responsibilities of the auditors because they auditors have been favouring the audit clients’ interest due to the presence of this personal interests (Maroun & Atkins, 2014). However, one major demand of this particular profession is to comply with the requirements of audit independence, audit scepticism and audit ethics as these are necessary tools for the auditors to maintain the dignity of the profession (Cohen & Leventis, 2013). The main aim of this report is to conduct a discussion on the needed aspects of auditing related to the auditors’ public interest requirements. The topics of the discussion are audit materiality, independence, whistle blowing, Enron scandal and the warning note of Greg Medcraft.
The following discussion shows the analysis of the key stakeholders of Wesfarmers Limited that is an ASX listed Australian Retail Company:
Suppliers: The appendix of the report indicates towards the long-term commitments of Wesfarmers towards their suppliers as they are one major key stakeholder of the firm (sustainability.wesfarmers.com.au, 2019). The company has adopted several strategies to engage with the suppliers. On the other hand, suppliers need certain specific information about the business of Wesfarmers to make decisions like credit decision and others. Significant threat develops when there are material misstatements in the financial statements of Wesfarmers due to the auditors and it creates negative impact on the decision-making process of the suppliers (Waligo, Clarke & Hawkins, 2013).
Shareholders: It can also be seen from the appendix of the report that Wesfarmers listens to their investors throughout the year as they are another key stakeholder of the company (sustainability.wesfarmers.com.au, 2019). One major initiative of Wesfarmers towards the engagement with this stakeholder group is the release of all necessary financial information about their financial performance and financial position so that the investors can make the decisions about the economic resources of the company. Significant risk of incorrect business decision making develops due to the failure of the auditors in appropriate addressing the material misstatements in the accounting books of the company (Jones, Wicks & Freeman, 2017).
Government: The appendix of the report states that Wesfarmers ensures their compliance with the rules and regulations of Federal and State Government as Government is a crucial stakeholder of the company (sustainability.wesfarmers.com.au, 2019). It needs to be mentioned in this context that materially misstated financial statements affects the company’s profitability and it can reduces the tax payment of the company to the government. This aspect develops the significant risk of decrease in income of government due to the failure of Wesfarmers in tax payment (Eskerod, Huemann & Savage, 2015).
Customers: It can be seen from the appendix that the customers are one major key stakeholder group of Wesfarmers and they have concern over specific business activities of Wesfarmers (sustainability.wesfarmers.com.au, 2019). For this reason, the presence of material misstatements can affect the decision-making process of the customers in these areas (Mari?, 2013).
Employees: As per the appendix, Wesfarmers has an employee base of around 217,000 people and thus, they are considered as a key stakeholder group in the company (sustainability.wesfarmers.com.au, 2019). The presence of material misstatements in the financial statements can jeopardize the career development as well as source of earnings of these employees (Cooper, 2017).
Auditor independence can be regarded as that specific obligation on the auditors that demands the commitments of the auditors to conduct the audit of the financial statements in the most objective manner so that they can avoid the impact of any conflict of interest and undue influence on the audit opinion (Sinha & Hunt, 2013). Two types of auditor independence can be seen; they are independent from mind and independent from appearance. It needs to be mentioned that audit independence can be considered as a major tool to increase the quality of the overall audit procedures (Wu, Hsu & Haslam, 2016).
Auditor’s independence has major positive influence on the process of whistleblowing by the external auditors. Whistleblowing can be considered as a specific situation when the external auditors discovers unethical and illegal business activities and directs the internal staffs to report against the same in the presence of sufficient proofs and evidences (Sagara, 2013). In this whole process of whistleblowing, the external auditors of the companies can take the assistance of the internal or the external regulatory authorities. Thus, it can be seen that both the auditor independence and audit whistleblowing plays a major role in ensuring the ethical accounting practices within the organizations (Wainberg & Perreault, 2015).
In the situations of audit whistleblowing and audit independence, “APES 110 Code of Ethics for Professional Accountants” plays a crucial part as it provides the auditors with the necessary direction to stay ethical (apesb.org.au, 2019). It needs to be mentioned that the previous auditors of the clients have such information that is crucial in the decision-making process on audit nomination by the new auditors and thus, they must obtain this information in the presence of the permission of the audit client as per “AUST210.11.1 of APES 110” (apesb.org.au, 2019). However, the current auditors cannot demand this information verbally as they need to follow proper protocol where writing request needs to be provided to the previous auditors for the nomination information in the presence of the client’s permission. This regulation is considered as crucial for audit independence and audit whistleblowing as the new auditors can know about the fraud and unethical activities of the companies. At the same time, the audit profession demands the commitment of the auditors to perform the audit procedures in accordance with the best interest of the public as they are the representative of the key stakeholders of the companies (apesb.org.au, 2019).
Lessons from Enron: The obtained information related to the collapse of Enron indicates towards the crucial fact that the management of the organization was majorly responsible for the accounting frauds like unnatural gain creation, off-balance sheet fraud and others where they received major assistance from their auditors, Arthur Andersen (Covitz, Liang & Suarez, 2013). Thus, it can be understood that there were certain major deficiencies in both the accounting and auditing standards and principles and these deficiencies need to be eradicated. Thus, the important lesson from this is that it is needed to introduce as well as implement better regulations and principles in both the accounting and audit profession and this specific objective can surely be achieved with the assistance of the compliance with the global auditing and accounting principles (Covitz, Liang & Suarez, 2013).
It can be seen from the above part of the discussion that the auditors of the Enron provided the management with major assistance in continuing the accounting falsification and this was the sole reason behind the appointment of Arthur Anderson by the management of Enron (da Silveira, 2013). This whole aspect contributed towards the major deterioration of the quality of audit processes and procedures in the company. Thus, the crucial lesson that can be obtained from this is that the government agencies should be responsible for conducting the audit of the companies instead of the private audit firms (Abid & Ahmed, 2014). At the same time, all the responsibilities related to the appointment of the external auditors also need to be handed over to the government agencies as this aspect will restrict the practice of the appointment of internal auditors from the team of the external auditors. The Enron scandal also shows that the auditors of Arthur Andersen were agreed to assist the management of Enron in the exchange of huge amount of fees. This particular aspect can be restricted by restricting the auditors in providing any kind of non-audit as well as consultancy services to the audit clients in exchange of huge amount of audit fees (Abid & Ahmed, 2014). This aspect will be majorly helpful in increasing the audit quality by eliminating the self-interest threat of audit independence.
Another crucial aspect that the scandal of Enron highlighted was the lack of ability of the auditors to perform the audit procedures in the most objective as well as professional manner (Dibra, 2016). Thus, even in the presence of sufficient skills, knowledge and expertise, the auditors of Enron did not use the auditor independent oversight in the presence of their self-interest in the audit client. Thus, another major lesson obtained from the collapse of Enron is to ensure the application of auditor independence oversight and it can be used a major tool to increase the overall audit quality (Dibra, 2016). It needs to be mentioned that the auditor independent oversight is positively associated with professional scepticism in auditing due to the fact that both of these aspects demand the commitment of the auditor to obtain an alert mind for the recognition of material misstatements in the financial statements.
Apart from the auditors, the collapse of Enron has provided a crucial lesson to the audit client organizations. The management of Enron did not take any initiative to ensure the true and fair disclosure of the financial information which was a major reason for the collapse of the whole organizations (Edel Lemus, 2014). For this reason, the crucial lesson for the audit clients is that they must ensure the true and fair disclosure of their financial information as true and fair disclosure is required for the auditor with the aim to apply the auditor independent oversight and professional scepticism. At the same time, this particular aspect that certain other benefits such as it helps in increasing the audit quality and it assists the companies in gaining the trust of their shareholders (Edel Lemus, 2014).
Arthur Andersen: It can be seen from the obtained information related to the collapse of Enron that Arthur Andersen was the audit partner of Enron that was responsible for providing the necessary assurance on the material misstatements in the financial statements (McLean & Elkind, 2013). However, it was then found that Arthur Andersen was majorly guilty for establishing business relationship with the audit client in the exchange of huge amount of audit fees. At the same time, Arthur Andersen was the major companion of the management of Arthur Andersen in the accounting manipulation of the financial statements (McLean & Elkind, 2013). It was also mentioned that the management of Enron offered jobs to the audit executives of the company. Apart from this, some of the crucial audit documents of Enron were destroyed by the audit members of Arthur Andersen ahead of the investigation of the federal government. It can be seen from the discussion of this that the auditors of Arthur Andersen were not ethical as well as not professional in the audit operations of Enron and this aspect ensured the collapse of the company (McLean & Elkind, 2013).
In the process of auditing, audit quality is considered as a crucial aspect that the auditors must maintain with the aim to provide the necessary assurance on the status of material misstatements in the financial statements. Audit quality can be considered as the specific substances or matters assisting the auditors in performing the audit operations in the most objective as well as professional manner. It is the requirement of the audit quality that the auditors are needed to ensure the proper communication of the material misstatements found in the financial statements in the audit report with the aim to retain the audit quality. A quality audit is necessary for the auditors in order to ensure the issue of the correct audit opinion. For this reason, Greg Medcraft has provided a warning to the big four audit companies that they are needed to enhance their auditing standards in case they do not want another Enron scandal takes place in Australia (abc.net.au, 2019).
In his warning, Greg Medcraft also mentioned the fact that the auditors of Australia are needed to ensure performing the necessary audit operations in the most responsible as well as accountable manner so that they can properly recognize, disclose and adjust the material misstatements in the financial statements of the large Australian companies (abc.net.au, 2019). For this reason, the auditors are needed to ensure the collection of the necessary audit evidences and audit information on the fact that whether there is any material misstatements in the financial statements of these companies or not. For this reason, the Australian auditors have the obligation on them to ensure the true and fair view of the financial statements of the companies and it can be found in “APES 110, Section 2” (apesb.org.au, 2019). The earlier part of the discussion helps in showing the fact that the deterioration in the audit quality led to the audit failure in Enron and it ultimately ensured the collapse of the same. This same can be found from the statement of Greg Medcraft. For this reason, it is needed for the auditors in Australia to bear the full accountability and responsibility of their audit operations so that they can express the correct assurance to the key stakeholders of the audit clients.
The article has information about the investigation as well as surveillance programs of ASIC on the key audit sample of PwC, KPMG, Deloitte and EY (abc.net.au, 2019). It needs to be mentioned that the main reason behind the arrangement of these actions was to ensure the fact that whether these big four audit firms were responsible as well as accountable in the audit procedures of the large Australian companies. The result of these surveillances and investigations showed that in 23% of the cases, these audit companies failed to give the required assistance in truthfulness and fairness of the financial information. Now, this can be considered as a subject of worry for the Australian auditors as it indicates towards the lack of professional scepticism by these auditors; and this lack of professional scepticism reduces the ability of these auditors to face and handle the challenging audit situations. For this reason, the auditors of Australia must not compromise the application of professional scepticism in any situation with the aim to increase the audit quality and avoid the occurrence of the scandals like Enron and others. Moreover, the auditors are needed to display their professionalism by complying with the required rules and regulations of auditing.
With the aim to increase the audit quality by decreasing the audit threats, the auditors must be able in assessing the situations where they need to apply the audit safeguard. In this context, “APES 110, Section 290.155” can be mentioned as it provides the message to the auditors that they cannot use the safeguard of revolving the audit partner of a company in case that company only has few members that can perform all the procedures of auditing (apesb.org.au, 2019). However, exception is there as the audit partners can remain the key audit partner for above seven years when there is exemption on that company not to rotate the audit clients. Thus, as per “APES 110, Section 100.2(c)”, the auditors are responsible for applying the safeguards in only those situations where the audit threat crosses the safe level and the threat is needed to taken into account for reduction (apesb.org.au, 2019).
On the basis of the above discussion, it can be said that it is the responsibility on the big four audit firms of Australia to take the necessary initiatives in order to enhance the audit quality. At the same time, they must be more careful, responsible and accountable in the auditing of the large Australian corporations due to the fact that the accounts of the large Australian corporations are prone to corporate frauds which can lead to the collapse of the company and can create major financial crisis. After that, the ethical regulation and principles of “APES 110” needs to be considered by the Australian auditors with the aim to increase the overall audit quality; these principles are integrity, confidentiality, objectivity, professional competence and due care and professional behaviour (apesb.org.au, 2019). In the presence of all of these compliances, it will be possible for the Australian auditors to avoid the occurrence of the scandals like Enron in Australia.
Conclusion
It can be seen from the above discussion that the auditors of Australia are needed o ensure the increase in the audit standards while performing the audits of the large business organizations in order to avoid the occurrence of the Enron like scandals in Australia. The above discussion indicates towards the fact that Wesfarmers have certain key stakeholders that can be affected in the presence of incorrect identification, disclosure and adjustments of material misstatements in the financial statements. At the same time, the content of the report helps in reaching the conclusion that both auditor independence and audit whistleblowing is needed for ensuring the public interest requirements of the audit profession and to restrict the presence of illegal and unethical business operations within the companies. Moreover, every lesson from the collapse of Enron is necessary for the auditors to ensure the increase in the overall audit quality. At the same time, the discussion of the report also indicates towards the necessity of the auditors to ensure the compliance with all the required rules and regulations of auditing so that they can avoid the occurrence of the scandal like Enron and another financial crisis.
References
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