Lack Of Required Professionalism, Skills, And Knowledge Of Auditors In Audit Operations

Importance of Auditing Process

Auditing is the process of inspection and examination of various financial reports of the business organizations (Knechel et al. 2012). In this regard, the auditors have inspected different components of the financial reports like balance sheet, income statement, statement of change in equity and others. Apart from this, the auditors also inspect the accounting policies of the business organization (DeFond and Zhang 2014). There are two major motives or objectives of auditing. The first objective is to inspect that all the financial reports of the organizations are free from material misstatements and frauds; and the second objective is to make it sure that all the financial and accounting works of the organization are done as per the required accounting standards and policies (Pitt 2014). Some specific set of skills and knowledge is required for the auditors in order to carry on the audit operations. These skills and knowledge helps the auditors to produce the fair audit report. In addition, the auditors have some responsibilities in the audit process. According to Accounting Professional and Ethical Standard Board, the auditors need to be independent at the time of carrying the audit operations (Kumar and Sharma 2015). It implies that the auditors must not have any financial or non-financial interests in the properties of the audit clients. At the time of carrying the audit operations, the auditors need to maintain honesty and integrity so that the proper and fair audit report can be produced. The main objective of this study is to analyze and evaluate the lack of required professionalism, skills and knowledge of the auditors at the time of conducting the audit operations for the organizations (Kapoor and Brozzetti 2012). For this reason, two articles are selected on the ASX listed companies. The analysis and evaluation of these two articles are shown below:

While considering the audit and accounting scandal in the Australian companies, the name of Dick Smith strikes first as the auditing and accounting scandal of the company is considered as one of the major scandal. The auditors of the company are held vastly responsible for the collapse of the company. Dick Smith Holding Limited, commonly known as Dick Smith is an Australia electronic retailer. Dick Smith was considered as one of the major retailers in the retail market of the country. The company was founded in the year of 1968 in Sidney. The name of the owner of the company is Dick Smith. Dick Smith and his wife was the joint owner of the company until 1982. In the year of 1982, Dick Smith Electronics was sold to Woolworths Limited. In the year of 2012, Anchorage Capital acquired the business of Dick Smith. In 2013, Anchorage Capital floated the business of Dick Smith in the Australian Securities Exchange, commonly known as ASX. By December 2016, the share price of the company fell heavily. In January 2016, it was requested to halt the business of Dick Smith. On 4^th January 2016, there was a massive fall in the share prices of the company. There was an 80% fall in the share prices of Dick Smith since their enlistment in ASX. For this reason, the authority passed an order to halt the business of Dick Smith. After the next few days, the company totally collapsed and placed into receivership. However, the company literally failed to arrange buyers for the business. For this reason, on 25 February 2016, receivers Ferrier Hodgson announced and declared the closure of all 363 Dick Smith stores of Australian and New Zealand. As a result of this action, 2460 employees lost their jobs. This is the business collapse of Dick Smith Electronics (Everett 2015).

Skills and Knowledge Required for Auditors

There were two bodies in the receivers; they were the administrators and the Australian Securities and Investment Commission (smh.com.au 2017). At the time of the receiving process, both the administrators and the Australian Securities and Investment Commission had to make effective investigation of the wreckages of Dick Smith. From that investigation, it has been seen that there was a massive role of the audit and accounting professional in that scandal. In the report of the administration, McGrath Nicol pointed out his opinion on the reasons for the collapse of Dick Smith. As per the report, the role of rebates from the suppliers has a great influence in the accounting and auditing failure of the company. In the financial year of 2014-15, Dick Smith reported that there were earnings before interest, tax, depreciation and amortization (EBITDA) worth $72 million (smh.com.au 2017). However, as per the actual performance of the company, there was EBITDA loss of $119 million that excludes advertisement subsidiaries and rebates. In this regard, it needs to be mentioned that Deloitte has been the long term audit partner of Dick Smith from 2013. In the financial year of 2015, the auditors of the Dick Smith did check all the financial reports of the company and the auditors provided the company with an audit report mentioning that there was no financial and accounting issue in the financial reports of the company (smh.com.au 2017). In actual, it can be understood that the auditors of Dick Smith skipped the matter of rebate at the time of auditing the financial reports of the company. Thus, from this part of the study, it is clear that the auditors of Dick Smith did not take into consideration all the necessary financial aspects of the company while inspecting the financial documents. This is a major fault of the auditing profession (William Jr, Glover and Prawitt 2016).

As per the article, there are several cases of accounting and auditing scandal of the business organizations all over the world (smh.com.au 2017). The major reason behind all these scandal is the misinterpretation of the accounting standards all over the world. There is no exception of this fact in case of Dick Smith. It is the responsibility of the auditors to make it sure that all the financial reports of the business organizations are made as per the financial rules, regulations, principles and standards. The International Financial Reporting Standard framework, commonly known as IFRS has written all the accounting standards and principles that the auditors and accounts professionals need to follow at the time of conducting the financial works of the business organization (Chua, Cheong and Gould 2012). It was the responsibility of the auditors of Dick Smith to follow the Australian Accounting Standards at the time of carrying the audit operations of the company. It has been seen that due to the collapse of Dick Smith, a large amount of investors had to lose their money in the financial turmoil. According to the International Forum of Independent Audit Regulators (IFIAR), the quality of audit is one of the major reasons of the collapse of Dick Smith. As per the chairman of IFIAR, the body is not yet satisfied with the fact that the auditors of Dick Smith have taken enough actions to address the shortfalls in the quality of audit process. It is a fact the accounting and auditing standards are developed around some major code of ethics that all the auditors and accountants need to consider. These codes of ethics are developed for the interest of the public and they help the audit professionals to navigate the complex financial situations of the organizations such as the proper accounting treatments of revenues, rebates and inventories of the organizations (Bachoo, Tan and Wilson 2013).

Responsibilities of Auditors during Auditing Process

It is desirable for the auditors of the business organizations to follow the principles based approach of auditing rather than following more regulations. It is not good to have too many regulations in the auditing professions as it shifts the focus of the auditors from professional judgments to compliances. The auditing profession assists in bringing values and expertise in the business operations by removing errors and frauds from them. For this reason, the audit profession occupies a position of trusts and respect in the society. All the independent auditors need to keep these aspects in mind while doing the audit operations (Houghton and Campbell 2013). Thus, from the whole analysis, it can be understood that there was a massive lack of auditing skill, knowledge and professionalism in the auditors of Dick Smith. Sometimes, it may happen that the accountants of the companies make some major mistakes in the financial reports of the companies, but it is not expected that the auditors skip such mistakes to. The auditors are there to find out such major mistakes in the financial reports of the companies. Serious questions regarding the professionalism of the auditors arise when they miss such accounting mistakes. It implies that the auditors lack enough auditing skills and knowledge. On the other hand, it is the responsibility of the auditors to make it sure that all the accounting works of the organizations are done with accordance to the IFRS principles. In case of Dick Smith, the auditors of the company failed to do so. This situation implies that the auditors of Dick Smith lacks profess. Professionalism is the most important part in the audit profession. The auditors take a huge responsibility at the time of conducting the audit operations. Hence, it is expected from them that they will maintain professionalism so that the fair and effective audit report can be produced (Han Fan, Woodbine and Cheng 2013).

Another example of massive accounting error in the business operations is the Target Scandal. Target is one of the biggest departmental stores in Australia. As per the article, there was a massive accounting scandal reported in an Australian discount department store named Target because 70% decline in earnings over the previous 5 years (icas.com 2017). After that, in mid April, Wesfarmers CEO Richard Goyder confirmed that the head office of retailer Target would be transferred from Geelong to Melbourne within one year. Knowing the fact that small city Geelong, a satellite of Melbourne, will certainly go through the loss of 900 local jobs, Goyder took the decision of shifting of the business to overcome the situation due to the accounting scandal of Target. The Australian Financial Review reported that when asked, Goyder said that Target head office would be shifted to somewhere in West Melbourne in the coming year. He also added that the purpose of this physical shift of the business was to involve some of the people they want into their business and to bring some change through the business. On 9th April, the Australian newspaper reported that parent company Wesfarmers was carrying out a formal enquiry on several executives of Target. In March, Goyder publicly called for an extremely thorough and careful frame for fiscal policy of the Australian Parliament. He ironically stigmatized individuals behind this scandal as mind blowing stupid people. A remarkable fact was that Richard Goyder was very strict in fiscal management and policy making within Wesfarmers. The Australian Financial Review published a report on 11th April, stating that Target has a company policy against delivering short term profits. Wesfarmers earned a lot of reputation/ great deal of reputation for unity in business under Goyder. Wesfarmers is a huge industry that includes Bunning and Home base home improvement stores, Coles, supermarkets, Office works, and office supplies stores, many other major industrials, and discount department store Kmart (icas.com 2017).

Case Study: Dick Smith Collapse Raises More Questions for Accounting Profession

According to Wesfarmers, one of the major reasons of the accounting and auditing scandal of Target is the introduction of super rebate scheme that does not comply with the accounting policies of the business organization. It was the responsibility of the auditors of the company to ensure that all the financial and accounting works of the company are done as pre the actual accounting regulations, standards and policies (Guénin-Paracini, Malsch and Tremblay 2014). In the final six months of the financial year 2015, the earnings of Target were manipulated to the extent of $21 million. The managing director of the company believes that the reported amount of earning is not material; and the reputation of the company is highly involved with this. From this part, it can be observed that the auditors of the company failed to find out this massive manipulation in the earnings for the year 2015. It has been seen that the parent company of Target, Wesfarmers strongly believes that some of the accounting executives of the company are involved with the massive audit scandal of the company (Blay and Geiger 2013).

From the above discussion, it can be seen that the aspect of auditing and accounting plays an integral part in the scandal of Target. There were major issues regarding the use of rebate system as they were not introduced as per the accounting policy of the organizations. However, only executives of the organization cannot be blamed with for this scandal as the auditors of the company are equally responsible for this accounting turmoil (Xu et al. 2013). As per APES 110, it is the responsibility of the auditors to maintain transparency in the audit process. However, in case of Target, the required transparency in the audit report was missing as the auditors failed to act in favor of public interest. APES 110 also say that the auditors of the business organizations should not have any kind of financial or non-financial interest in the properties of the audit client (Ball, Tyler and Wells 2015). In case of Target, it can be happened that the auditors were influenced to provide the kind of audit report that is bias and not true. This is not expected from the auditors as this action violates the basic principle of audit profession. This action of the auditors raises serious questions regarding the professionalism of the auditors (Ottaway 2014). Professionalism demands the auditors to work in the favor of public interest and to use the required skill and knowledge at the time of conducting the audit operations. In case of the Target scandal, the absence of professionalism was clearly seen.

References

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