Discuss About The Obligations In An Evolving Legal Landscape?
This study deals with researching on topic and preparing a report on new auditing standards ASA 701 (Allen and Ramanna 2013). This auditing standard is prepared for getting better understanding of concepts on Communicating Key audit matters in the Independent Auditor Report. The new auditing standard was developed in the wake of global financial crisis. This was developed so that shareholders should have better and full understanding of the companies where they plan to invest in. Even, investors had requested for earlier warnings of potential issues that takes place with respect to an entity skill to maintain as going concern that results in the revision of ASA 570 (Zadek, Evans and Pruzan 2013). The current segment research on auditing issues that led to the expansion of new Auditing standard ASA 701 Communicating key audit matters in the Independent Auditor Report. The study briefly explain about the key audit matters that need to be revealed in the audit report to the members of ABC Learning Centres if the new auditing standards ASA 701 has practical in the period that led to collapse of ABC Learning Centres as well as evaluating the usefulness of ASA 701. ABC Learning Centres is one of the Australian companies that were once a principal provider of early childhood education services. This company was listed in Australian Stock Exchange and based in and across Australia (Eilifsen et al. 2013). The company went into voluntarily liquidation in the year 2008 and purchased by Goodstart Limited by the year 2009.
The Auditing Standard ASA 701 explains matters relating to Communicating key audit matters in the Independent Auditor Report. In this section, it explain with the compulsion as well as accountability of the auditors to correspond effectively regarding audit matters that are of main significance in the report of auditors (Fontaine, Letaifa and Herda 2013). The Auditing Standards mainly addresses verdict of the auditors in regard to the nature of dealings that should be communicated in the audit report and compiled in the final report as well. The main purpose of communication procedure is to improve in the valuation of report that is prepared by the auditors in order to provide clarity about the performance of audit activities (William, Glover and Prawitt 2016). It is important to communicate the matter to the shareholders as they had invested money in the company and they should be communicated additional information so that they have proper understanding of the important matters in relation to financial report of any company. It is important to communicate important matters to the users so that they can properly engage with the managerial actions as well as charged by Governance in order to build relation with entity and management as a whole (Zadek, Evans and Pruzan 2013).
It is the accountability of the auditor to issue an opinion on the financial statement of trade enterprise and carry out audit performance where the auditor has the responsibly with the engagement terms of the audit (William, Glover and Prawitt 2016). It is the liability of the auditor to meet the terms of the audit engagements while signing the engagement letter where they agree that they will carry on the mission and compliance with the audit standard. The main mission objectives should be taken into contemplation in order to decide variety of financial reports for assessing the structure of any business enterprise (Koh, Rajgopal, and Srinivasan 2013).
ABC Learning Centres is one of the companies that were founded in the year 1988 by Eddy Groves and Le Neve Groves (William, Glover and Prawitt 2016). This company was the first private owned childcare centres. In addition, the Australian Government paid subsidy direct to the concerned families. ABC Learning Centres expanded by acquiring properties as well as purchasing out childcare centres (Zadek, Evans and Pruzan 2013). Furthermore, ABC Learning Centres was listed in Australian Stock Exchange. The company had 43 centres in and across Australia by the year 2001. The company stared to expand their operations outside Australia by the year 2005. ABC Learning Centres opened centres in US, New Zealand and UK. The company owned 2238 centres by the year 2007.
The main reason behind the collapse was ABC Learning Centres could not repay its debt on time. ABC Learning Centres entire UK subsidiary as well as 60% of US subsidiary. The stock price of ABC Learning Centres fell down from $8.62 to $0.54. Finally, ABC Learning Centres got delisted from Australian Stock Exchange and went into receivership (Kumar and Mohan 2016).
Successful Government has failed to think of long-term about the stipulation of childcare centre in Australia. The failure of ABC Learning Centres was considered as a policy failure. This failure was not only a business failure but also a government policy collapse of the highest order. Here, the real blame was put on the successive government’s child care policies (William, Glover and Prawitt 2016). It is noted that Australian had moved from a society conquered childcare model to a private-dominated model without coming into real debate on matters relating to industry type structure where the Government plays major role. ABC Learning Centres had initially tried the Macquarie Bank for leveraging a reliable income stream for getting fund acquisitions as well as hoping an ever-increasing share price that would fund boundless growth at the same time. ABC Learning Centres does not own much to the land on which the centre was sited. The competitors of ABC Learning Centres were leaving a low-profit or unprofitable centres (Louwers et al. 2013).
rom the news article taken from “The Australian”, it was mentioned that the corporate regulator had taken its first scalp over the collapse of biggest childcare chain in Australia named as ABC Learning Centres by slapping its auditor with a 5-year work ban. Eddy Groves, Founder of ABC Learning Centres had taken action against the long-time auditor of ABC Learning Centres after Australian Securities and Investments Commission withdrew a criminal charge against the company (Zadek, Evans and Pruzan 2013). ABC Learning Centres collapsed into receivership in the year 2008 that owed creditors a sum of $1.6 million as well as forced a fire sake of 1200 childcare centers that cured 1,20,000 children. The auditor of ABC Learning Centres failed to carry out or perform their duties adequately as well as properly. Mr. Green was working as a long-time auditor at ABC Learning Centres and he was banned from practicing as a registered auditor for time span of 5 years. The auditor showed $143 million profit in the last financial statement (William, Glover and Prawitt 2016). The auditor should have noticed that ABC Learning Centres had overstated its revenue by incorrectly including centre development fees as income. In addition, there was inadequate appropriate audit proof on the audit file that reveals that the auditor of ABC Learning Centres had applied an adequate level of professional judgment as well as professional skepticism and attained a sensible assurance that the 1997 financial report was free from material misstatement figures as well as meet the terms with all the relevant ASA (Australian Auditing Standards requirements (Messier 2016).
here was inadequate evidence that the auditor of ABC Learning Centres had properly documented all the applicable investigations and completed all relevant assessment and analyzes and communicated with the management on matters relating to significant issues as well as took all relevant and necessary enquiries, testing and checking in relation to the risk of fraud. The auditor had not neither identified nor disclosed related parties as well as related-party disclosures (Schmidt 2012).
BC Learning Centres had boarded on some of the serious questionable measures at the development phase where the most important factor is the use of asset assessment methods (William, Glover and Prawitt 2016). Mainly, there are two asset assessment methods in accounting. The first is historical cost that is the amount paid for the assets when acquired by the business. The second is the fair value that is the predictable current market value of the possessions. Company can use any of the method where value cannot surpass the receivables amount of the asset (Tarr and Mack 2013)
he failure of ABC Learning Centres took place because of over complexity of operations as well as poor decision-making process. It gives rise to ineffective corporate governance as well as questionable accounting practices that were the reason behind ABC Learning Centres failure. The other reason is revelation of related party transactions as well as individuals abusing their power and destructive expansion approach (William, Glover and Prawitt 2016).
ASA 570 is the auditing standard that explains about going concern aspect. It is important for an auditor to take into consideration the suitability as well as aptness of the employment in different propositions of going concern at the time of preparation of course by conducting financial announcements (Ye and Simunic 2013). It is important for an auditor to consider material as well as considerable suspicion that connects to the aptitude of business unit that goes on with the idea of going concern. In condition such as Global Financial emergency, there is need for strong convenience of credit that gets along with the illiquidity throughout restricted of period (William, Glover and Prawitt 2016). There is wide range of potential issues or problems that has the capability to influence the process of continuance or perseverance of the trade entities going concern
It is the responsibility of the auditor to act more cautiously and aware of the need of communication with the administration who has the charge with Governance (Ye and Simunic 2013). If there was proper and transparent communication between Mr. Green (auditor of ABC Learning Centres) and Founder of ABC Learning Centres, then there would be clear understanding of situation and no malpractices could have been noticed. There was lack of communication present between the management and auditors of ABC Learning Centres that had led to collapse of the company. Weakness identified by auditor at the time of auditing should be highlighted to the management without making strategies to hide it in the audit report. Highlighting the weakness will help any company to get that issue checked and minimized as far as possible (William, Glover and Prawitt 2016). These issues should be properly communicated by the auditor to the management of any organization. The auditors should be responsible to communicate each of the audit matters to the management that can relate to nature of business entities, environment and other factors. To that, the auditor need to evaluate the process that should be strong and effective by identifying the risks and show in the financial reports and other material misstated figures that lead to fraud. The auditor needs to provide professional and fair judgment to the company with proper audit evidence and strategies to reduce it as far as possible (Zadek, Evans and Pruzan 2013).
Recommendations and Conclusion
It is recommended to the auditors for planning and creating strategies and policies that help them at the time of gathering proofs and evidences. The auditor has full responsibility to carry out their audit work with full diligence and help shareholders by providing correct information about the company. The auditor should not engage in malpractices as in case of ABC Learning Centres where the auditor had shown profits for the company but in real it was not the case. The auditor had shown in the financial report that the report is free from material misstatement. As per ASA 701, it is important to communicate key audit matters in the Independent Auditor Report. It is recommended recognizing revenue in proper ways. It is important to focus mainly on the core trade activities even after when an project is going through a enormous expansion stage. It is essential to give central importance regarding financial accounts of the company that shows financial health. It is essential to realize the importance or significance of sound corporate governance practices in trade activities. Therefore, financial structure of business as well as business transactions should not be overly complex by nature. From the ethical or legal perspective, the illegal perspective are the accounting irregularities and not ethical activities are when public was given false information about the business. The penalty were non principled behavior as it is not good for the public as they had put trust in the business who was not ready to disclose the information and give rise to lost trust for childcare providers as well as loss on education and care. Therefore, shareholders lost a lot of money at that particular period time.
At the end of the study, it is concluded that ABC Learning Centres faced social, political and financial disaster. To that, there was failure of regulatory and accounting process at ABC Learning Centres. There was issue with ethical behavior at ABC Learning Centres. There was lot of issue found at ABC Learning Centres where Chris Honey was given the receivership, Federal Government injected sum of $22 million. The company was purchased by Goodstart by the year 2009 and become one of the non-profit organizations. ABC Learning Centres appeared to be failed in exercising the fundamental level of control over the management. It was needed for the administration to oblige considerably higher responsibility requirements especially on the public sector worker and establishing a sort of price regulations as the private health insurance
Reference List
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