Auditing for public 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 public 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 especially in the public sector (Sutton, 2000). In most countries, auditing for public listed companies and private 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 public listed companies in both UK and Bulgaria by discussing different aspects that are related to the topic.
The main aim of carrying out this research is to identify and discuss the value of auditing in publicly listed companies in UK and Bulgaria especially because the public auditing environment is changing by day due to greater access of public information from the internet.
The United Kingdom’s company laws illustrate the rules and regulations that should be followed when it comes to auditing of either private or public 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 principlesas 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 Standards ofAuditing (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 public companies are closely related (Active Consult Ltd, 2013).
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 public 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 inventors 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).
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 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 (Arens et al. 2016). Addition to that, both internal as well as independent auditors need to contribute to audit system of companies in varied ways.
Despite that auditing is important for public 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 companies 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 especially in public sector 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 public 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 also ensure they observe them all. This will improve accuracy and transparency, which in turn saves the company the risk of fund mismanagement.
PWC is one of the auditing companies based in UK and recognized all over the world as it comes under “Big Four”. The Financial Reporting Standard adopted by public listed companies that are listed on Stock Exchange is International Financial Reporting Standards. According to Companies Act, it explains that the audit committee for these public listed companies needs to be appointed by the shareholders at the time of attending annual general meeting. It is for this reason that the requirement shows the importance of nomination committee in the Board (Borlea, Achim and Mare 2017). It is important for all companies to encourage transparency as well as accountability in their activities. Almost all the companies need to maintain general transparency and accountability requirement as mentioned and needed that comply with enhanced accountability and transparency requirements. It is necessary for all the public listed companies to appoint an audit committee as well as company secretary at the same time. The Auditing Practices Committee aims at providing a framework of practice for exercising an individual judgment of the auditing and this was done by proposing statements of explanation as well as guidance on auditing and explanatory statements of auditing standards.
From the case study on PWC, it is understood that all companies should have their financial facts and figures cleared or checked prior as it will inform the shareholders and other concerned interested parties. It is the responsibility of the auditors to make use of guidance from the Accounting Standards Board for stating the fact whether according to them, financial information should be presented by the company is a true and fair representation that highlights the financial health of the company. The auditors are not accountable to look at the fact where every individual transaction is performed by company and for this reason, the auditors cannot state that the financial figures are 100% or not. In their opinion, auditors comment as true and fair financial information in every case (Chan and Vasarhelyi 2018).
There are several key elements of a sound corporate governance framework in a bank that is based in Bulgaria. This further includes adequate internal control system that takes into account both internal as well as external audit functions. These control systems are used in the financial process with required checks and balances. Shareholder is one of the players in corporate governance in a bank and their responsibility is to appoint Board of Directors. Other key player is internal auditor and their responsibility is to test compliance of bank policies. External auditor is one of the key players and their responsibility is to evaluate as well as express an opinion. There are three levels of disclosure system where the meeting with shareholders takes place at the time of electing an auditor and get approval at the time of presenting the annual financial report. It is important to have well-functioning internal audit system that had been audited by Institute of Internal Auditors. Addition to that, Internal audit system is designed based on Committee of Sponsoring Organizations of Treadway Commission Internal Control framework (Cohen and Simnett 2014).
Both Bulgaria and UK had responded to IFRS. It is important to understand the fact that comparability of financial statements plays significant role in the accounting literature. Introducing IFRS in the European Union and even other countries has not eliminated requirement for research that is concerned with the topic. IFRS have many options as well as need significant estimates for the same. Comparability is done in the financial statements for given period of time and look at those company who operate within the same industry are treated as significant types of accountability. It is all about the judgments that are made by the preparers that takes into account and considered as vital factors that influences the comparability of financial statements as a whole (Knechel and Salterio 2016).
Before merger: It can be seen that companies before merging gets involved in understanding the risk management policies as well as processes. In order to understand, it is important to identify Audit Committee members who have proper experience in this Mergers & Acquisition Activity. It is required to evaluate the policies as well as procedures that can become a part of Audit Committee that plays major role in overseeing the risk management protocols for the entire business enterprise that takes into account accessing major financial risk exposure and undertaking steps for controlling them.
Post- merger integration- It can be seen that companies should plan for post merger integration that should cover synergy targeting as well as realization, supply chain management, customer sales and maintaining cordial relationships with the suppliers.
Aspect of Corporate Governance
On analysis, it can be seen that 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.
The research design to be applied in this study is qualitative and information will be collected from different people in UK and in Bulgaria. This information will be based on the views and opinions of the people who will participate in the study with the aim of examining the importance of auditing to public limited companies. In this case specific information will be collected on phenomena to test a theory using a top-down or a deductive approach. This will help in answering all the research questions laid down in the study by systematically collecting evidential statements.
The sample used in this study will be drawn from domestic public listed companies and audit firms in UK and Bulgaria. The criteria for inclusion of the companies and audit firm are that they must be operational in more than five years and have been able to audit book of both private and public listed companies. The participants from the sampled companies must also have worked with these organizations for more than five years and are actively involved in the organization’s operations.
In this study, both questionnaires and interviews will be used to collect information. The questionnaire will contain five sections whereby the first section contains general question, second section on the experience with auditing, third section on importance of auditing, forth section on limitations of auditing and the fifth and final section will be for recommendation to improve audit efficiency. The interviews will be semi-structured to allow the interviewer to ask extra question as the data collection progresses. In addition secondary data will also be used to collect more information from published texts such as books, periodicals journals and peer reviewed articles. A thematic analysis will then be used to analyze the data collected to ensure that it answers the research questions accordingly.
In this particular research study, case study method will be treated relevant by nature as several cases can be referred that links with the research topic (William Jr, Glover and Prawitt 2016). Case study on auditing for public listed companies in both UK and Bulgaria are taken into consideration by referring to a company based in that country. Case study method is one of the research methods where researcher will be able to conduct in-depth as well as detailed examination of a subject of study. In this study, qualitative case study is taken into account where information are collected by using secondary sources and then analyzed after linking with the given research topic on “Importance of audit for public listed companies in UK and Bulgaria. Case study analysis is done by first collecting case study that is linked with the research topic. In this research study, 2 case studies are evaluated in which first one speaks about PWC audit firm that is based in UK. The second case study is about bank based in Bulgaria. After collection of case study, proper analysis is needed by the researcher so that there is no limitation taken place in this given research study (Rezaee et al. 2018).
In this particular research study, interview method will be used as data collection method where interviews will be taken by the auditors who work in public listed companies in UK and Bulgaria (Simnett, Carson and Vanstraelen 2016). The questions asked to these auditors will be based upon the research topic so that proper understanding can be gathered about the importance of audit for public listed companies in UK and Bulgaria. The researcher will be interviewing 4 auditors (2 auditors working for UK based public listed company and 2 auditors working for Bulgaria based public listed companies).
References
Active Consult Ltd. (2013, June 4). Accounting and Auditing in Bulgaria. Retrieved from https://activeconsult.wordpress.com/2013/06/04/accounting-and-auditing-in-bulgaria/
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.
Beattie, V., &Fearnley, S. (1995). The importance of audit firm characteristics and the drivers of auditor change in UK listed companies. Accounting and business research, 25(100), 227-239.
Borlea, S.N., Achim, M.V. and Mare, C., 2017. Board characteristics and firm performances in emerging economies. Lessons from Romania. Economic research-Ekonomska istraživanja, 30(1), pp.55-75.
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
GOV. Dep of businesss. (2014). Audit, accounting and reporting – GOV.UK. Retrieved from https://www.gov.uk/guidance/audit-accounting-and-reporting-guidance-for-uk-companies
Hay, D., &Cordery, C. (2018). The value of public sector audit: Literature and history. Journal of Accounting Literature, 40, 1-15.
Hogan, C. E., Rezaee, Z., Riley Jr, R. A., &Velury, U. K. (2008). Financial statement fraud: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 27(2), 231-252.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Li, H., Dai, J., Gershberg, T., &Vasarhelyi, M. A. (2018). Understanding usage and value of audit analytics for internal auditors: An organizational approach. International Journal of Accounting Information Systems, 28, 59-76.
Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.
Salehi, M. (2007). Reasonableness of Audit Expectation Gap: Possible Approach to Reducing. ICFAI Journal of Audit Practice, 4(3).
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.
Sutton, S. G. (2000). The changing face of accounting in an information technology dominated world. International Journal of Accounting Information Systems, 1(1), 1-8.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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