The Role Of Auditors In Corporate Governance: A Case Study On Wesfarmers Limited

Auditor Independence

The role of auditors assumes a place of special importance because it is in direct link with the ethics and functioning of the company. The corporate governance of the company relies on the function of the auditor. Moreover, the auditor report lays a strong foundation when it comes to the concept of a stakeholder. In this report, Wesfarmers Limited is selected that is listed on the ASX and in the light of this company; the role of the auditor is studied in an elaborate manner. The report initiates with the introduction followed by the auditor’s independence, key audit matters, and the audit committee (BHP Billiton, 2017). Further, the adequate discussion is spread on audit opinion and various other matters pertaining to material events

The honesty and the hardworking of the company is highlighted by the by the audit report and the functioning of the auditing body. It is seen that BHP has put up a good and fair show with reference to the auditing assignments related to the company. All this has been made possible with the help of systematic audit planning and balanced networking. Also, the company has been seen to act in accordance with the Audit standard and the Corporation regulation 2001 which has been beneficial to the company. Audit control, remuneration, auditing facts is some of the important highlighted points that will appear in the report along with the auditing techniques of the company and the acts and the execution of the plans by the main governing bodies (Geoffrey et. al, 2016).

Even though the external auditor has facilitated in the provision of a few non-audit services, yet the independence and objectivity of the company’s external auditor are protected by limitations on the offering of such services. For instance, various kinds of non-audit services can be taken by the external auditor only with the RAC approval. In contrast to this, there may be services that may not be accounted for at all. This includes services wherein the external auditor may indulge in affairs that would be handled by the management (BHP Billiton, 2017). In addition, the auditor can also operate in the advocacy role for the company. Nevertheless, the RAC has implemented a special policy in the name of the provision of other services and audit. This policy covers the pre-approval processes and policies of the RAC to maintain the external auditors’ independence.

Auditor fees	2017 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2016	%	%
Audit and review of financial reports
Audit of annual report	3381	3.126	21308.38	19.73236
Subsidiaries audit	7.04	7.715	44.36882	48.69966
Services of Assurance	3.597	3.493	22.66969	22.04898
other services	1,849	1.508	11653.12	9.519
Total	15.867	15.842
Corporate finance services	0.042	0.276	6.656101	25.29789
others	0.589	0.815	93.3439	74.70211
Total	0.631	1.091
TOTAL	16498	16.933

No non-audit services were done by the auditor those were excluded by the policy on provision of audit and other services by the external auditor.

Key Audit Matters

These matters are primarily signified as those matters wherein professional judgment is necessary and that forms part of the most important audit process in the company’s financials. This also includes the most crucial evaluated risks associated with material misstatements that have been recognized by the company’s auditors and that can have the biggest impact on the overall audit process (Hoffelder, 2012). The company’s key audit matters have remained unchanged from the year 2016 and the same has been disclosed in the year 2017 financial report. The following matters have been addressed by the auditors in relation to BHP Billiton and the audit opinion is clearly based upon the same.

The prime area of judgment is associated to the company’s evaluation of future flows of cash for every CGU (cash-generating unit) that is utilized to analyze the PPE’s recoverable value together with the recoverable value of intangibles in the financial statements of the company. Further, this also comprises of recoverable value of the investments in the company’s subsidiaries. Moreover, the future flows of cash in relation to forward-looking estimates are inherently problematic to ascertain with accuracy (BHP Billiton, 2017). Besides, there is also a judgment level implemented in the ascertainment of order key inputs. The next key audit matter in relation to BHP Billiton is the valuation of assets. In this matter, the company has selected the same because of the size of balances that is around seventy-two percent of the total assets of the company, and the judgment level implemented by them in the assessment of the reasonableness of inputs utilized in evaluating the company’s analysis of the recoverable value of the assets (KMPG, 2010). Nevertheless, the company also has affairs in various countries that are within its taxation regime. Therefore, the nature of the company’s activities drives various taxation duties including royalties, corporation tax, production-based taxes, taxes associated with employment, etc. Further, the cross-border attribute of the company’s sales of the commodity also plays a key role in creating issues related to international transfer pricing. Nevertheless, the tax has been regarded as a key audit matter because of the implementation of taxation rules to the company’s activities that is complicated, specialized, and necessitates judgment to be exercised by itself in association to the evaluation of its estimation of tax funds, related provisions, and contingent liabilities. In relation to closure and rehabilitation, the same is governed by an admixture of statutory requirements and company’s policies (BHP Billiton, 2017). Further, potential estimates over the life of reserves and mine are made by the company in ascertaining its rehabilitation provision whose computation requires judgment owing to the complications in forecasting the time and quantum of future expenses and thereafter, ascertaining an effective rate to discount such expenses back to their present value. Besides, the majority of the company’s assets are long-life in nature that enhances the anticipation of uncertainties related to the future flows of cash (Livne, 2015). In addition, the reason behind the selection of same as a key matter was because of potential size associated to the financial position of the company and judgment level applied in assessing the estimates of time and quantum of future expenses and evaluating the rate to discount the expenses back to present value.

Audit Opinion

To see that the financial report is updated and is positive in nature is that the main priority task of the accounting and the management body but the auditors thinking and opinion is of very significant importance. It is the major and upheld task of the auditor to see that the company’s financial condition has been transparent in nature and all the statements presented previously are true to the records and to the public (Matthew, 2015). When the accounting and the management body is concerned, it is their priority to see that all the policies and the portfolios adopted by the company are beneficial to the same and all the outcomes are satisfying that will ultimately help the auditors to do their jobs without any hindrance and also to maintain the transparent nature. All this is seen to affect the final financial report in a very positive manner. All the records that are about to get disclosed in the financial reports must be true in nature (BHP Billiton, 2017). It must be noted that the transactions and the related assets along with the liabilities are all under the supervision and the control f the management department. Also, the knowledge that an auditor holds is confined to the one that the company shows up in the starting and the one gained during the process of audit in the company. The maintenance of transparency of the records showed to the auditor and the statistics shown in the financial report is the responsibility of the management of the company (Gay & Simnet, 2015). It is the choice of the auditor if he wants to take suggestions about the statistics and the structure of the financial report and also have the choice to release and plan the financial report part by part as per the availability of records from the side of the management (Roach, 2010). The presentation of the financial report of a company can be said to be a true blend of the records presented by the company along with the thinking and opinion of the respected auditor. In the case of the auditors of BHP, it was seen that the auditors did not take part in the structure making of the financial report or the establishing of records for the audit and were only concerned with the detection of the material misstatements which were either caused by frauds or carelessness followed by the company management (Pilbeam, 2009). This can give a very fair and clear idea about the kind of work that both the management body and the auditing body do and the marked difference between the working principle and priorities of both the bodies working for the same company (Cappelleto, 2010).              

Audit Committee

In relation to BHP Billiton, there were some material subsequent events that incurred after the date of reporting. The reason why subsequent events are referred to as the material can be attributed to the fact that the same can have an influence on the company’s performance if they had been reported earlier (BHP Billiton, 2017). BHP announced an investment scheme of US$2.5 billion for development of its Spence Growth Option. This included construction of a copper concentrator that can diversify mine life of the same by fifty years. The company also approved a multi-currency repurchase plan of bond with an international aggregate capitalization of $US 2.5 billion. Later, the company announced that they have enhanced the value of such international aggregate cap up to US$2.9 billion (BHP Billiton, 2017). Furthermore, another material subsequent event was that the company together with the management and directors ascertained that its onshore US assets were non-core and options to quit these assets were being effectively pursued. This material subsequent event was a part of a continuing review of the company’s portfolio. Nevertheless, the execution of such options on the part of the company could take slight time and as of now, the company had also proved itself incapable of estimating the financial influence of any future transaction (Wood, 2011).

Since these events incurred after the reporting date, they failed to possess any impact on the company’s performance and financial statements as a whole. Based on the effectiveness and importance of these events, it can be noted that if these events had incurred prior to the reporting date, the financial data and overall organizational performance of the company would have been completely different (Roach, 2010). However, the effect of these events can be noted in the upcoming reporting period wherein the performance and financials will be surely affected.

After the presentation of the financial report by the auditors of the BHP who said to have prepared it with honesty and as per the Corporation Acts of 2001, it didn’t feel like the same and there were some loopholes and lacking in positiveness and transparency was seen which have not been present if the above lines spoken by the auditors were true enough. The reason behind the above loopholes can be the fact that the auditors only paid attention only to some of the major key points of the rules and explained these actions perfectly an in detail while neglecting the others without any reason. It was also seen that the points that were selected to be depicted and explained in the financial report were chosen without any base and they utterly failed to give the bases for which they have or had selected only those particular points (Wood, 2011). But it must also be seen that among such major mistakes, they did one thing perfectly and that was the explanation of the process that was taken into action for the adoption of those particular rules which displayed a positive side of the auditing body as well. It must always be kept in mind that when investments are made in a company then they are from the core parties and also from the one who is looking for surplus profits and in such a case all the records about the assets liabilities and transactions of the company must be fir and clear in nature and also perfect explanations should also be saved for them for future references (BHP Billiton, 2017). But as per the financial report which was presented by the auditor this was the major key point that was seen to be out of the consideration books and was not included in the report which causes the hindrance for the investors to make the exact decisions. The carelessness of the auditors about the fact that not to consider the key points is clear but they have provided additional and extra footnotes and highlighted the working of the same in their financial reports. It is thus advised that the financial reports and the records presented by the auditors of the company can often be misleading and the investors who have been seeking profits only are to invest in the company with utter care an only after making perfect and brave decisions (Baldwin, 2010).              

Material Subsequent Events

It can be seen from the annual report of the company that when it comes to financial statements, there has been provision of details regarding the notes to financial statements but the company has offered proper footnotes to such information in the previous segments but it has not disclosed the same in the financial statements where it was necessary to be disclosed. Footnotes can assist users in referring and enhanced decision-making but the absence of such information can make them confused and deteriorate their effectiveness in making proper decisions. Furthermore, the accompanying notes to the financial statements of the group have not been properly reported because the information provided can create complications for users in decision-making. Besides, the statement of income reported by the company is reported in a manner that can easily arise doubts in the minds of users. The reason behind this can be attributed to the fact that there are two income statements disclosed by the company (Baldwin, 2010). One is the statement of income for the year 2017 and the other is a statement of comprehensive income for the year 2017. In relation to this, such additional details must form part of another segment and not in the financial statements because these details cannot assist in the assessment of a company’s performance. Furthermore, even though these details were necessary to be disclosed in the financial statement, yet there are no footnotes that can allow users in taking a valid decision.

Therefore, if the company has not disclosed proper footnotes in the earlier segments and instead, have reported them in the financial statements, it would have been more beneficial to the users in their decision-making process (Baldwin, 2010). Overall, other material information is prevalent in the report that is a positive indicator.

Conclusion

The audit control mechanisms of BHP Billiton are in proper place because the auditors have identified all key audit matters that can assist in mitigating the risks of material misstatements. Furthermore, the directors have ensured compliance with statutory regulations like Corporations Act that sheds light on the fact that all the rules have been properly followed. Besides, BHP has also disclosed material duties of their auditors in addition to their provision of non-audit services that is a positive indicator of risk assessment strategies on its part. Overall, the audit report and director’s report have been projected effectively by BHP through the fulfillment of necessary reporting guidelines.

References

Baldwin, S. (2010) Doing a content audit or inventory. Pearson Press.

BHP Billiton. (2017). BHP 2017 Annual report and accounts. https://www.bhp.com/media-and-insights/reports-and-presentations  [Accessed 9 September 2018]

Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne

Gay, G & Simnet, R. (2015)  Auditing and Assurance Services. McGraw Hill

Geoffrey D. B, Joleen K, K. Kelli S. and David A. W. (2016) Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons. [online] 30(1), pp. 143-156. Available from https://doi.org/10.2308/acch-51309  [Accessed 9 September 2018]

Hoffelder, K. (2012)  New Audit Standard Encourages More Talking. Harvard Press.

KMPG. (2010) An overview of Risk and disclosure. Available from 12 September 2017 https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/KPMG-pharmaceuticals-disclosures-summary.pdf

Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online].  Available from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full

Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Available from https://doi.org/10.2308/accr-50871 [Accessed 9 September 2018]

Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan

Roach, L. (2010) Auditor Liability: Liability Limitation Agreements. Pearson.

Wood, D A. (2011) The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision.  The Accounting Review. [online] 86(6), 2131-2154. DOI: https://doi.org/10.2308/accr-10136