The current report is based on understanding the independent concept of auditor’s materiality that misstatement in the accounting information below the level of materiality changes the perception of company’s economic state of affairs among the stakeholders. During the audit engagement, the premise largely influences the degree and focuses on the audit effort. The materiality judgement is integrally associated to the concept regarding the acceptable level of risk and the nature or extent of audit evidence which is necessary to form an opinion (Dunn, 2016). While the concept of materiality directly bears the conduct of audit with the subsequent opinion, controllers or the investing community are sceptical regarding its application.
The present report would accordingly address the research to the question of how the material misstatement effects the stakeholder’s decision making. The report would also address the key risks that is posed to the stakeholders from the material misstatement. In the later parts of the report, the concepts of independence and whistleblowing in respect of the auditors would be addressed that relates with the requirement of public interest. Reference to Enron scandal would be made together with the audit quality while performing an audit. Concluding remarks would be provided regarding the stakeholder’s ethics and values as they play an important role in maintaining the business brand value.
At Woolworths, the business believes that creating a strong stakeholder’s partnership forms vital element in establishing a more sustainable business and future. The vital element of this is understanding how materiality effects and influences the stakeholders and how can the business learn from and leverage the base of its stakeholders (Carmichael et al., 2016). In return, the business aims at creating a strong base of shared values through its activities by recognizing the societal and business benefits instantaneously for its all its stakeholders.
Woolworths functions under the dynamic market that offer both risks as well as opportunity which may materially impact the ability of the business in meeting its responsibility for its customers, group associates, suppliers, societies, shareholders and other stakeholders. The business of Woolworths is exposed to the wide range of compliance, strategic, financial and operational risks related with operational of retail business. Below stated are the key risks that is posed to each of the key stakeholders of Woolworths;
Customers: In majority of the cases the magnitude of the misstatement forms the important factor in determining the materiality (Mautz & Sharaf, 2013). Given the materiality misstatement is not identified properly, disclosed or adjusted in respect of the financial statement then it may cause significant reputational damage, adverse regulatory and financial impacts on the Woolworths business.
Suppliers: For Woolworths effective supplier relationship management is vital in conveying the right product proposition for its customers. The material misstatement may create an impact on the debt covenants or other financing and contractual arrangement with the suppliers.
Communities: Woolworths communities forms the key to the success of business, including its ability of building the retailers future by retaining and motivating the team members with the diverse skills, backgrounds and capabilities (Hargie & Tourish, 2015). Financial misstatement or non-disclosure of financial information might affect the compliance and regulatory requirements of Woolworths.
Shareholders: As the joint stock enterprise and publicly trading company, Woolworths has numerous shareholders that ranges from major institutions to individuals. Given that the material misstatement at Woolworths is not addressed in a proper manner, the ratios used by the shareholders to assess the Woolworths financial position may provide misleading results regarding operations and cash flows.
Debt funders: Woolworths main source of capital are the debt funders to make sure that the company is sufficiently funded to satisfy its financial obligations and objectives of business while administering the associated risks (Thomas et al., 2015). The material misstatement or non-disclosure of financial information might create an impact with the regulatory requirements of Woolworths. The material misstatement may also effect the debt covenants with the debt funders or other contractual obligations.
According to the section 290 of the code addresses the requirements of independence for auditing and review engagement which provides assurance engagements where the members in the public practice articulates the conclusion on the historical financial information (Stewart & Shamdasani, 2014). Furthermore, section 291 of the code explains the requirement of independence for assurance engagement that does not involves Audit and review engagements regarding the historical financial information that is referred to the code of ethics based on the other assurance engagements.
The notion of Independence forms essential in obeying with the principles of integrity and objectivity. The auditor’s independence is regarded as the independence relating to internal auditor and external auditor from the parties that might have the financial interest in the business which is being audited. The term independence needs integrity and objective to the process of audit (Louwers et al., 2015). The concept of auditors mandates an auditor to freely carryout their work freely and in the objective manner.
The term independence consists of independence of mind which permits the expression of conclusion without getting impacted by the influences which compromises the professional judgement, ultimately enabling the individuals to act with integrity and use objectivity for professional scepticism. Independence also includes appearance of the auditors. Avoiding of facts and situations that are very noteworthy is sensible and conversant third party is most likely to conclude the weightage of exact facts or situations which the audit team members, integrity and professional scepticism has been cooperated.
Whistleblowing can be defined as something when the employee, contractor or the supplier goes beyond the channels of normal management to report the alleged wrongdoing at work which includes speaking out the confidential manners (Knechel & Salterio, 2016). This can be carried out through internal procedure that is set up by the organization or to the external body namely the regulators or the external whistleblowing. The public disclosure to the media is generally seemed as whistleblowing and those that are of interest to the internal audit as the probable indicator on the controlling environment where the internal auditor is required to go out of their organization to get the concerned person to deal with the problem.
According to the belief of Cohen & Simnett, (2014) it is not the work of internal audit to identify or prevent the corrupt practices. The internal auditors generally come into the possession of information that is critically sensitive and subsequent to the organization that poses significant potential consequences. This separates the auditors from several other members of the organization. The information might relate to exposure, frauds, uncertainties, threats and mismanagement, misuse of power, misconduct that threats the health or safety or other wrongdoings.
The Enron’s case is regarded as one of the largest scandals of fraud in the world. Following the investigation of fraud, the company was forced to bankruptcy. Enron’s filing for bankruptcy during the month of November in 2001 marked the commencement of unheard signal of corporate scandal. Enron failed mainly due to the unethical practices of its senior (Junior et al., 2014). The scandal of Enron clearly provided lesson and also certain major challenges which is yet faced by auditors. The lesson learned from the Enron scandal includes the following;
Incorrect of use of power: Abuse of power can at times hurt the financial viability of the company. The executives at Enron wielded power ruthlessly. The position of vice-chairman was regarded as the ejector seat because majority of the occupants were removed from the position when the issue was addressed (Simnett et al., 2016). Abdication of power resulted in a problem for Enron. On numerous occasions, manager failed to understand that employees were creating a new market. The members of board failed to use appropriate oversight and hardly challenged the decision of management.
Supervisory approach: It is already known that the quality of audit can be best used to provide the incentives instead of threatening and punishing. Majority of the auditors and accounting companies is deeply committed towards professionalism and integrity. Oversight must be a substance in assisting the firms to recognize the weakness and strengthen their practices. The supervisory approach would have helped excess typified top management at Enron (Carson et al., 2016). Under the supervisory approach as long as the auditing firm or the individual auditor is acting in the good faith and willing to perform audit in accordance with the prescribed auditing standards, this would help in improving the quality of practice by making the recommendations for taking the disciplinary action.
Internal Control Auditing: Another area of lesson is the internal auditing control. This is an important area of special interest in respect of the reporting requirements of internal control. Another area of lesson was restoring the lesson of confidence required by the management and auditors to report on the effectiveness of the company’s internal control over the financial reporting. One of the lesson that is learned is the level of difficulty in balancing the costs and benefits in this area.
The auditor-audit committee relationship: Another lesson learned from is that the external accounting oversight cannot be entirely effective given the company is itself not dedicated to the reasonable and precise financial disclosure (Becker et al., 2016). In this regard, the relationship between the auditor of company and its independent audit committee forms the key.
Auditing as the global profession: The ultimate lesson which is learned from the Enron scandal is that auditing is regarded as the global profession (Chambers & Odar, 2015). Therefore, it is regarded as the critical factor for the board to work with the other auditor oversight bodies. The case of Enron provided that oversight introduces difficult issues that includes the probable conflicts with the laws and those that is operating in other countries.
Irresponsible behaviour: The officials of Enron acted officially by failing to undertake the required action, that fails to take into the account the adequate oversight and Enron’s failure to shoulder the responsibility resulted in the ethical miscues of their organization (Soh & Martinov-Bennie, 2015). The CEO laid down the played warnings of financial indecencies and some of the board members failed to understand the numbers or the operations of company. On many occasions the managers of Enron left their employees on their own that encouraged them to undertake numbers by the possible means. Following the collapse of the company, none stepped forward to shoulder the responsibility for what happened at the company. Greed was regarded as the main motivator for both the managers and their subordinates at Enron. The optimistic earnings report hidden losses and other noteworthy tactics were designed to keep the stock price insincerely high.
Arthur Andersen is regarded as one of the world’s five leading accounting companies was also auditing Enron (Fernandez-Feijoo et al., 2016). This implies that the job of Arthur was to exercise check on the accounts of company whether a true and fair view is reflected from the financial statement. As a matter of fact, Andersen must have been in the line of defence during the event of fraud and deception. Arguments regarding the conflict of interest was thrown at Andersen since they acted as Enron’s auditors and consultant. Andersen derived higher amount of fees for the work of audit and consultant work from the company.
During the third quarter of 2001, when the activities of accounting irregularities were reported, the regulators and media focussed extensively on Andersen. The extent of supposed errors in accounting together with the role of Andersen as the widespread media attention. The auditor of Enron gave an apparently powerful environment of exploring the effect of auditor reputations on the client market prices regarding the audit failures (Alzeban, 2015). The most damaging impact on the reputation of Andersen was perhaps the admission that the employees of the company has destroyed the documents and email that was related to the engagement. As the entirety the destroying announcement has resulted in noteworthy impact on the seeming quality of the Andersen’s audit and the reputational loss gave rise to the negative effect on the market values of the company’s clients.
In the statement made by the Greg Medcraft Australia might be facing the Enron type business collapse except the big four accounting companies significantly improve their standards of auditing as warned by the chairman of ASIC (ABC News, 2018). According to the statement made by Greg Medcraft the practice of poor auditing of the company accounts may act as the canary in the coal mine till the next financial crisis.
According to Greg Medcraft another Enron might soon be in the making. However, the key of not having another Enron is to assure that the auditors perform their work and obtain assurance that the financial statement does not has the material misstatement. Greg Medcraft also expressed his fear that he no longer has trust in the financial information (Apesb.org.au, 2018). He recalls that the investigation of Enron’s collapse invited financial crisis in the major area of audit. According to Greg Medcraft, he stated that the extent of trust the society can have on the financial statement is meant to be guaranteed by the auditors.
In the recent study conducted by the ASIC, the samples collected from the key audits of KPMG, PWC, Deloitte and E & Y over the past eighteen months till December 2018, 23 per cent of the audit did not offered any reasonable assurance that the books of accounts are accurate or free from any material misstatement (Carson et al., 2017). Evidences from the findings suggest that there was the lack of scepticism and usually lacked the approach of challenging that was faced by the company. When it was asked that the poor auditing was the canary in the coal mine, Greg Medcraft warned that there was noteworthy red flag and with passage of time it was turning out to be worse.
The US-based firm Enron collapsed spectacularly during the year 2002 in the scandal and planned the accounting fraud in a creative manner. This ultimately resulted in the demise of accounting firm Arthur Andersen as it failed to identify the financial misstatement (Chiu et al., 2018). According to the statement made by Greg Medcraft, ASIC has performed more than 7000 high intensity surveillances that involved numerous investigations, imprisonment of more than 80 people and banning of greater than 600. It is also included the return amount of $1.3 billion for the investors that stormed into financial scandal.
Greg Medcraft in its statement held that there is a list of unfinished business that he has handed to the Federal Government and has his successor ready for the next year. According to the Greg Medcraft, imposing the civil penalties is regarded as insufficient (Davies & Aston, 2017). The government has identified it and the financial system of inquiry has identified it. The key audit partners whose continuity is particularly vital to audit quality might in rare cases because of the unforeseen circumstances out of the company’s control may be permitted an additional year in the audit team till the threat of independence is eliminated or lowered an acceptable level by implementing the safeguards.
According to the statement made by Greg Medcraft when the company has only few people that has the necessary knowledge and experience to act as the key audit partner on the audit of the public interest entity, rotating the key audit partners which might not be available for safeguard (Nickell & Roberts, 2014). Given the independent regulator, in the relevant jurisdiction has offered an exemption from the rotation of partner in such situations, provided that the independent regulator has specified the alternative safeguards that are applied to the regular independent external review. The distinguishing mark of the profession of auditing is the acceptance of responsibility and acting in the interest of public. As a result of this, the responsibility of the members is not exclusively to meet the needs of the individual clients and employer. While acting in the public interest, the auditor should observe and comply with the APES 110 code.
Greg Medcraft in its view stated that implementing the safeguard measures becomes necessary to eliminate the threats and reducing them to the acceptable level. Safeguards becomes vital when the auditor determines that the material misstatement threat is not at the level where a reasonable and informed third party would like to conclude that the fundamental principles of auditing is not compromised (Abdullatif & Kawuq, 2015). As stated by Greg Medcraft another financial crisis can be avoided if adequate care and professional competence is maintained by the audit professionals with appropriate knowledge and skill at the required level to assure that the relationship between clients and employer is competent enough. Furthermore, to respect the level of confidentiality of evidence obtained as the result of information and business relationships therefore, no information is disclosed to the third parties without the specific authority unless the legal or professional right or duty to disclose the information to the members or third parties.
Conclusion:
On the conclusive note, the stakeholder analysis performed states that it plays a vital role in preserving the brand image of Woolworths. Woolworths is centrally focussed on maintaining the values of the stakeholders and ethics in order to differentiate the business from other forums in the market. The central area of focus for Woolworths includes the customer satisfaction, strong relations with suppliers and attaining economic objectives. The materiality concept effects the decision making procedure of the stakeholder and requires Woolworths to implement appropriate care in provide a complete disclosure of the financial information to its stakeholders.
On the other hand, corporate scandals such as Enron abused their power and privileges. The corporate culture of Enron played a vital role in its collapse. It is noteworthy to denote that the case of Enron is the biggest series of corporate scandal that damaged the reputation of corporate firms. The scandal of Enron moved the balance away from the corporate boards in the direction of investors. Following the scandal there is more awareness among the corporate executives regarding the accounting misstatement that may be erroneous as they currently face the criminal charges.
References:
ABC News. (2018). Poor auditing could be ‘canary in the coal mine’ for financial crisis: ASIC. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-poor-auditing/9114490 [Accessed 29 Dec. 2018].
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Alzeban, A. (2015). Influence of audit committees on internal audit conformance with internal audit standards. Managerial Auditing Journal, 30(6/7), 539-559.
Apesb.org.au. (2018). Apesb.org.au. [online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 29 Dec. 2018].
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