2014

[AUDIT]

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Part A Discuss how the auditing profession behaved after the Enron collapse and the introduction of the Sarbanes-Oxley legislation.

Solution: Newtons Law of Motion has wide applicability and this could be clearly seen in what happened after the Enron Collapse. This could be called reactionary as long impact measures took sometime coming and the unfortunate kept on happening for sometime e en after strong measures !Munro and "tewart# $%&&'. (inancial year $%%$)$%%* was the time when most of these changes were brought to the system of accounting with the inception of +ublic Company ,ccounting - ersight .oard !+C,-.' which is a N/and lies in the +ri ate "ector. 0t has the powers to set and enforce auditing standards. Ma1or points that were addressed were !Munro and "tewart# $%&&'2 &. ,udit 0ndependence2 Corporate /o ernance matter addressed where some of the senior management leaders were part of the audit committee. $. 0mpro ed (inancial reporting standards2 making the financial transactions enhanced and transparent and addressing the issues of 3ariable 0nterest Entity *. Ethical "elling 4 Client Management2 5here practices taken up for winning new clients were scrutini6ed and ensured Ethical practices were being followed. The ,udit firms must be appreciated for the fact that they took the abo e points by their stride and followed the processes introduced religiously. "arbanes -7ley pro ides increased Corporate /o ernance and corporate

accountability. "-8 does the following to ensure the aforementioned points2

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+re enti e regulation in nature Conflicts of interest prohibited ,udit and Consulting Ensure /,,+ "tandards are being followed E aluates controls +erforms fraud risk assessment

"-8 had more beyond this9 the ma1or sections of "-8 often in contro ersy can be discussed as follows2 Section 302 of the ,ct makes a set of internal procedures mandatory designed to ensure that the financial disclosure is accurate. -fficers who are going to sign off should certify about their responsibility for establishing and maintaining internal controls. Section 404 has been often considered contentious and re:uires management and the e7ternal auditor both to report together on company;s internal controls ade:uacy on financial reporting !0C(<'. Considered the most costly part of "-8 to be implemented# the documenting and testing re:uires huge efforts. -ne of the points to ponder o er was the pro ision that empowered "EC to force a company;s
CE- or C(- to e7pel any e7ecuti e compensation in an year of misconduct.

E en though the audit firms had increased accountability of all their acti ities# auditor independence and increased compensations were big benefits they gained out of the regulations that came into force.

PART B
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Accounting firms have been accused of delivering dodgy auditing Discuss. Solution: , saying goes like# =Theres no smoke without fire> and this smoke and fire has been obser ed in the case of big accounting firms and their clients. <ight from the Enrons of the world to the not so farfetched "atyams in 0ndia accounting firms and their practices ha e been brought under the scanner. These ha e been ma1orly because of the following ma1or reasons !Lindsay# &??$9 Engel et al# $%&%'2 +rofessionali6ation and competition among audit firms Lack of strong business go ernance @uestion marks on the Economic go ernance +oor :uality of record keeping .usiness <elationships +oor :uality of record keeping Non adherence to Legal system Non Compliance of "ystemsA"tandards Lack of Barmony in accounting practices around the world

The management of the organi6ation where the audit is being conducted needs to ensure the following !Lindsay# &??$'2 ,udits add alue to the system and dont 1ust become regimented. More authority added to the auditors to keep the audits 1ust# regulated and disciplined

Audit
3arious legislations ensure the legality of the audits is maintained."-8 is one of those which makes sure that the dodgy practices can be curbed using the ele en points addressed by it2 &. +ublic Company ,ccounting o ersight board !+C,-.'. <egisters auditors# defines processes and procedures for audits# ensure @uality control. $. 0ndependence of the ,uditor. *. Corporate <esponsibility C. (inancial Disclosures E. , oiding Conflicts of 0nterest F. Commissioning ,uthority and resources G. Consolidation of <eports H. (raud ,ccountability) Corporate and Criminal ?. 5hite Collar Crime +enalty Enhancement &%. Corporate ta7es and returns &&. (raud ,ccountability)Corporate

, igil can be kept on the poor audit practices through all the regulations enforced and a little more responsibility and ethos from both the corporate and ,uditors# thus a oiding the dodgy practices often talked about.

Part C !hat is an accounting networ" and what benefits are there for the big accounting firms# Discuss and explain.
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Solution: Most auditing firms like to refer themsel es as +rofessional "er ices firm. The accounting network in discussion here is a professional ser ice network which pro ides its member firmsA resources to assist the clients and sol e arious problems together. .ig (our# comprising of Deloitte# +5C# I+M/# E4J form the largest accounting network. ,ccounting networks came into force to ha e the financial results audited for the public ,merican companies as directed by the "ecurities E7change Commission. The network ensures common standards and internal means of communications to undertake the audits. The brand that got established due to the accounting network pro ided greater credibility and in turn offered the opportunity to charge more from the Clients. The network started as .ig H# consolidated to become .ig F then E and now .ig C. The network has had many conflicts of interests and people ha e talked about the monopoly but these ha e been ad antageous for the big accounting firms as well. These ad antages ha e been !(rancis and "tokes# &?HF9 Munro and "tewart# $%&&'2 a. Branding. ,s already discussed# network that was created# allowed the organi6ations already in the big league to consolidate their position and grow bigger in stature. .ig C ha e had arious other competitors in the market but ha e fell prey to the big name that the former ha e earned the strengthened their names in the manner in which they ha e done it. b. Fees. The increased respect and faith shown as part of the network companies allowed them to charge more to their clients and higher risks were in ol ed in the 1ob following the Enron saga. Though a few schools of thought belie e
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legislations like "-8 may not help Cost effecti eness the network companies ha e shown such good understanding of these that the clients ha e agreed to pay those hefty sums. c. Multidisciplinary ro!t". The name earned in the accounting profession

helped the organi6ations to e7pand as Consulting and Ta7 firms and thus add more to their repertoire. This probably could be their biggest growth in terms of their own bottom and top lines. d. Mutual Bene#its. The organi6ations benefitted from the knowledge sharing happening within the network thus the theory of Cooperate to dominate worked perfectly for them. e. lo$al ro!t". The network also helped the big firms to e7pand internationally

to wider geographies and thus grow as an indi idual firm. The ad antages are far more than we can see but these networks ha e helped the auditing profession and people using their ser ices immensely.

Part % $he incorporation of auditors. $he law of %oint and several liabilities in relation to actions for negligence causing property damage or purely economic loss and its replacement by proportionate liability. $he capping of professional liability within the framewor" of State and $erritory &rofessional Standards legislation
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Discuss each of the aforementioned three points 'i.e. could or should these changes be made(

Solution: 0ncorporation of ,uditors in ,ustralias current scenario# it is important that ,uditors are protected against e7posure of unlimited liability which has been

default till now. 0ncorporation would protect ,uditors personal assets and reduce direct e7posure in case of a lawsuit since it would be against an entity and not an indi idual. Thus liability would be limited for all obligations !"tewart and Munro# $%%G'.

The law of 1oint and se eral liabilities in relation to actions for negligence causing property damage or purely economic loss and its replacement by proportionate liability. The law of 1oint liability would restrict the implications of any damage caused by the auditor and the conse:uences would be 1ointly held responsible which would in turn pro ide more independence to the auditor. The auditor would be free from the pressure of unlimited liability and would perform unbiased !.essell# ,nandara1an and Kmar# $%%*'.

The capping of professional liability within the framework of "tate and Territory) The auditors perform their ,udit functioning within the 1urisdiction of a state or territory. Therefore in case of any negligence or property or economic loss# the liability should be restricted to the bounds of that territory or state only. 0f this is
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not considered# the auditor might be sub1ect to unlimited risk or inappropriate claims owing to the liability. Thus this capping is also a step towards rationali6ing the liability of the auditor instead of an earlier unlimited blanket !.essell# ,nandara1an and Kmar# $%%*'.

Re#erences Munro# L.# 4 "tewart# L. !$%&&'. E7ternal auditors; reliance on internal auditing2 further e idence. Managerial Auditing Journal# 26!F'# CFC)CH&. Lindsay# D. !&??$'. ,uditor)client conflict resolution2 ,n in estigation of the perceptions of the financial community in ,ustralia and Canada. The International Journal of Accounting# 27!*'# *C$)*FE. "tewart# L.# 4 Munro# L. !$%%G'. The impact of audit committee e7istence and audit committee meeting fre:uency on the e7ternal audit2 +erceptions of ,ustralian auditors. International Journal of Auditing# 11!&'# E&)F?.

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(rancis# L. <.# 4 "tokes# D. L. !&?HF'. ,udit prices# product differentiation# and scale economies2 further e idence from the ,ustralian market. Journal of Accounting Research# 24!$'# *H*)*?*. .essell# M.# ,nandara1an# ,.# 4 Kmar# ,. !$%%*'. 0nformation content# audit reports and goingconcern2 an ,ustralian study. Accounting & Finance# 43!*'# $F&)$H$. Engel# E.# Bayes# <. M.# 4 5ang# 8. !$%&%'. ,udit committee compensation and the demand for monitoring of the financial reporting process. Journal of Accounting and Econo ics# 4!!&'# &*F)&EC.

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