BUACC3741 Corporate Governance Activities

All this has been introduced as a result of the corporate scams and scandals that have took place in the past and have increased the concerns for the stakeholders. One such major corporate scandal was Enron Scandal. It was a financial scandal which eventually led to the bankruptcy of the company. The company at that time was being audited by one of the five major audit firms in the world, Arthur Anderson. The company was found to have stated the wrong financial results in the annual report of the company and was found to hide billions of debt balances which were a result of the failed deals. During the 2000 ear, Enron share prices rocketed to the all-time high of $ 90.56. In 2005, the CEO of the company got replaced and Enron repots a major loss of $137 Mn due to which analysts feared of the company’s internal financial status and dropped the rating due to which the share prices fell to the a 52 week low of $ 39.95.

In October 2001, the company reports a further loss of $ 618 Mn and $1.2 billion of assets write off and the share prices slumped further down to $ 33.84. All this continued and finally amidst the falling share prices to $ 20.75, the company announced in the public media that the company has been inflating the income since 1997 to the tune of $ 586 Mn and thereby Arthur Anderson as an accounting and audit firm for Enron becomes another casuality. Finally, in 2002, the cout convicts and declares the firm Arther Anderson as obstructing the justice and be a privy to the falsified financial statements being released by the company. What did the company actually do? The company used the fraudulent accounting practices in order to hide the losses and then show the same as profits by the means of subsidiaries accounting. It kept on transferring the debt on paper to its subsidiaries and recognizing the revenue from the fully owned subsidiaries showing that it was doing much well than the company was actually performing. All these happened under the nose of the auditor but the auditor di not bother to take the necessary steps to stop it or to detect and discuss it with those charged to governance.

Due to all this saga, Sarbanes Oxley Act was introduced and the disclosure of corporate governance activities gained momentum. It is due to this act and many other corporate frauds and aggressive accounting practices where the auditors have been involved that the significance of audit has increased manifold in the past. Therefore, auditor are the custodian of the financial statements of the company and the internal control being maintained at the company (Wang, Chiu, li, & Hsiao, 2018). They are the ones who should be applying all the measures, be it analytical or substantive procedures to verify the accuracy of what the management is reporting in the annual accounts. They should also be verifying the internal control and the accounting practices being used by the management of the company. All this will ensure the quality of reporting and transparency of the financial statements. 

Regulatory Attempts to improve quality of audit in Australia.

There are various regulations that have come up in the recent times to improve the overall quality of audit in Australia. There has been various standards that have been set that aims to improve the position of the auditors and encourage them to work more effectively. If we see closely the basic areas in which the improvement is required is improving communication between the auditors and the management and other people who depend on the audit report to take important decision with regards to the company and its finances. The basic ways in which companies can change this scenario and follow a more quantitative approach is by seeing the auditors are applying these standards in practice. The code of ethics have been established that states what the auditor has to follow and that includes his integrity, his professionalism and his independence.

The new standards like AASB 107 have been introduced that focuses on informing key matters of audit to the management and mentioning it in their audit report. Key matter includes those areas in which there is certain element of risk which the company might face and people who are investing in the company needs to be aware of it. Like in case of Enron if the auditors have applied this principles then the audit report would have been more better and with lesser errors. The Sarbanes Oxley Act was formed post this scandal that focuses on independence of the auditor in taking their respective decisions and seeing that it is free from all kind of influence. The auditor needs to see his own personal interest is not hampering his work in any ways (Tadros, 2017). Therefore rules have been established where auditors who are related to the companies as per the prescribed guidelines of the law cannot be appointed to work as per their auditor, there is also a cooling period between specific terms during which the auditor  can work for the company.

In case the auditor is found guilty then he would be penalized and his license would also get cancelled. The various accounting standards and principles sees to it that the overall financial statements have been prepared in the best ways possible and there is no issues involved with them (Eisemann, Parker, & Alstyne, 2017). The main aim of the audit report is to show the true face of the financials of the company, in case of Enron they showed stock which dint exist and the auditors agreed to the same and thus people ended up investing their hard earned money in the company and suffered huge losses. So from this it can be judged how important it is to have a balanced correct and figurative ethical approach while conducting audit and there should not be any negligence from any part. Thus, these regulatory standards that have been introduced in recent times have played a very important role in making the audit simple, cooperative and free from errors and has provided the auditors with a base which they can follow to get best results.

The overall aim is to improve the quality of audit and that can only be achieved from the auditor maintains effective amount of diligence from his end and thus that is where these standards comes to play and tell the auditor what he should do and what he not. Thus, the investors can then depend on these audit report that are framed based on such standards to take important decisions about the company and their overall investment (Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis, 2017).

Use of Machine language by Accountants.

Artificial Intelligence is the key of today, everything is moving towards automation and in that case, it has become comprehensive on how this can be of any use to the auditors. The realm of artificial intelligence is very big, and if seen closely it could be of great help in providing quality audit work. Machine learning is just a part of the Computer Assisted Auditing Tools and Techniques (CAATTs). ). The auditors can use this to reduce a lot of  manual work, they can push the entire ledgers for analysis through these tools instead for opting for sampling. Machine language comes into play in suggesting extra additions that can be made in the exceptions mentioned by the auditor based on the exceptions that the machine language has updated (Shimamoto, 2018). In this way the auditor would be able to detect those areas in which he requires more changes.

In more advanced circumstance, a set of data can be provided to the machine language and it can identify the normal set of transactions and that would help in finding any peculiar changes that is not normal as per that set. The machine language would thus help in identifying elements of fraud that might be there. So in all cases we see that the machine language can do a  lot of work but in no situation can it comprehend to a human auditor, the need for that would always be there. But machine language do one thing is that they can make the work of the auditors easy and they can help in finding certain errors that the auditors might have missed on, so in that way it would be great if it comes in picture. The changes in technology would always specify better uses of machine language for the auditors and thus we can see how automation has made life easier and also the overall quality of the audit work that is delivered would also improve based on that (Alsagoff, 2010).

Dependance of the Auditors on the Companies for fees.

In all ways auditors are employees who are working for the management of the company and delivering what is expected out of them. As all employees the auditors also need some remuneration in return for the work that they do and thus in that case they need to depend on the management of the company to deliver them what they need. So in that case there are all possible situations and chances in which the management can lure the auditors for extra money in return to changing the audit reports and also can offer them less or more remuneration based on how much they allow the management to comprehend the audit reports.

Thus we see that there is a dependence on part of the auditor on management of the company to give them what they need. There may be situations where management can take undue advantange of the situation of the auditor financially and can force them to work as per them, thus in all that  cases it becomes important that auditor should get good return and timely returns for their work delivered and there work must be safeguarded from the management of the company. It should be seen that management is not harassing the auditor in any way for remuneration in such cases the auditor can raise the issues to the compotent authority (Boghossian, 2017). But this is a big threat to the independence of the auditor in that respect.

It was witnessed in case of Enron also, the company had given auditors a lot of money to deviate them from providing correct audit report and work as per the management of the company. Thus in all these situations the personal integrity of the auditor comes into play, the auditors need to understand that they should be ethically responsible towards their work and should not let any undue sources to influence what they are delivering to the client, they have authorities to whom they can raise concerns when they feel that there is any threat to their indepedance (Shikha, 2009). In situations where they give in to the management and it is caught they would be heavily penalised and it is against the work ethics (Cayon, Thorp, & Wu, 2017). 

Conclsuion

Thus on going through the entire analysis we can say that being independent when conducting audit of any entity is very important in all ways. It helps in providing quality work to the people who depends on these audit report. Audit is a very independent judgement based work and thus there should be no influence whatsoever. If ever the aduitors feels that his independence is being charged he can raise a question to the management, to those who are charged with governance but in no situation he should be involved in any kind of fraud, thus we see how important it is to do proper due diligence on once part when they go through an audit report. It is important that auditors should depend on such standards that can help them in conducting the audit in a more effective manner. There are several changes occurring every new day and all is regulated towards improving the kind of work that the auditor is delivering so that such fraud cases do not happen again.

References

Alsagoff, N. (2010). Microsoft Excel as a tool for digital forensic accounting.

Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.

Cayon, E., Thorp, S., & Wu, E. (2017). Immunity and infection: Emerging and developed market sovereign spreads over the Global Financial Crisis. Emerging Markets Review.

Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility.

Eisemann, T., Parker, G., & Alstyne, M. (2017). STRATEGIES FOR TWO SIDED MARKETS.

Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis. (2017). Accunting and Finance, Carson,E;Fargher,N;Zhang,Y;.

Shikha, P. (2009). Financial crisis and the silence of the auditors. Accounting, Organizations and Society, 34(6-7), 868-873.

Shimamoto, D. (2018, JANUARY 29). Why Accountants Must Embrace Machine Learning. 

Tadros, E. (2017). 'Appalling' audit quality could lead to next Enron: ASIC's Greg Medcraft. Financial Review.

Wang, Z., Chiu, Y., li, Y., & Hsiao, L. (2018). Performance appraisal for the operation and management of listed and OTC Taiwanese companies with DEA benchmarking models.