Ma611 Master Of Professional Accounting Assessment Answers

Assignment Description 

In addition to the Submission Guidelines appearing on page 1, the assignment is to be completed by groups of four students. The submission into the campus specific assignment drop box is to made by ONLY one group member. 

Part 1

Audit firms are categorized in a number of ways; the two most common being the international ‘Big 4’ audit firms and the ‘non-Big 4’ (or mid-tier) audit firms. 

The Big 4 audit firms are; (i) PriceWaterhouseCoopers (PwC), (ii) Ernst and Young (EY), (iii) KPMG, and (iv) Deloitte. 

Most audit firms maintain a website that explains the services offered by the firm and provides resources to their clients and other interested parties. The services offered by most firms include both audit and non-audit services. 

Required 

Find the websites for: (a) a ‘Big 4’ audit firm and (b) a ‘non-Big 4/mid-tier’ audit firm. Present a ‘business report’ that addresses the following two requirements; 

a. Compares your two audit firms on the following ten characteristics: (20 marks; i.e., no more than 1000 words)

1. Range of services provided.
2. Geographic coverage (i.e. where their offices are located).
3. Number of staff and special skills
4. Industries in which they claim specialisation/expertise.


Publications and other materials provided to their clients or the general public
Key marketing message(s).
A topic of your choice No.
A topic of your choice No.
A topic of your choice No.
A topic of your choice No. 

Note, to find four ‘topics of your choice’, you will need to look-up (at least) four articles published in ‘professional’ and/or ‘academic’ accounting/auditing journals that have examined differences between ‘Big 4’ and ‘non-Big 4’ audit firms. These articles (reference sources) must be cited in your responses, and listed appropriately at the end in a reference list using APA referencing style.

b. Makes a recommendation on which audit firm your group would prefer to work for and why. Your explanation must refer to the material presented in Part 1 (a). If the recommendation of your group is ‘undecided’, then explain why, again, referring to the material presented in Part 1 (a). (4 marks; i.e., no more than 200 words) 

In terms of Part 3’s ‘Format and presentation quality’ (worth 4 marks out of 40 marks; 10 per cent), your ‘business report’ for this part must have a/an;

• Executive summary (between 100 to 200 words),
• Introduction that succinctly outlines the main theme (s) and requirements of this part of the assignment (no more than 200 words),
• Body that specifically addresses the requirements of Part 1 (a) (no more 1000 words),
• Conclusion that specifically addresses Part 1 (b) (no more than 200 words), and
• Reference list containing all cited
• Proper English grammar, appearance.

Part 2

In 2002, the audit firm Arthur Andersen (one of the then ‘Big 5’ audit firms!) collapsed following charges brought against it in the United States relating to the failure of its client, Enron. Some other clients announced that they would be dismissing Arthur Andersen as their auditor even before it was clear that Arthur Andersen would not survive.

Required 

a. Using any two of the three theories outlined in Gay and Simnett (2015, Chapter 1, pages 20-21)) (i.e., the prescribed textbook) on the demand for assurance ((i) Agency Theory, (ii) Information hypothesis, and (iii) Insurance hypothesis), explain some reasons why these clients took this action. (2 x 4 marks = 8 marks; i.e., no more than 400 words)

b. Present an argument of why a similar event is not likely to happen again. Your discussion should be (i) in context of what went wrong with Arthur Anderson/Enron and (ii) make specific references to how regulations and auditing standards have changed since the collapse of Arthur Andersen.

Answer:

Part 1

Introduction

The main purpose of this assignment is to analyze the service which are provided by PwC and BDO in Australia which is related to auditing. In recent world, the role of auditing in business is very much essential. The changing business environment and in the wake of accounting scandals the role of an auditor is considered to be very important for the business and promoting fairness and honesty in preparation of the financial statement of the business. The role of an auditor is comment on the financial statements whether the financial statements are showing true and fair view or not. In this assessment, the comparison is between PwC and BDO both of the firm provides audit services to the business.

Discussions

Range of Services

The business of PwC which is regarded as one of the big four audit firms. PwC is regarded as one of the big 4 because of the large-scale operations which is carried out by the business. The business provides advisory services which helps businesses to formulate strategies which are effective for the business, audit and assurance services which forms a major part of the services which is provided by the business (Yasar, 2013). Audit and Assurance Services provides assurance to the potential investors about the true and fairness of the financial statements of the business. In addition to this, PwC also provides family business services and tax services to the clients of the business. On the other hand, BDO provides similar services which are same as PwC and the core part of the business is the audit services which is provided by the business (Messier, Glover & Prawitt, 2015).

Geographical Coverage

PwC is one of the big 4 firms and therefore has a wide scale operation across many countries. The company has established its business in more than 107 countries across the world and the headquarters of the company is situated in London and the business also has branches in US, India, Australia and some other major countries of the world (Kend, Houghton & Jubb, 2014). On the other hand, BDO operates in Australia and has various branches which are situated across Australia itself. Therefore, it can be said that the company is local company and only looks after the domestic business. PwC on the other hand is multinational and operates and handles businesses of foreign countries as well.

Number of Staffs and Special Skills offered

PwC is known to be one of the firms which provides exceptional services in auditing and assurance as well as tax. The company is responsible for tremendous employment generation in Australia and other countries in which the business operates. The business specializes in providing audit services and tax services to the clients (Eilifsen et al. 2013). On the other hand, BDO also generates employment opportunities in the service sector but does not generate as much employment as PwC can be generate which is natural as the company has not that much vast business as compared to PwC.

Industries in which the Business specializes

PwC has wide business market and offers a wide range of services for its clients. The business however specializes in industries such as Banking and finance, automotive, manufacturing sector, energy generation, healthcare sector, Governmental services. In addition to this, the business also provides services to various other sectors which are subsidiaries of the above mention industries or related to the same.

BDO on the other hand specializes in financial sector, healthcare, Governmental services, Natural resources industry and non-profit business. Some of the Industries are similar to PwC’s business. However, the scale of operations which PwC engages is significantly more than what BDO operates.

The business of PwC is committed towards providing the best quality services so that the business can gain competitive advantage in the eyes of the client and the business can effectively compete with the other big 4 firms. The motive of PwC is to be at the top of the other big 4 firms for which the business recruits the best talents in employees and train them to ensure that they are of value to the business (Leung et al., 2014). On the hand BDO is focused towards bettering the services which the company provides and also further expanding the business in Australia. The business of BDO is committed towards providing its clients with the best services possible and the business is still developing considering the variety of services such advisory, audit and assurance, tax related services which the business has on offer. The scale of operations of the business might not be as large as PwC but the firm is certainly developing.

Recommendation

After analysis of the above discussion part which compares the business structure of PwC and BDO in order to estimate which of the audit firms have a better service opportunity and scope for growth in the business. The above discussion clearly shows that the services which are provided by both the audit firms are similar in all respects and both businesses provides more or less services. However, there are certain areas where PwC which is one of the big four audit firms are more productive from the point of view of services which are provided by the business than a non-big four firm like BDO. The areas where PwC is more productive from an employment perspective are given below in details:

• The global exposure which the company provides for the employees of the business is very productive for the employees in the long run. It is a known fact that PwC operates in many countries and it is quite natural that a branch of PwC of a foreign country takes help from the PwC which is situated in Australia. Therefore, the employee working in PwC has an exposure to global working conditions and norms.
• The quality of services which are provided by PwC is exceptional in every way and the business is highly trusted by the clients and therefore has a positive image of the integrity of the firm in the view points of the clients. This motivates the employees to perform better and provides work satisfaction.
• The level of Operation of PwC is much more than BDO and therefore employee would like to work for PwC due to the variety of services and vast range of operations for the business.
• Lastly there is a condition of remuneration of the employees which is certainly more in case of any big for firm as compared to a normal accounting firm.

Therefore, from the above analysis, it can be clearly stated that the group should work for a big four big four business firm such as PwC. The employee will be having better scope of growth and remuneration in PwC and in addition to this there is the global exposure which PwC has to offer.

Part 2

a) Research on Arthur Anderson/ Enron

One of the biggest auditing collapses and infamy activities that have taken place in the global economy has been the bankruptcy of Enron and the closure of Arthur Anderson. The closure of the Arthur Anderson was an event of their clients and the potential clients refraining from undertaking auditing activities with them. There are several factors that have led to the client undertaking these kinds of actions and the client undertook the decision even before the company announced their closure (He, Pittman and Rui 2016). The clients of Arthur Anderson undertaking these decisions have mainly been due to the two related theories that are information hypothesis and insurance theory.

Sorensen and Miller (2017) highlighted that there were two other incidents of bankruptcy that took place for Arthur Anderson’s client and information on these companies were not known in the economy properly. However, after the incident of Enron, the clients were in no doubt in order to take the decision. The decisions were based on the information hypothesis because of the fact that information hypothesis is exploited in order to address the demand that is existent for external audits. With respect to this hypothesis, it is seen that services related to audit are demanded in order to mitigate the risk related to information to the ones who make use of the financial reports. The risk related to information refers to the risk related to the decisions of the investors due to the availability of false information (Boddy 2017). Therefore, auditors are essential in order to mitigate the losses because of the false and incorrect decisions leading to errors within the financial reports. Therefore, according to this theory, the companies have discovered that Arthur Anderson being the external auditors has not been provided true and fair information to the investors and this may lead to faulty decisions. Therefore, in order to safeguard themselves for this kind of issues and to maintain the trust of the market the clients have taken this decision.

The decision is even based on another theory as well and this theory is the insurance theory. This theory states that the auditors are demanded for the fact they can be sued in case there is a failure of a business. The process of auditing therefore provides the investors to create insurance. In case the investors buy shares by relying on the financial reports that have been audited and thereafter faced loss, the laws provide some sort of extent to recourse against the auditors (Gerakos and Syverson 2015). It is due to the hypothesis that the clients of Arthur Anderson anticipated that the investors may file a case a case against Arthur Anderson that in a way would have an impact on Arthur Anderson and thereby have an impact on their brand image as well. Therefore, they undertook the decision even before Arthur Anderson announcing their closure.

b. Argument

ii) After the advent of this incident, there have been changes in several accounting and auditing standards and regulations in order to safeguard the sentiments of the investors and keep the auditors and the audit companies under surveillance and check. One of the changes have been seen with the establishment of AICPA and various other accounting groups and the other changes have been development of rules and regulations from the government and the government agencies (Choi, Kim and Raman 2017). The other changes have been the ones that have incorporated naturally. The new standards that were introduced by AICPA have been SAS98, SAS 96 and SAS 99 and these standards were effective from 2002. These policies were established in order to ensure that the retention policies of the records of the companies were reaffirmed (Torbert 2015). Each of the regulations had their own feature and everyone one of them looked to keep a check on the auditing practices of the companies in order to create true and fair results through audits for the financial statements of the organizations.          

Reference

Boddy, C.R., 2017. Enron Scandal. Encyclopedia of Business and Professional Ethics, pp.1-4.

Choi, J.H., Kim, S. and Raman, K.K., 2017. Did the 1998 Merger of Price Waterhouse and Coopers & Lybrand Increase Audit Quality?. Contemporary Accounting Research, 34(2), pp.1071-1102.

Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.

Gerakos, J. and Syverson, C., 2015. Competition in the audit market: Policy implications. Journal of Accounting Research, 53(4), pp.725-775.

He, X., Pittman, J. and Rui, O., 2016. Reputational implications for partners after a major audit failure: Evidence from China. Journal of Business Ethics, 138(4), pp.703-722.

Kend, M., Houghton, K. A., & Jubb, C. (2014). Competition issues in the market for audit and assurance services: are the concerns justified?. Australian Accounting Review, 24(4), 313-320.

Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance Services 6e. Wiley.

Messier, W. F., Glover, S. M., & Prawitt, D. F. (2015). Auditing & Assurance Services: A Systematic Approach. Qing hua da xue chu ban she.

Soltani, B., 2014. The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of business ethics, 120(2), pp.251-274.

Sorensen, D.P. and Miller, S.E., 2017. Financial accounting scandals and the reform of corporate governance in the United States and in Italy. Corporate Governance: The International Journal of Business in Society, 17(1), pp.77-88.

Torbert, P.M., 2015. What felled Arthur Andersen? It depends…. Peking University Law Journal, 3(1), pp.227-284.

Yasar, A. (2013). Big Four Auditors' Audit Quality and Earnings Management: Evidence from Turkish Stock Market. International journal of business and social science, 4(17).