Sustainability Accounting and Accountability: Accounting and Finance

Audit quality is mainly obtained from the process of identification and administrating with the financial activities for reaching the quality objectives in an overall manner (Kaplan and Atkinson 2015). Audit firm aims at high-quality audit committees and minimizing in the internal control weaknesses for future business activities. 

Firm Size

Most of the large business organization perform powerful test for measuring the audit quality in the operational matters. There is positive relationship between the firm sizes of audit firm as well as audit quality for the same. There are vast differences between the forecasted as well as reported incomes for the large companies.

Fees of Auditors

Audit fees relates with the charges that is paid by the companies especially to the external auditors. They are paid for rendering audit services as well as non-audit services. These services include management advisory as well as professional consultancy services (DRURY 2013). These fees include various wages and benefits especially for the office as well as field personnel in audit support activities. Audit fees are quality differentiated in the competitive market for viewing at the quality differences in an overall manner.

Independence of auditors

Independent audit committee helps in enhancing in the independence of an external auditor. This ensures professional advices with response to management activities for the same. Audit committee mostly conduct informal as well as private meetings for discussing the material issues for future business activities (Brown 2014). Audit independence helps in maintaining auditor-client negotiation for most of the financial reporting issues for the quality external auditors.  

Reputation of auditors

This particular research will help in investigating on audit failure based upon the reputation of auditors. Reputation of an auditor depends on the perceived as well as actual levels in the auditing reports (Deegan 2012). It is important to understand the fact that high-quality job will help in increasing the level of profitability as well as audit results.

Industry specialization

In this particular research, relation between audit quality and the industry of an auditor will help in detection of audit results.

Qualification and proficiency of auditors

The main aim of audit report is to assure the outsiders on matters relating to material misstatements in the financial statements (Bebbington, Unerman and O'Dwyer 2014). It is required to develop in the leadership as well as management skills and level of proficiency in an overall manner.

Critical appraisal by the professor regulators and effectiveness of proposed measures in improving audit quality

Accounting or auditing scandals are the events, where the trusted executives of an organization provide misleading financial facts to influence various factors such as profit, taxes etc. Misusing or misdirecting funds, overstating revenues, misusing or misdirecting funds, overstating the value of corporate assets, understating expenses or under reporting the existence of liabilities are the most common forms of auditing scandals (Hay 2015). Various companies such as TESCO have been found involved in various audit scandals. Recently, after identifying revenue recognition irregularities in the half-year results of TESCO, it is found that the management of TESCO overstated their profits by £263 Million in 2015 (Mohamed and Handley-Schachler 2015). The regulators and the Conduct Authority (FCA) decided to penalize the organization accordingly. The management of TESCO estimated that their supermarket business would go to earn £1.1 Billion as half-year trading profit in 2015. The company enhanced their profit by embarking on aggressive accounting excessively. However, the half-year trading profit became £263 Million (originally £250 Million). After the incident, the management started reviewing the figures to identify why they end up inflating first half- year profit prediction in 2015. They realised that they overstated the figures during the final preparations for their latest interim results (Haddock-Millar and Rigby 2015). Although, PwC is the usual auditor, but Deloitte actually conducted a comprehensive and independent review to analysis the situation by involving the delayed accrual of costs and the accelerated recognition of commercial income. Deloitte found that TESCO indeed overstated their profit.

Table 1: Investigation of Deloitte

(Source: Sharma and Kelly 2015)

Balanced Scorecard for the audit quality that includes four major categories:

The group CEO of TESCO, Dave Lewis accordingly accepted their mistakes and duly indicated the incident as a serious issue. He also concentrated on both transparency and integrity. He also assured that the management would take necessary actions based on the investigation outcomes. The full-year trading profit of TESCO went down due to challenging trading conditions and the market share of the company also decreased due to the presence of various potential competitors. Additionally, the audit scandal also affected the market reputation of TESCO (Tsegba and Upaa 2015).

TESCO has been one of the market leaders within the UK grocery sector, but the business is now facing threats from various rivals. As a result, the market share and the profitability of TESCO significantly decreased, especially during 2014 and 2015. This was the situation that mainly influenced TESCO to involve in aggressive accounting scandal. The threats of a publicly traded company, which is focusing on the short-term perspectives, can be evaluated from the case of TESCO (Yu 2015). Due to increasing pressure from the investors, the company was hardly able to concentrate upon establishing a long-term sustainable business with innovation and better customer relationships. The company often forecasted that their earnings would never going to match the demands of the investors. They tried overstating figures in order to retain support and attractiveness of their business organization (Hay 2015). They realised that TESCO was not going to reach their sales target and they dealt with their suppliers to make such payments by offering various benefits in the next financial year. Such benefits are actually kept secret unethically and TESCO actually had to pay the money back to their suppliers in the worst-case scenarios. Aggressive accounting is acceptable to limited extent, but TESCO went too far with that.

Six major Japanese banks: Master Trust Bank of Japan Ltd, Mitsubishi UFJ Trust & Banking Corp, Trust & Custody Services Bank Ltd, Japan Trustee Services Bank Ltd, State Street Trust & Banking Co, and Nomura Trust & Banking Co sued Olympus Corporation for submitting misleading financial statements for 13 years starting in the 1990s (Tsegba and Upaa 2015). The key purpose of Olympus Corporation was to attract more investors in the short run. Starting from 1990s, the Japanese equity market started declining and Olympus Corporation started incurring loss. However, under the accounting standards of Japan back then, Olympus Corporation did not report their unrealized losses. The company has also tried hiding their loss with overpriced acquisitions. However, due to the introduction fair value accounting by the Business Accounting Deliberation Council, Olympus Corporation had no option but to mention their loss (Sharma and Kelly 2015).

Conclusion and Recommendations

From the above study, it is easy to gather information on audit quality. This research on audit quality helps in understanding concepts related to corporate transparency as well as market efficiency in an overall manner. There were various undoubted effects related to transparency as well as reliability on the corporate reporting system. It mainly tracks the audit quality and its lacking in the regulation activities. This increases in the level of complexity as well as subjectivity of the research work. Audit quality framework will help in satisfying the main aspect that includes the degree of compliance for the predetermined criteria for the same. In order to understand the audit quality, it is essential to assure the reliability pattern in the corporate reporting system. It helps in regulators for setting the shareholders role and identification of quality drivers in the input process in an overall manner.

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