The Lost of Relevance of the Auditor Profession - Literature review Example

? Has the auditor lost its relevance as a profession? Table of Contents Table of Contents 2 Introduction 3 Historical background 3 Methodologies 4 Previous studies on the topic 5 Mainstream versus alternative viewpoints 6 Principle questions being asked 6 General conclusions drawn from literature review 7 References 9 Introduction The review has been carried out on the relevance of auditing as a profession on the context of increasing financial scams involving financial disclosure of companies. This review is important as such financial scams have raised concerns over the protection of investor’s interest and also jeopardized the company’s goodwill. The various areas in which auditing function has lacked competency as per the prescribed financial reporting standards have been discussed. The secondary data sources have been used to study the previous studies and the empirical literature on the incompetency of the auditors and the adverse consequences faced the public due to their irresponsible activities. The literature review then assesses the justification of the expenses incurred for the purpose of auditing and the value that has been added as a result of auditing activities. The questions asked on the relevance of auditing function, mainstream and the alternative viewpoints on the topic have been reviewed. The recommendations on the ways of adding relevance to the auditing profession have also been included in this study. Historical background The auditors and their functions of auditing have never in such a limelight as ever before. The occurrence of the global financial crisis has raised concerns in the US, UK, Belgium, Singapore and in many other countries of the effectiveness of the auditing profession in the industry. The economic debacle exposed the inefficiencies in the auditing practices conducted by the auditors. The US Senate, parliaments in different countries of Europe have started to relook into exploring a new model for auditing practices as its was felt that the auditors and their profession of auditing has lost its relevance in streamlining the business records, identifying the gaps and loophole and help the business to keep fair and transparent financial records for public disclosure. Several companies in the past have been involved in the financial scams where there balance sheets and financial statements have been inflated and thereby misled the investors about the true financial status of the companies. For example, Enron has been earmarked as the biggest audit failure in the history when they showed poor standards in auditing of financial statements mainly due to the mal intentions of their board of directors that led to the incorrect disclosure of financial statements to its shareholders. The eventual fall of performance of Enron brought out the truth and finally Enron Corporation went bankrupt. The impacts of failure of auditing were hugely felt during the global financial crisis. The accountability for lack of transparency in the financial statements was affixed to the auditors (Kornberger, Justesen and Mouritsen, 2011, p.525). Hence, the costs incurred and the time and energy spent in the profession of auditing were felt as unnecessary burdens with the advent of control technologies and automated systems to streamline the financial records and information. Methodologies The methodologies adopted for carrying out the activities of auditing is important in establishing the relevance and effectiveness of the auditors. The auditors are the final check points of the financial information to be disclosed to the public after their certification. Thus the methodology adopted by them for evaluating the values of the assets and liabilities of the company in judging the correctness of the financial information is very important. The auditors follow the method of going concern in assessing the value of the assets and liabilities of the companies. This raises the complications in the activities of the auditing profession. The method of going concern requires the auditors to consider that the company would be running its operation for a certain period of time in future. This assumption is taken into account in evaluating the assets and liabilities and in judging the correctness of financial information. In cases where the management decides to cease operations after the conduct of audit, the valuation of the assets and liabilities undergo dramatic changes and thus, the correctness of the certified value of assets and liabilities of the company becomes questionable. The role of the auditors is often misunderstood in the implementation of the going concern method of valuation of the companies. In cases where the companies fail within a short period after auditing, it is believed that the auditors have not maintained the standards of auditing. The auditors are also required to follow auditing standards according to the international financial standards of reporting. The auditor’s role, however, does not involve guaranteeing the future prospects of the company. The auditor could only the appropriateness of the going concern method based on the available financial statements. Previous studies on the topic The whole of 2010 and 2011 has witnessed several inquiries being raised about the relevance of auditing as a profession, especially on the background of the global financial crisis. Several studies were conducted to introspect what went wrong in the field of auditing that led to a severe economic debacle all over the world. Considering the fact that the organizations spent a huge amount of expenditure on the activity of auditing, the concerns of the regulatory bodies and the governments in different countries became obvious on the role of audit that could not prevent the financial crisis of 2007-08. This helped in assessment of relevancy of the auditing profession in cases where it has turned to be non-value adding activities at cost of large expenses. The previous studies also indicate the role of auditors and their independence in carrying out auditing function. The profession of auditing requires the auditors to be unbiased and certify financial statements on its own merit (Free, Salterio and Shearer, 2009, p.124). The instances of auditors being influenced by the management and examples of inefficient corporate governance have led to unreliable financial disclosures that were certified by the auditors. Previous studies also indicate lapses in ethical considerations as an integral part of the auditing profession that requires the auditors to take judicious decisions in certifying the valuation of the assets and liabilities, contingent risks and returns. Mainstream versus alternative viewpoints The mainstream view point suggests that the profession of auditing establishes the confidence and trust between the consumers and the production facilities in an economy. The reporting of audited balance sheets by the companies provides the investors with a fair and transparent view on the company’s valuation and performance. However, due to the adverse impacts of global financial crisis, increase in financial scams and reporting of inflated financial statements by the companies have raised questions about relevance of the auditing profession from the viewpoint of investor protection. The alternative view points suggest suggests necessary modification in the auditing standards in order to strengthen the aspect of ethics in the auditing profession (Humphrey, Loft and Woods, 2009, p.817). In a scenario when the profession of auditing is loosing its relevance, the expansion of the role of audit in the areas of corporate governance, risk management and testing of business models would help to address the concerns of the shareholders. The introduction of Sarbanes-Oxley Act on the disclosure requirement of companies is an example of the alternative viewpoints for tightening the gaps in auditing function. Principle questions being asked The principle questions that are being asked investigate whether there have been loopholes in the existing standards of auditing practice or whether the auditors were not competent to implement the auditing standards, the consequences of which were evident in the financial crisis of 2007-08. The questions are also being asked about the ethical considerations in the auditing practices and the degree to which the auditors have been able to maintain an unbiased approach and certify financial statements on the basis of its own merit. These questions were asked as there were numerous instances of lack of corporate governance and interference by the management to influence the activities of the auditors. This led to the questioning of accountability of the auditors in upholding the public interest involved in their profession. General conclusions drawn from literature review The general conclusions that could be drawn from the literature review are given as follows. The international financial reporting standards and the auditing rules suggest that the auditors should carry out independent review of financial statements without any form of bias towards the management or the public in the process of certifying the books of accounts. However, several studies in the past show that the auditors have lacked power of decision making and did not adhere to ethical considerations while certifying the financial statements for disclosure. This has led to the financial scams and fall in the market price of shares of the companies. The eventual result was the fall of market index and financial crisis. Thus concerns on the relevance of auditing function were relevant as it turned out to be a non-value adding activity. Conclusion The concerns over the role of auditing as studied in the literature review shows disagreement over accepting auditing function as a value added activity. Although it has been agreed the functions of auditing brings about the trust and confidence between the economy and the investors, the implementation of the auditing standards though the practices of the auditor is under question considering the background of financial crisis. The suggestions in order to address the relevance of auditing function involve inclusion of ethical considerations in the role of auditors. The expansion of role of auditing to areas of risk management, corporate governance and the entire business model would add relevance to the functions of auditing and would help in creating value for the companies. References Free, C., Salterio, S. E., and Shearer, T. 2009. The construction of auditability: MBA rankings and assurance in practice. Accounting, Organizations and Society, 34(1), 119–140. Humphrey, C., Loft, A., and Woods, M. 2009. The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis. Accounting, Organizations and Society, 34 (6–7): 810-825. Kornberger, M., Justesen, L., and Mouritsen, J. 2011. “When you make manager, we put a big mountain in front of you": An ethnography of managers a Big 4 Accounting Firm. Accounting, Organizations and Society Volume, 36 (8): 514-533. Read More