Audit and Accountability Issues - Assignment Example

Audit and Accountability Table of Contents Question 3 Question 2 5 Question 3 7 Reference 9 Question In what ways might the FSA make greater use of an auditors knowledge about an individual bank to help improve the effectiveness of bank supervision? The Financial Service Authority (FSA) is a non- government body, which is entrusted with the statutory powers. There is a board to set the policies but the everyday decision-making is done by the executive committee. A wide range of powers are allocated to FSA, by the government of UK. It ranges from rule-making, investigation and enforcing powers. The government of UK has set up this body for regulating and controlling the financial markets, firms and exchanges, etc. So FSA sets the standards that the firms must meet in order to meet the required standards. The auditors are very important components for the financial institutions. It is the responsibility of the auditors to see and ensure that the financial statements of the firm are true and are prepared by authentic people by referring to the correct numbers. But many allegation received explained that the auditors failed in performing their responsibility. The auditor studied the financial reports of banks approving their financial reports, but the same banks collapsed just a few days after that (FSA, 2012). Auditors study the financial books of firms to check that all the firms are on a financial sound condition. So due to this activities of the auditor, they come across various strategies and business models of the company. This information that the auditors have sometimes might be useful for the FSA. This would help the FSA for supervising the firms and also help to ensure the financial stability. It is the duty of the auditor to perform all those functions which are in the interest of the people but they also have the duty to maintain the confidentiality of their client’s records. So in order to maintain loyalty with the clients the auditor sometimes has to ignore the other side. The auditors might know the financial condition of the bank but the bank authority might not want to tell it to anyone. The FSA has the authority, under section 166 of the Financial Service and Markets Act, to ask for such reports and information on any account from the auditor of the banks. However, these powers are used rarely. Now, the question is, as how the relation between the audit firms and the FSA can be strengthened. The five main areas where the auditor’s role can be extended are: There are a few financial information which has been reported by banks do not form a part of the audited accounts, such as the regulatory capital ratios. Firstly, it is suggested that the scope of studying these disclosures can be granted. Secondly, it is stated that from the year 2009, the banks have to disclose their risk position in greater details. The FSA considered that they would not require auditing these. But the suggestion to FSA would be that they throw light on this decision and reconsider this kind of decisions. Thirdly, the regulatory information that banks need to produce to FSA includes financial information on liquidity, balance sheet and capital structure. At present these returns are not reviewed by the auditors. Previously it used be reviewed by bank auditors. So it would be advisable to reinforce the law and let the auditors review such regulatory return reports. Fourthly, FSA has the power to commission reports by the auditors. FSA can use its power more frequently to gather extra information from the auditors. Lastly, there should be a scope of regular meetings between the auditors and the FSA. The FSA should see to that, it conducts meeting at regular intervals to bridge gaps between them and the auditors (House of Commons: Treasury Committee, 2002, p. 392). Question 2 Discuss, providing examples from different industries/sectors of the economy, specific risks and issues auditors will need to consider when conducting audits during the current ‘credit crunch’? Credit crunch generally involves tightening in the condition of the credit availability in the banks. It generally involves reduction in the loan availability in the country. In situations like this the interest rates and credit availability are at a mix match position. There are a number of reason as to why this situation takes place, such as the inadequate information regarding the financial borrowings, overestimation and creditworthiness. A credit crunch often takes place when careless borrowings and inappropriate lending sustain. The auditors perform a very important function in the financial infrastructure formulated the government of the countries. So, it is the role of the auditor or the auditing firms to study analyze the financial statements of firms, banks and all the profit making organizations and predict their financial positions. This in total reflects the financial status and the economic position of a country. So they must keep in mind the value of their status and take necessary steps accordingly. In the recent times the world economy has faced a sharp punch. The financial market conditions were worse and there was a reduction in liquidity. Though the stock rose due to the defaults on sub-prime mortgages in the primary market of United States, but the effect of this situation was felt globally. This was mainly due to the use of structured securities and leveraged funding. The auditors need to consider various things such as the current financial market conditions, which might increase the risk factor of misstatement of the books of accounts. So, there are a number of risk factors which an auditor must consider such as past financial status of the firm, alternative financial plans, affects on suppliers during credit crunch and also delay in collection from debtors. There are several other risk factors pertaining to this situation. So, the question is that, as how will the auditor respond to such situation when the economic condition of the economy is not reliable due to a credit crunch. The risk factors when the fair value accounting is used are considered. The fair value accounting method involves recording the assets and liabilities on an ongoing basis. In approach the companies reported loss due to the decrease in their assets and increase in liabilities. Those losses reduced the equity of the company and further reduced the net income of the company. The general risk factors are: 1. The assets which are not held at fair value might be harmed. This would have an effect on the debtors, fixed assets or stock of the firm. 2. The carrying value of the goodwill might weaken. 3. The pension obligations may increase due to the reduction in the value of the assets. 4. Another way of reducing risk of investments is to hedge the risks by investing in derivative market. But during the crisis, hedging instruments also become futile. 5. The affect on off- balance sheet arrangements (IFAC, 2011). Question 3 How might the involvement of external auditors in financial services supervision strengthen the supervisory framework, and how may it affect the auditors’ role, relationships and responsibilities? An external auditor is the personnel, who audit the financial books of the firm according to the laws or regulations laid down by the financial laws regulatory body, such as the FSA. They are independent of the firms or banks being audited. So it can be said that an external auditor is unbiased and independent of the report of audit. It can be said that an external audit is the formal and independent review of the financial statements, records, transactions and operations. Generally in most of the countries, it is the regulator who is responsible for approving the external auditor. Regulators may even demand to change the external auditor in every few years. This is done is to maintain the transparency in the auditing function. The functions performed by external auditors are very significant depending on their objectives behind the audit. The financial books are the most common and important thing that is audited. But apart from this the management letters, special purpose audits are also scrutinized and audited by external auditors (Ledgerwood & White, 2006). The external auditors mainly report to the shareholders. Their main objective is to add reliability and credibility to the financial statements or reports received from the firms. They give their valuable opinion on them. They cover all the financial disclosures and risk reports and management reports. Their only responsibility is to analyze the problems without any biasness. The financial regulators in UK traditionally used to take assistance from external auditors in their work. But the FSA did take steps and restricted the use of external auditors. The task of the regulator is to see the interest of the investors and depositors. They are not really interested in shareholders’ value. The external auditor primary function is to serve the shareholders of the company and see their interest first by revealing the true status of the companys financial condition. So, now to ensure the validity of such activities of the external auditor, the regulator along with the external auditor verifies all the financial statement and books. The external auditor has to work according to the standard and ethics set by the regulatory board. It is the function of the external auditor to detect the fraud practices in the financial front of the c0ompany. They are also responsible for bring up such issue in the attention of the management of the company. Generally the external auditor also review the IT controlled procedures while assessing the internal controls. They also have the duty to investigate the issues that are raised by the regulatory body, the professionals and the other financial authorities. It is a known fact that the role of external auditors in the supervisory process involves working with the use of standards such as independence, integrity and objectivity. The role of the external auditor might vary from one country to another. But due to the merger of FASB with IASB, now the auditor and experts round the world can follow the work of one another. The external auditors do not work with the company on a daily basis. So effort is made from the companys side to familiarize them with the important know how is of the company. This is very important for a successful auditing process. The key word that describes the external auditor is the independence of work and the unbiased and transparency of reports. The internal auditors are recruited by the companies. But the external auditors have much more responsibly on their shoulder to reveal the truth and facts of the firm (Singh, 2007, p. 154-155). Reference FSA. (2012). Who are we? [Online]. Available at: http://www.fsa.gov.uk/about/who. [Accessed on May 9, 2012]. House of Commons: Treasury Committee. (2002). Banking Crisis: Reforming Corporate Governance and Pay in the City; Ninth Report of Session 2008-09; Report, Together with Formal Minutes. UK: The Stationery office. IFAC. (2011). Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment. [Online]. Available at: http://www.ifac.org/sites/default/files/downloads/staff_audit_practice_alert.pdf. [Accessed on May 9, 2012]. Ledgerwood, J. & White, V. (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. Washington DC: World Bank Publications. Singh, A. (2007). Banking Regulation of UK and US Financial Markets. USA: Ashgate Publishing, Ltd. Read More