Auditing and the Public Interest - Assignment Example

?Running head: AUDITING AND THE PUBLIC INTEREST Auditing and the public interest ASB 3214: Auditing Insert Insert number Insert Instructor’s Name 30th November 2011 Word count 2035 Introduction The availability of opportunities to diversify the investment portfolio for organizations depends on the reliability of the financial information and the availability of adequate financial resources. Due to the stiff competition that has engulfed business environment, companies have emulated various strategies that are aimed at attaining a competitive edge. Audit reports are vital aspects that cannot be overlooked by business entities that are focused at maximizing their profits and retaining the trust of all the stakeholders. Being prepared by either internal or external auditors, audit report gives the evaluation of the performance of a company. The reports are not only essential to the management but also they are heavily relied upon by other parties including the shareholders, government, financial institutions and the general public. It is important to note that auditors only give an opinion as to whether or not the financial statements depict the correct financial position of a company. This paper seeks to discuss whether the current international regulatory environment for the auditing is effective in ensuring that investors and owners are provided with reliable information by external auditors. Public interest in relation to the (accounting and) audit profession According to the International Federation of Accountants (IFAC) public interest entails the entity or individuals who are directly affected by the financial reports that are given by auditors or by the accountants. One of the major objectives that accountancy profession must strive to achieve is to safeguard the interest of the public. This includes provision of accurate and reliable financial information that is vital in making investment decision. In addition, the audit reports must be uniform in order to make the public comprehend the financial aspects covered by the report. In order to develop a robust economy that enhances the lives of the financial report users, it is imperative for the works of the auditors and the accountants to be comparable and precise. It is essential to note that by ensuring uniformity in the financial statements of various companies, members of the public are in a position to determine the profitable and the well managed organizations. One of the major aspects of accountancy as depicted by Gonzalo (2009) is that in order to attain an efficient economy, it is vital for the financial accounts to be accurate and comparable. In this way, companies can access the risks that may negatively affect the public investments. He also stipulates that proper financial reporting results into efficient economic outcomes and common good while poor reporting adversely affect the performance of an economy. To create public confidence especially in the financial market, it is prudent for companies to provide adequate information that eliminates uncertainty which demotivates individuals to engage in transactions. Provision of independent certification which is the major role of auditors significantly creates confidence among the investors particularly in the current world of asymmetric information (Gonzalo 2009). In the same way, certainty is a key aspect that motivates individual to engage in purchasing of company products. In this regard, auditors should play an imperative role of public certification in order to increase public confidence and reduce uncertainty thus lowering the prices of the commodities. This will not only result to financial stability but also it generates social benefits to the individuals. One of the notable implications of proper auditing and professional accountancy is that they ensure comparability and verifiability of the financial information thus propagating public interest since they result to efficiency of markets. In order to ensure advancement of public interest, it is vital for auditors and accountants to ensure that they emulate high quality standards in their duties. It is worth to note that public is keen on scrutinizing the skills and the professionalism of the auditors and accountants. It is therefore imperative for companies to ensure that experienced and properly trained personnel are hired in their finance departments. According to Tom (1995) the major cause of adoption of externalized defenses that advocates for professional mission by the UK and USA auditors, was due to the increased public scrutiny. The research conducted by Tom (1995) also indicates that one of the major aspects that motivate accountants and auditors to protect public interest is their economic self-interest. Current international regulatory environment In order to streamline audit reports and ensure that public interests are safeguarded by the accountants, International Federation of Accountants (IFAC) in conjunction with international regulatory agencies has established various auditing regulations. Some of the key structures that the IFAC has established include Public Interest Oversight Board (PIOB) and Monitoring group. Public Interest Oversight Board One of the major roles of PIOB is to oversee standard settings of the IFAC. Particularly, the board is focused at ensuring that public interest is given priority by the IFAC during auditing in order to create sustainable confidence. In addition, PIOB is responsible for developing the duties of the committees and the boards that are established by the IFAC. These boards are basically referred to as Public Interest Activity Committees (PIACs) include Consultative advisory boards, Ethics committee as well as Education committee. In its efforts to enhance the performance of the auditors and accountants, PIOB prepares annual reports that portray how public interest has been reflected by IFAC and other committees it oversees (International Federation of Accountants). Another significant regulatory aspect that has been put in place is the Monitoring group. Monitoring group includes international and regulatory organizations that ensure advancement and protection of public interest by ensuring that quality international auditing standards are followed by IFAC. Key members of the Monitoring group include World Bank, European Commission, Basel Committee and the IAIS. Another vital role of the MG is to update the PIOB on the various regulatory requirements that are related to audit practices. International Federation of Accountants (IFAC) IFAC is an international organization whose mission is to serve public interest by establishing and implementing high-quality international standards in the accounting and auditing professions. The organization is also focused at ensuring that accountants and auditors perform their duties in a professional way that entails taking into consideration public interest. In the same way, IFAC ensures that high-quality financial information is made available to the public. It is critical to note that high quality financial information is a major aspect that enhances comparability of the audit report, clarity as well as transparency. Additionally, the organization facilitates the adoption of quality standards in accountancy education, public sector accounting as well as accounting ethics. In order to achieve these goals, IFAC in collaboration with other regulators, companies and the donor community initiate training programs to improve the performance of accounting professionals. The International Auditing and Assurance Standards Board (IAASB) The International Auditing and Assurance Standards Board (IAASB) is a body that set high quality standards for auditors in order to serve public interest. Through convergence of national and international auditing standards, IAASB undertakes regular review of the quality control among other functions. One of the key objectives of IAASB is to ensure uniformity of auditing standards globally, so as to enhance public confidence. Having been established in 1978, IAASB is currently focused at facilitating and monitoring of audit practices (Ian and Chris 2009). This also involves initiating changes in the auditing profession. IAASB also responds to various concerns that arise during the implementation of the policies that it initiates in its effort to bring consistency in the auditing profession. In order to put in place effective policies that benefit auditing fraternity, IAASB obtains ideas from various stakeholders including government, consultative advisory group, oversight bodies, investors and the general public. Some of the major aspect that indicates the dedication of IAASB to promote public interest and accountability include holding meetings that are open to members of the public as well as posting its meeting resolutions, audit records and agenda on its website. Audit reports serve the needs of owners and investors Based on the changes that are regularly undertaken by International Auditing and Assurance Standards Board as well as International Federation of Accountants, audit reports have continued to serve the needs of investors and owners. It is essential to note that auditors are major determinant of investor’s confidence. In this regard, companies have emulated various strategies in order to make the audit report be comprehensive and reliable. To ensure proper auditing, most companies have established audit committees that are responsible for interacting with external auditors. In their efforts to communicate their view on the financial performance of a company based on the provided financial statements, auditors gives four types of report. First, auditors can make unqualified opinion. This means that the financial statements of the company depict true and fair view. This opinion also indicates that there was adequate disclosure of entire aspects that are vital for auditing process. Secondly, auditors can make qualified opinion. Qualified opinion is made if the auditor is faced by a scenario that is inconsistent with Generally Accepted Accounting Principles (GAAP). Additionally, if the auditor is not in a position to audit some parts of the financial statements, a qualified opinion can be issued. Thirdly, auditors can issue an adverse opinion. This entails reporting that the financial statements of a company are misstated and are not in line with the GAAP. By confirming to the owners and investors on the inaccuracy of the financial statement appropriate measures are put in place in order to collect the deviation. Fourthly, an auditor can issue a disclaimer. A disclaimer opinion is issued if the auditor is not independent possibly due to conflict of interest between the auditor and the company. Limitation of scope is another aspect that makes auditors to make disclaimer opinion. Current thinking on these issues According to the research done by Mock et al (2009) there exists a difference between auditor aim and user discernment of the aim. This occurs particularly when the auditors issue unqualified report. In this case, Mock et al (2009) argue that it is imperative for auditors through the collaboration of management to make the communication effective. This is done by use of definitions within the audit report. In order to ensure the independence of the auditing process, Ian and Chris (2009) argues that relationship and other engagement between the auditor and companies should be revealed by the auditors. This also includes the auditing fees that are paid to cater for the entire process. According to Porter (2008) due to increase on the level of financial and other resources by organizations, their influences on the society and supremacy have been experienced. In this regard, accountability of the managers is mandatory in order to offset possible abuse of the power possessed by organizations. Initially, companies aimed at strengthening the audit by putting in place audit committee. However, Porter (2008) argues that companies have emulated responsible corporate governance as a way of securing high level of accountability of corporate management. In addition Porter (2008) depicts that external auditors should not only provide fair reflection of the financial performance of their clients but also they should indicate the ethical performance, social as well as environmental achievement of the company. Conclusion The current international regulatory environment for the auditing profession is sufficiently robust to ensure that the external auditors of listed companies provide reports to owners and investors which serve the public interest. Through the control mechanisms that have been put in place by IAASB, auditors are now under obligation to provide adequate and reliable information to the investors and owners. It is imperative to note that one of the major aspects that affected the work of the auditors in early times was lack of independence. However, IAASB has initiated effective system that ensures public interest is taken into consideration during the auditing of public companies. The role of national regulations that ensures compliance of auditors with IAASB and GAAP provisions is a vital aspect that will monitor the performance of individual auditors as well as auditing firms. For instance, Auditing and Assurance Standards Board (AUASB) that regulates auditing practices in Australia ensures that auditors follow the regulations as stipulated by IAASB. Other professional bodies that govern the performance of auditors include UK Financial Reporting Council (UK FRC) and Assurance Standards Oversight Council (AASOC), a Canadian regulation that was established in 2002 (Ian and Chris 2009). References Brenda, A.2008. The audit trinity: the key to securing corporate accountability. http://www.victoria.ac.nz/sacl/cagtr/working-papers/WP64.pdf Retrieved on 30th November, 2011. Gonzalo R.2009. The auditing profession and the public interest http://www.docstoc.com/docs/34085212/THE-AUDIT-PROFESSION_-THE-PUBLIC-INTEREST-AND-THE-TURNING-POINT-OF. Retrieved on 30th November, 2011. Ian, F., Chris, P. 2009. The future of the external audit function. Managerial Auditing Journal, Vol. 24 Iss: 2, pp.104 – 113. International Federation of Accountants (IFAC) http://www.ifac.org/. Retrieved on 30th November, 2011. Mock, J., Turner, l., Gray, l & Coram, J.2009: The Unqualified Auditor’s Report: A Study of User Perceptions, Effects on User Decisions and Decision Processes, and Directions for Further Research. http://www.fdewb.unimaas.nl/ISAR2009/02_13_Mock_Turner_Gray_Coram.pdf. Retrieved on 30th November, 2011. Tom L.1995. The professionalization of accountancy: a history of protecting the public interest in a self-interested way. Accounting, Auditing & Accountability Journal .Alabama: MCB UP Ltd. Read More