Factors Affecting the Quality of External Audit
Factors Affecting the Quality of External Audit
External Audit代写 Factors Affecting the Quality of External Audit：External auditing plays a critical role in the economy and more so in businesses.
External auditing plays a critical role in the economy and more so in businesses. It is the work of auditors to express the opinion in regard to the presentation of the financial statements of an entity. In essence, the reason for auditing is for stakeholders to gain confidence in the financial data that has been properly entered, reported, and fairly presented. Thus, it is the role of auditors to raise their skills and standards in order to increase their authenticity and reliability in providing relevant, unbiased and accurate opinions that decision-makers can rely on.
The quality of external audit is not only affected by the qualifications and standards of the auditors but also the internal control mechanisms that might hinder auditor independence and professional skepticism, as well as the size and reputation of the audit firm among other factors.
The global financial crisis has triggered the debate among the policymakers on the effectiveness of external audit function and key drivers of audit quality. External Audit代写
For instance, the United States established the Advisory Committee on the Auditing Profession (2008) to offer advisory services to the U.S Treasury Department of the auditing functions. Similarly, the United Kingdom established the Financial Reporting Council that The Audit Quality Framework (2008). Also, in Australia, The Treasury gave Audit Quality in Australia–A Strategic Review (2010).
These prominent reports aimed at addressing the audit functions and quality at the advent of increased corporate greed, corruption, collusion and scandals that saw the public lose huge investments. They made it clear that there are issues with corporate governance, audit quality, and the roles of audit and auditors. This report inquires on the various factors that undermine the quality of external audits.
Auditor Independence External Audit代写
According to Akpom & Dimkpah (2013)
Audit independence is the opportunity for the external auditor to conduct audit functions without internal interference that may block integrity and impartiality. Audit independence by the public is mostly determined by the perception of their independence rather than actual independence. It is characterized by integrity and an objective approach to the audit process. The generally accepted accounting standards require the auditor to do auditing work in free from management influence and objectively.
According to Sharma and Sidhu (2001, p. 619), audit professional should not mixed with non-audit services. Other engagements beside auditing functions increase erosion of audit independence. Audit independence is the fundamental existence of audit function in any entity and hence the hallmark of the auditing profession. External Audit代写
In 2002, there was an increase in the scrutiny over the public auditors after the collapse of Arthur Anderson (Eisenberg & Macey, 2004). The company failure raised questions on quality of audits and particularly the audit profession (Gendron, Suddaby, & Lam, 2006). This incident among others in the accounting industry raised concerns about the ethical values in the accounting profession. As a result, there has been loss of confidence to the audit firms and create skepticism on the independence of auditing practices.
Therefore, the Financial Reporting Council was mainly concerned with the audit performance of Carillion. External Audit代写
The audit is considered a vital component of corporate governance. KPMG, which has been Carillion’s auditor since 1999 revealed a lack of auditor independence. The report by the parliament questioned the 19-year tenure of KPMG; over $25 million audit fees since 2008; lack of tendering for external auditor and two FDs of Carillion were from KPMG. It is an indication that the relationship between Carillion and KPMG was very close owing to the above factors. The long relationship and lack of change of tenure since 1999 show a lucrative client relationship. Also, the presence of KPMG alumni in Carillion further reduced the gap that exists between the client and the audit firm and hence increased conflict of interests.
Audit and accounting regulations seek to install confidence in the financial statement users. External Audit代写
According to Fearnley et al. (2005), audit quality is tarnished by material misrepresentation and company failure. Hence, there is a need for skepticism over the auditing opinion to ascertain authenticity and reliability. As such, the International Federation of Accountants (IFAC) has contributed immensely to the improvement of audit quality through global harmonization of accounting standards (Farrell & Cobbin, 2001). There is also the Code of Ethics for Professional Accountants (COE) as stipulated by the International Ethics Standards Board for Accountants (IESBA, 2013). The IESBA together with IFAC work towards creating standard accounting presentation and instill professional conduct.
However External Audit代写
Clements, Neill, and Stovall (2009) observed that the adoption of IESBA COE varies from one organization to the other as some business firms choose to retain their own code of ethics due to stringent measures by IESBA. It is not contingent that members of IFAC adopt IESBA COE. However, it is expected that the member should not use codes that are less stringent compared to those of IESBA. Flanagan and Clarke (2007), noted an increase in ethical compliance monitoring.
The downside is that interpretation and application of the ethical code are mainly dependent on professional discretion. Fraser (2010), found that the global business environment as a precursor to complex ethical and emergence of convenient accounting practices. As a result, these have created rifts in the audit conduct relative to the accounting standard being applied in various corporations. It is difficult for the auditing regulations to achieve optimum balance in the needs of the commercial stakeholders.
Overall External Audit代写
The Joint Select Committees of Work and Pensions and Business, Energy and Industry Strategy (BEIS) have noted issues of inadequacy and outright auditor negligence that has resulted in a lack of independence in most United Kingdom companies. The non-independence of auditors has led to conniving between internal and external stakeholders to defraud the company or artificially manipulate the performance that is short-lived resulting in loss of investments and jobs.
Industry Specialization External Audit代写
The accounting scandals that the collapse of BHS, Tesco Plc, and Carillion Plc prompted the studies and assessment on the effect of auditor industry specialization on audit quality. The regulation requires that public listed companies to assess the effectiveness of their internal audit control systems and have external auditors give an opinion on the assessment. At the advent of these major dissolutions, investors, audit committees and the Public Company Accounting Oversight Board (PCAOB) are closely scrutinizing auditors and management activities (Beattie, Fearnley, & Hines, 2015). As such, most auditing firms are realigning their structure and strategies regulations and clients’ needs.
Therefore External Audit代写
Audit firms are restructuring to meet the needs of the broad industry sector and target their market around industry specialization. The move is after the realization that industry specialization and expertise increase quality audit and compliance with the industry standards. As such, the definition of industry specialization has been taken to mean the market share of the firm. Generally, it industry specialization leads to better quality audit and financial reporting. According to Balsam, Krishnan and Yang (2003), specialized audit company are able to develop better audit plans and provide better risk assessment.
They found that industry expertise is obtained through repetition of audit function in the same conditions and hence people perceive that if an audit firm has a large share of the market, it also has monopoly of expertise in that industry. A specialized auditor is also able to detect errors and irregularities in the accounts records at ease. They overall earn better than other general auditors for quality work and disclosure. Therefore, if the external auditor has not industry specialization, the chances of erroneous auditing increase and hence the overall effectiveness.
However External Audit代写
Audit client contracts should be based on the desire for quality audit instead of market reputation. The audit procurement process should be made competitive so that the client can get a firm that can provide quality audits (Elder, Lowensohn, & Reck, 2015). Bidding provides the client with choices for best-specialized audit firms. Although both the PwC and KPMG auditing for Tesco Plc and Carillion respectively are part of the big 4 auditing firms, there seems to be a lack of specialization in the sense that they offer auditing services in various sectors.
An important aspect of audit specialization is audit rotation (Elder, Lowensohn, & Reck, 2015). External Audit代写
PwC was the auditing firm for Tesco Plc for the 32 years while KPMG’s tenure with Carillion lasted for 15 years (Warmoll, 2015). Although the company maintained the relationships based on the auditor expertise in the provision of audit services, they overlooked the need to create competitive bidding in auditing services that encourage the identification of other most specialized and suitable firms. Both Carillion and Tesco lacked a rotational policy that imposes a mandatory limit on auditor tenure.
The policy aims to improve on the audit quality by reducing the client’s influence over auditors or avoid auditor complacency (American Institute of Certified Public Accountants [AICPA], 1978). However, there are opponents for audit rotation based on the argument that substandard auditing may occur with newer clients since the auditor lacks background about the firm (Stanley & DeZoort, 2007; Carcello & Nagy, 2004). Other reasons are that the new auditor may aim to recover costs or may easily be influenced by the client in the early years of engagement.
That notwithstanding External Audit代写
Research has proved that firms that encourage competitive bidding and selection of specialized auditors have higher audit quality (Elder, Lowensohn, & Reck, 2015). They also found that rotation policy for specialized auditors increases the chances of higher quality audits. The risk associated with the rotation policy of selecting inexperienced auditors or those that might offer low-quality audits can be mitigated by the use of specialized audit firms.
It can, therefore, be concluded that Tesco Plc and Carillion failures were caused by a lack of regular audit rotation policy and audit specialization. They over-relied on market share to mean audit expertise and hence overlooked the need to have competitive bidding to source other specialized auditors. As a result, the relationship between the clients and auditors was close which may have compromised auditor independence and reduce auditor skepticism as well as increase auditor complacency. If the frequency to rotate specialized auditors was implemented, the misrepresentation of financial statements would have been identified early or the specialist raises the red flag.
Professional Skepticism External Audit代写
When auditors fail to apply professional skepticism, their effectiveness in auditing is diminished. As a result, the evidence obtained is may not be appropriate and sufficient. In this context, professional skepticism is the mindset where the auditor questions the information provided or evidence collected in the practice (Vinten, Payne, & Ramsay, 2005). Rather, the auditor applies a reasonable questioning attitude while performing the audit.
Generally External Audit代写
Most audits comply with professional standards including PCAOB and they give many financial statements a clean bill of health free from financial fraud. However, in regard to BHS, Tesco Plc and Carillion Plc cases, audit failure has been more prevalent than expected (Business Energy and Industrial Strategy and Work and Pension Committees [BEIS], 2017). The cases reveal previously unreported financial misrepresentation that has ailed most corporations. BEIS committee questions the KPMG, Deloitte, and PwC and other big auditing firms for failing to question Carillion, BHS and Tesco Plc financial judgments and information and complacently signing off its directors’ increasingly fantastical figures for years. Financial issues in these companies did not come without prior warnings, it is only that they were hidden by the management and the auditors failed to exercise their professional skepticism.
In these cases, KPMG has been paid over £29 million in a period of 19 years. External Audit代写
Due to the familiarity with Carillion’s management, the auditor has attached self-interests as well as that of the friendly management so that it turned a blind eye on the questionable financial statements for years (Business Energy and Industrial Strategy and Work and Pension Committees [BEIS]. 2017). Deloitte was over £10 million to do an internal audit job but be it a reputable auditing company it was unable or unwilling to identify financial failures in Carillion’s management and financial control (Marriage, 2018). EY too was paid £10.8 million but failed to give a workable turnaround solution to the company (Plimmer, 2018). The turn of events that saw Carillion dissolved proved that the auditors had not been exercising their professional skepticism when signing off financial statements as the true presentation of the company status at any given time.
On the other hand External Audit代写
PwC continued to pocket million for over 30 years but failed to identify and advise Tesco Plc on financial failure (Kukreja, & Gupta, 2016). It was not until some of the company stores were closed that Deloitte was selected to investigate the matter. Due to the long-term relationship with the management, PwC could not or was unwilling to exercise professional skepticism over the financial figure and raise the alarm.
Generally, it is at the heart of a quality audit that professional skepticism is exercised and the lack thereof, the audit has little value. Skepticism is a shared value in the organization in the bit to helping external auditors in attaining the best out of the audit evidence. The internal auditors and accountants need to be skeptic before handing information to the external auditor. As such, effective skepticism is neither cynic or dupe and hence the auditor needs to question any information provided even if plausible to ask.
In summation External Audit代写
Three critical observations can be made. Lack of auditor independence exist due to parasitic relationships between auditing firms and business organizations. Audit firms are depending on big corporations for survival and profit-making while these corporations are benefiting by being shielded from castigation over financial misappropriations. BEIS Committee report has revealed that big four auditing firms as becoming a “cozy club” where they enjoy the monopoly of expertise and reputation but in the real sense harbor inconceivable incompetence and malpractices. This is owing to the sagas that have revealed years of financial misrepresentation in the presence of these big auditors.
Secondly External Audit代写
In efficiency in external auditor is also attributed to the lack of industry specialization that foster adherence to ethics and professional standard. A specialized auditor have better performance in terms of improved quality of error detection and disclosure. As a result, auditors’ independence and professional skepticism is improved. Lastly, lack of auditor independence and industry specialization is linked to lack of professional skepticism in externall auditors. They have been accused of being passive and too timid to use the auditing powers vested on them by the law. FRC has also failed to create proactive interventions that threaten management from engaging in financial mischief. Therefore, a more active and interventionist approach is needed to solve financial misconducts in publicly listed companies.
References External Audit代写
American Institute of Certified Public Accountants (AICPA). 1987. Report of the Task Force on the Quality of Audits of Governmental Units. New York, NY: AICPA.
Akpom, U. N., & Dimkpah, Y. O. (2013). Determinants of auditor independence: a comparison of the perceptions of auditors and non-auditors in Lagos, Nigeria. Journal of Finance and Accountancy, 14, 1.
Balsam, S., Krishnan, J., and Yang, J.S., (2003). Auditor industry specialization and earnings quality. Auditing: A Journal of Practice & Theory 22 (2): 71-97
Business Energy and Industrial Strategy and Work and Pension Committees. (2017). Industrial Strategy and Work and Pensions Committees, ‘Carillion: Second Joint report from the Business, Energy and Industrial Strategy and Work and Pensions Committees’ HC, 769.
Beattie, V., Fearnley, S., and Hines, T. (2015). Auditor–Client Interactions in the Changed UK Regulatory Environment–A Revised Grounded Theory Model. International Journal of Auditing, 19(1), 15-36.
Eisenberg, T., & Macey, J. R. (2004). Was Arthur Andersen different? An empirical examination of major accounting firm audits of large clients. Journal of Empirical Legal Studies, 1(2), 263-300.
Elder, R. J., Lowensohn, S., & Reck, J. L. (2015). Audit firm rotation, auditor specialization, and audit quality in the municipal audit context. Journal of Government & Nonprofit Accounting, 4(1), 73-100.
Farrell, B. J., & Cobbin, D. M. (2001). Global harmonization of the professional behavior of accountants. Business Ethics: A European Review, 10(3), 257-266.
Fearnley, S., Beattie, V. A., & Brandt, R. (2005). Auditor independence and audit risk: A reconceptualization. Journal of International Accounting Research, 4(1), 39-71.
Flanagan, J., & Clarke, K. (2007). Beyond a Code of Professional Ethics: A Holistic Model of Ethical Decision‐Making for Accountants. Abacus, 43(4), 488-518.
Fraser, P. N. (2010). A single set of worldwide auditing standards: The road is long… International Journal of Disclosure and Governance, 7(4), 298-309.
Gendron, Y., Suddaby, R., & Lam, H. (2006). An examination of the ethical commitment of professional accountants to auditor independence. Journal of Business Ethics, 64(2), 169-193.
Stanley, J. D., and F. T. DeZoort. 2007. Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects. Journal of Accounting and Public Policy 26: 131–159.
Kukreja, G., & Gupta, S. (2016). Tesco Accounting Misstatements: Myopic Ideologies Overshadowing Larger Organizational Interests. SDMIMD Journal of Management, 7(1), 9-18.
Marriage, M. (2018). MPs turn the fire on KPMG and Deloitte partners over Carillion. Financial Times. Retrieved from https://www.ft.com/content/71c8f2b8-17d7-11e8-9e9c-25c814761640
Plimmer, G. (2018). MPs raise EY’s ‘apparent conflict of interest’ over HS2 and Carillion. Financial Times. Retrieved from https://www.ft.com/content/76d2beac-5d0e-11e8-ad91-e01af256df68
Sharma, D.S. and Sidhu, J., 2001. Professionalism vs commercialism: The association between non‐audit services (NAS) and audit independence. Journal of Business Finance & Accounting, 28(5‐6), pp.563-629.
Vinten, G., Payne, E. A., & Ramsay, R. J. (2005). Fraud risk assessments and auditors’ professional skepticism. Managerial Auditing Journal.
Warmoll, C., (2015)., PwC’s 32-year Tesco audit reign ends as Deloitte appointed. Retrieved from https://www.accountancyage.com/2015/05/11/pwcs-32-year-tesco-audit-reign-ends-as-deloitte-appointed/