1. Describe the role that external auditing fills in promoting good corporate governance.
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Role that external auditing fills in promoting good corporate governance.
Corporate governance includes the way the institutional system is control and direct in a Company. The aim of corporate governance is to assure the transparency and fairness in organization by use of monitoring system in performance of management and ensure accountability(Aguilera, et. al., 2015). External auditor is the mandatorily appointed by public listed Companies to independently validate the financial reports and progress and servesas primary protector of corporate governance. External auditor plays as third party role and act as certified examiners who are licensed to execute such validations.
One of the primary roles of external auditor is to safeguard and protect interest of shareholders. External auditor provides reports free of any biasness and influence. External auditor is also responsible for reporting the financial position of Company and attest to the reliability and viability of financial reports. External auditors can also address measures and policies for compelling accountability at workplace(Carcello, et. al., 2011). Auditors can also recommend penalty for officers if they found to manipulate financial statements such as inflation of figures and cooking number of accounting. External auditor also performsperiodicrisk assessment which is significant for governance of corporate. Auditors also review and monitor the security measures which need to be in place for recognition of corruption and fraud. While assessing potential risk, auditor also analyses the tolerance of risk by Company and efforts which are made by Company to mitigate risk. For instance if there is underperformance of Company such as Whistle blowing system then efforts will be required to enhance them.
External auditor also ensures that the Company has employed efficient crisis management plansused for allegations of fraud event and corruption(Cohen, et. al., 2010). There is involvement of delivering responsibilities to different officials and administrative. In case of financial crisis, the Company must also have action plan which can be used in sustaining confidence of investors.
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2. In what ways might the public accounting profession have failed its important role prior to the issuance of the Sarbanes- Oxley Act of 2002?
Ways which might the public accounting profession have failed its important role prior to the issuance of the Sarbanes Oxley Act of 2002
Sarbanes Oxley Act, 2002 was majorly passed after decreasing in quality if audit profession and happened of cases such as Enron. Arthur Anderson was found guilty of corruption and persuasion which resulted inneed of having improvement in accounting profession. Bankruptcies of WorldCom and other business and accounting scandals led the pass of Sarbanes Oxley Act, 2002.
There were no rules for separation of services of an external auditor to one Company. In other words auditors were able to provide two services such as consultancy and auditor services to same Company(Francis, 2011). Sole provider of services such as tax and consultancy services as market specialist practices for non-audit clients were included. There were no stringent rules and standards in relation to attestation, quality control, ethics and independence to be used for public accounting firms and issuance of report of audit. The public Companies accounting oversight board process was burdensome for everyone which has become now easy in 2007.
There were limited laws and regulations on securities fraud. Auditors were required to maintain audit review papers for one year which now extended to five years under SOX, 2002. There was no much awareness ofwhistleblowing mechanism for auditor before the act which introduced in the act and also promoted "Forensic accounting". Auditor attestation requirements were also weak before the SOX. There was no clarification on the relation of an accounting firms with clients publicly held(Ianniello, et. al., 2013). The report of an auditor was seen by management not audit committee which gave the chance to management to manipulate the information before it passes to audit committee. The audit and non-audit services was not approved by any professional committee rather the management of Company was found to be involved in appointment of auditor as in the case of Enron.
There was also no limit on non-audit services and auditor could provide any non-audit services. There was no rotation requirement in auditor which lead the one auditor to serve for organization for longer period(Gubler, 2012). This led to arrival of conflict of interest and personal interest of an auditor and also led to development of personal relation of an audit with its client. There were no such stringent rules for maintenance of working or review papers of records of audit. There are also strict penalties for destruction and shredding of documents. Furthermore, there was no second partner review and need of approval for public company audit report.
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3. A former chairman of the SEC described auditors as public watch-dogs. What does the term public watchdog convey regarding the responsibility of the external auditor to the public?
Public watchdog meaning regarding the responsibility of the external auditor to the public
Watchdog conveysjob of an auditor to ensure that management of Company is not acting illegally and irresponsibly(Bruynseels&Cardinaels, 2013).Auditor will ensure that organization is maintaining the standards in conduct of operations. Auditor is needed to execute professional skepticism throughout the process of an audit. Public watchdog is dedicated towards assurance of accurate and reliable financial reporting which can lead to integrity and stability of capital markets as it has been dependent on financial reports of Company as per Securities exchange commission. Capital markets majorly fluctuate with the performance of corporation. Capital markets face a downfall when the Companies found to be weak in performance or are going to have financial distress. This impacts the decision of the investors and shareholders as they are largely dependent on annual and financial reports for taking economic decision. If there is fake news on the financial position of the organization then the market will move based on the fake reports which will lead to huge loss to innocent investors and shareholders. Hence, auditor plays a responsible role in providing true and authentic information on financial position and operations which provides the shareholders and investors to take decision wisely.
Auditor will act as watchdog on behalf of investors and shareholders who invested or deciding to invest their money in Companies. Shareholders and investors cannot keep eye on the operations of organization and cannot ensure the right use of their money invested. It is the duty of an auditor to keep an ongoing watch on the decisions, functions and operations for protecting the public funds and make the public feel safe and secure for the confidence they have shown on organization(Leipziger, 2017). The auditor review and statement provides and ongoing viability of Company and proper health of Company. In case, if the financial position of the Company as per the auditor is not well then it gives opportunity to investors and shareholders to withdraw their investment and prevent any sudden movement in the value of shares and genuine loss.
4. One component of good corporate governance is a code of ethics that has been developed for a company. For example, Enron had one of the most complete codes of ethics in corporate America.
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a. How would an auditor go about determining whether a corporate code of ethics is actually being adhered to?
Determination of corporate code of ethics by auditor
Auditor will review the internal control process of an organization. Auditor will also assess the whistleblowing mechanism of the organization and how much it encouraged among staff by organization(Messier et. al., 2011). Auditor will also evaluate and ascertain the compliance history of organization. Further the operations of an organization will be assessed in comparison of rules, laws and regulations and will see that whether the rules and regulations set by different authoritiessuch as Corporation Act, standard of accounting, employees and employer relation act etc.are regularly followed. Auditor will also evaluate the actual behaviour of employee with the code of ethics for behaviour of employee.
The policies and procedures will also be assessed greatly in comparison of the guidance provided to staff of organization. The internal auditor function will also be assessed for understanding the ways the organization is ready to accept and handle the change or any sudden technically or operational errors executed by any staff of an organization or any outside party(Moroney, et. al., 2012). The risk management and monitoring system will also be watched carefully with the plans, policies and procedures framed by management. Auditor will also compare the internal behaviour with external regulations which exist in corporate code of conduct and ethics policies(Singleton & Singleton, 2010). The relationship of internal auditor with management of Company will also be ascertained. The fulfilment of disclosure requirement by board and management will also be assessed as defined by securities exchange commission.
b. What evidence would the auditor gather to support an assessment of the corporate code of ethics?
Evidence need to gather by auditor to support an assessment of the corporate code of ethics
In case an auditor detect any material misstatement, illegal and manipulation in the figures of accounting then it can be said that the management is not acting ethical and is working with wrong intention(Pickett, 2010). When the financial statements are not in accordance with generally accepted accounting principles then there is weak internal control system. Bribery and corruption cases recognized by an auditor in conduct of an audit process then itwill act as a support to the assessment of corporate code of ethics. Auditor had found any instances in relation to mistreatment of labour in supply chain such as use of child labour and financial scandals such as LIBOR, high payment and bonuses to executives and management and evasion of taxes in audit process. Any non-compliance which has not yet recognized by legal party due to its small nature can describe unethical practices of Company.
Auditor has identified any differences in laws for men and women in organization and making them work for long hours will also be unethical practices of an organization(Sadgrove, 2016). Off-balance sheet transactions are allowed in some cases but when these transactions has been exploited by management in order to provide fake values of balance sheet demonstrates the wrong intentions of management to mislead investors and shareholders. Auditor will also ensure fair payment terms and conditions with suppliers, employees and customers in order to assure ethical practices.
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