Q The assignment focuses on Auditor’s Public Interest Responsibilities and Audit Quality is being used by the stakeholders Home, - Auditor’s Public Interest Responsibilities and Audit Quality Auditor’s Public Interest Responsibilities and Audit Quality EXECUTIVE SUMMARY: In recent times, it has been observed in the profession of accounting and auditing that there have been many scandals wherein it was assessed that the auditors were not discharging their liabilities with honesty which was ultimately affecting the stakeholders of the company. This is because of the fact that the audited financial statements are the most reliable document of a company’s performance which are being used by the stakeholders. The duty of the auditor is therefore to perform audit in such a way and to express opinion about the true and fair view of financials which are being prepared by the management of the company so as to give an opinion that the financial statements are free of material misstatements. In cases where the duty of the auditor are not being performed by them honestly are giving rise to the company’s liquidity and sustainability. All this gave rise to the need of a code of conduct which should be followed by the Auditors for making any opinion for the company’s financial. APES 110 being introduced by the Accounting Professional and Ethical Standards Board, popularly known as APESB with an objective of providing a framework to the accountants so that they can discharge their duties and responsibilities effectively and honestly. The paper contains the stakeholder analysis of an ASX listed company, considering the concepts related to auditors of independence and whistleblowing, lessons learned from the scandal of Enron and audit quality and the warnings in the APES 110. A. INTRODUCTION: The code of ethics outlines in APES 110 for Professional Accountants outlines five major fundamental principles which are required to be followed by the accountants who prepare the financial statements as well as the auditors auditing those financial statements. The principles outlines both of them to be straightforward, honest, unbiased, maintaining professional knowledge, respect confidential information and to comply with the laws and regulations that complies on them. The code also requires to have any threats to the principles that are fundamental that exist if any to be identified, evaluated and to be addressed (APESB, 2010). This scope of action has been defined by the APESB so as to minimize or to evaluate any material misstatement present in the financials of the company that affects the stakeholders at large. The analysis of the stakeholders being affected due to the presence of any material misstatement have also been assessed. There are certain concepts being discussed in the APES 110 which are related to the interest of the public like the concept of independence where the unbiased nature is must to have the effective reliability on their opinion about the financials (Gay & Simnett, 2017). The scandal of the Enron have been discussed wherein it was held that Arthur Andersen, the auditing firm was more responsible for their bankruptcy rather than the management itself. The warnings of the chairman of the ASIC stating the scandals and giving warnings to the auditors is also being discussed. It should be noted that the ultimate goal of the regulators are to have financials free from any material misstatements. B. ASSIGNMENT QUESTIONS: 1. PERFORMANCE OF KEY STAKEHOLDER ANALYSIS OF QANTAS: The ASX listed company chosen for the stakeholder analysis is the Qantas Airways which is the largest airline and the flag carrier of the country Australia. The company is the oldest airline in the country Australia and is the second oldest airlines across the globe. The company was privatised entirely by the year 1995. Since the company is listed in the Australian Securities Exchange and therefore public interests are held by it therefore there is an increasing need of the fact that the financials prepared and audited of the company should be true and fair and should be free from any material misstatements. The key stakeholders of the company Qantas are its shareholders, employees, customers, business competitors, government of Australia, suppliers and the society. The key risks posed to each category of stakeholders in case of any material misstatement being identified are discussed as below: • Shareholders: They will incur financial loss as because their investment decisions are based on the financials being published by the company • Employees: The employee will have the danger of losing their job and their sustainability at the work place would have to be reconsidered • Business Competitors: The competitors will have a fake situation of rising competition thereby affecting their framing of policies • Government of Australia & Other Regulators: The government will be affected as because the companies will be running into losses soon in case of material misstatement thereby effecting the society at large • Supplier: Their business will also be affected as because they are not being portrayed with the true picture • Society: The society will be affected as because the results of the material misstatement will sooner or later results in having financial losses. Therefore, we can see that in case the material misstatements are present in the financials and are not identified and disclosed then that will result in having negative results for all the key stakeholders of the company thereby losing the company’s reputation and financial sustainability. 2. CONCEPTS OF INDEPENDENCE & WHISTLEBLOWING IN RELATION TO AUDITORS & THEIR RELATION WITH THE PUBLIC INTEREST REQUIREMENTS AS PER APES 110: The concept of independence and whistleblowing are the most important one when it comes to ethics of accounting as because these are the important attributes that has to be present in a professional. The auditor independence means the unbiased behaviour that should be present in the auditor while performing the auditing functions and during discharge of the audit activities. The auditor should apply its judgement on the basis of independence under various circumstances so as to arrive at an opinion which is free from any biasness. The auditor’s independence fails in cases where the auditor or its team have relationships with the members of the entity being audited by them thereby raising questions on their independence. This is being regulated by the government through the introduction of the concept of the auditor’s rotation wherein one single auditor is not made to audit the financials of the company year after year, instead, new auditors are to be appointed mandatorily so that the influence if any of auditor can be checked. One of the most important part of the auditors’ independence is the auditor having a written declaration stating the fact that the auditor is free from any influence of the entity and thereby complies with the independence policy. The concept of Whistleblowing is the term which is used within a business system wherein the information of any wrongdoing within it is being passed to the key members (Steven Mintz, 2015). Whistleblowing means disclosing the wrongdoing within a company that has been witnessed and brining the same into the notice of the management. The concept of whistleblowing in relation to auditors means the fact that during the conduct of audit if the auditors come across any wrong doing i.e. any misrepresentation of facts and figures, the same is required to be informed to the management. As per the public interest requirements mentioned in the APES 110, the concept of independence and the whistleblowing plays a very important role, this is because both of these contributes towards eliminating the fact of any material misstatement from the financials of the company on which the key stakeholders relies upon for making business and investment decisions. 3. LESSONS LEARNT FROM ENRON SCANDAL: The Enron Scandal was out in the public in the year 2001, wherein the company went bankrupt due to failing of the company on the ethical grounds. The top management of the company Enron user their powers for manipulating information. The information that was published which was used by the stakeholders of the company were manipulated in the interest of the top officials and therefore all this subsequently led to the company failing and going bankrupt. This also resulted in the dissolution of the accounting and auditing firm Arthur Anderson, which was among the top five companies of Auditing. The failing of the company Enron was the largest bankruptcy in America during that time. The major reason of the failure of Enron on assessment was found was due to audit failure. The Enron failure resulted in having the need of making significant reforms in the auditing and accounting field. The ethical culture was also needed to be reconsidered for business of United States. The reasons of collapse of Enron are many that major being the conflict of interest of the auditor of the company Enron, Arthur Anderson. This is because of the fact that Arthur Anderson not only played the role of Auditor for the company Enron but it simultaneously acted as the consultant to Enron. The culture of the company Enron added the reason for its collapse as because the employees and the management of the company were not true towards their activities of preparing a healthy financial system. There was destruction of more than $60 billion of the value of shareholders resulting due to its failure. The lessons that can be learned from the failure of the company Enron are listed below: • Understanding Investments Decision: The business model of the company Enron was very complicated as because it had huge involvement with the derivative trading. Therefore, understanding its business activities was very difficult on part of the investors. The footnotes of the company’s financials were even unintelligible stating the fact that management didn’t wanted the investors to understand them. The business if very difficult to be taken for analysis should never be chosen for investment. • Companies using Fancy Derivatives should be avoided: The company Enron used Fancy Derivatives to attract the investment opportunities in it. However, the most legitimate investor Warren Buffet also found the fact that fancy derivatives are like time bomb and they should be highly avoided. The company Enron had must reliance on the derivatives entered by them for making huge earnings out of it. • Companies using Excessive Leverage should be carefully examined: The Company Enron used excessive leverage for managing its financial positions so as to attract the investment opportunities in it. Therefore, the businesses that have levels of debt being very high and the ones having volatility at highest, should be avoided for making business and investing decisions • Assessing the Risk of Counterparty: The counterparty risks should also be assessed while doing business with any company. The parties entering into contract with anyone should assess the fact that the counterparty is capable enough to pay off its dues and obligations. In case of Enron Scandal too, many of its counterparties suffered losses that were very huge. • Importance of the Integrity of Management: The integrity of the management is must for the effective results of the business. The difference between good and bad managers have to be assessed taking into account the decisions and the actions taken by them through efficient evaluation of the same. • Importance of the Auditors Independence and whistleblowing: The Company Enron failed and the major reason for the same was due to the lack of the fundamental principles present in the auditing firm Arthur Anderson that were responsible for its audit. The auditing firm Arthur Anderson, tried to conceal the real and true picture of the company’s financials as because it did not acted with honesty. The company being the consultant of the company Enron, supported the company in hiding the true picture of the financials of the company and its position. The company Enron, was losing its funds and profitability since long time and the same was being hiding through misstatements of the financials. The auditor too also supported the company by not putting the picture in front and continued to express opinion on the financials that were actually neither true nor fair. All this resulted in the failure of the company Enron. The company Arthur Anderson, failed in effectively checking the accounts of the company Enron as because the true fact of what was going on within the company was not being reflected in the company’s financials. The auditors are the first line of defence in cases of any fraud or misrepresentation being prevalent within the company. The company Anderson was earning huge commissions and fees from the Enron, thereby they started compromising the documents and shredding the same so that the true picture of the company does not comes into light. 4. AUDIT QUALITY AND WARNING NOTED IN THE STATEMENT BY GREG MEDCRAFT: Auditors plays a very important role in the financial stability. This is because of the fact that they are suppose have all the fundamental principles while conducting audit of the financials of the company and so their opinion expressed on the same are true and fair. However, due to many scandals of material misstatements wherein there have been adjustments in the finalised financial statements of the company in line with auditor have been observed affecting all the stakeholders of the company at large in a negative manner. All this gives rise to the need of maintaining Audit Quality, wherein the code of ethics containing the fundamental principles that should be adopted by the auditor while auditing have to be considered and given importance. In case of absence of such qualities the auditor will be dissolved from the position for the rest of his life. Audit Quality is required to be maintained for building and fostering trust in the reporting quality of the management. There has been many regulatory requirements being highlighted and outlined by the regulators for the maintaining the audit quality. The framework of audit quality is being provided for having the key elements of audit quality, the role the key stakeholders plays for improving the quality of audit. The maintenance of audit quality is required and also is highlighted in the standards issued by APESB i.e. APES 110 where in the importance of the audit quality have been highlighted. The information consisting of financial reports should be reliable so that they fulfil the needs of the users of them and maintaining audit quality is required for giving the users of the information confidence so that they can trust them. Audit Quality is a subject that is very complex and no universal recognition for the same have been accomplished to be considered within them. There is maximisation of the chances of the quality audits being performed continuously by the auditor in cases where the quality audit is being maintained. The responsibility of the same vests with the auditors. However, the accomplishment of the healthy quality audit is maintained where there is proper interactions among all the people of the supply chain vested with the financial reporting. There have been Framework for Audit Quality in place which focuses on the audits of the financial statements of the company being conducted effectively. It applies to all the audits and all the firms of audit irrespective of their size, legal status, nature and complexity. The quality audit contains exhibition of proper values, ethics and attributes along with being skilled and knowledgeable. It contains the auditors to have process of audits which are very rigorous complying with all the applicable standards, laws and regulations. The outputs generated from the quality audits are very reliable. The best way of achieving audit quality is through getting support from all the participants of the supply chain of financial reporting viz. Management, Regulator, Users and those who are charged with the governance. The warning note in the statement made by Greg Medcraft, the former chairman of ASIC, stated the fact that the auditors are required to discharge their duties and responsibilities complying with all the fundamental principles stated in the APES 110. This is because of the fact that the auditors during conduct of audit if suppress any whistleblowing situation, they then compromises with the audit quality thereby endangering the investments within that organization and thus putting a question mark on the sustainability of the organization. The auditors acts on behalf of the public interest as because their audited reports are used by the stakeholders of the company for making business decisions. Therefore, the chairman warned the auditors to comply with the ethics during discharge of their activities so that the situation that lead to the fall of the company Enron is not reported again. This is because many people operating with the business enterprise are affected of the same. The auditing firm Arthur Anderson, failed to deliver its auditing report by compromising with the audit quality and thus was dissolved because of the failure of Enron. Moreover, the chairman warned that auditors and stated the fact that among the audits conducted by the Big 4’s auditing firms, 23% of the audits does not have reasonable assurance of the financials being free from material misstatements. Therefore, there arises a need for complying with the standards and the ethics being put in place for the governance. C. CONCLUSION: The audit of the company should be performed in such a way by the auditor that it is free from material misstatement. This requires the auditor to be independent and also it should act as a whistle blower i.e. he should inform any alarming situations to the regulator and the management. An audit which is done through compromising the auditing needs results in affecting the stakeholders of the company in a very adverse manner. The auditor should act on behalf of the public interest and therefore should comply with all the regulations by way of standards and framework during discharge of auditing functions. The Enron scandal resulted in affecting the stakeholders of the company and also dissolution of its auditing firm, Arthur Anderson since this firm did not discharge its duties fundamentally. All this have given rise the need of maintaining audit quality since the accounting profession is entrusted to have the responsibility of acting in the interest of the public.