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Is Audit Profession Self

Interested?AC3300 Coursework 2 2010/11

Student Name: LIU He Xin

Student Number: G20406886

Module Name: Audit Theory and Practice

Module Number: AC3300

Module Tutor: Mohamed Parker

Date of Submission: 28th February 2011

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Plan

Firstly, this essay will include various criticisms made.

Then I will point out the response of them with reference to:

Auditor independence;

Laws and regulations:

Companies Act (2006);

International Standards of Auditing;

IFAC Code of Ethics:

Integrity;

Objectivity;

Professional competence and due care;

Confidentiality;

Professional behaviour;

Ethical standards:

ES 1 - Integrity, objectivity and independence;

ES 2 - Financial, business, employment and personal relationships;

ES 3 - Long Association with the Audit Engagement;

ES 4 - Fees, remuneration and evaluation policies, litigation, gifts and

hospitality;

ES 5 - Non-audit services provided to audit clients;

ES Provisions Available for Small Entities (Revised);

In the end I will summarise the above response and the current situation of the audit

profession before giving a brief conclusion.

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Is Audit Profession Self Interested?

Since the corporate scandals involving very large businesses like Enron and

WorldCom were made public in the early 2000s, there has been a widespreadconcern about the audit profession. As a result, the expectations for the auditors

from the general public are getting higher and higher during the past few years.

More and more criticisms have been made toward the audit firms. Auditor

independence has been seriously questioned. Auditors are being accused of acting in

dishonestly or unethically to maximise their own personal interests.

As a matter of fact, these problems have been existed since the audit profession first

came into being hundreds of years ago. Many laws and regulations were set up to in

order to solve them.

Companies Acts

In the 1989 Companies Act, Recognized Supervisory Bodies (RSBs) and Recognized

Qualifying Bodies (RQBs) were established in law with the purposes of securing that

the auditors are being properly supervised and qualified and their work are properly

carried out with a proper degree of independence. The role of an RSB is to maintain

and enforce rules as to: (a) eligibility of persons to seek appointment as company

auditors; and (b) the conduct of audit work. The role of an RQB is to enforce rules,

such as those relating to: (a) admission to or expulsion from a course of studyleading to qualification; (b) the award or deprivation of a qualification; or (c) the

approval of a person for the purpose of giving practical training or the drawal of such

approval (Gray & Manson, 2008, pp. 107, 139, 145). After a few amendments, the

newest Companies Act 2006 has been fully implemented in 2009 (Companies House,

2009). One main change that should be considered is that it allows the limitation of

liability to be negotiated openly between the audit firms and their clients. It reduced

the risk of failure of audit firms and is a way of protecting the audit profession.

Setting auditing standards

In 1976, the Auditing Practices Committee (APC) was established, aiming to set up

guidelines and standards for auditors to prevent financial crises resulting from audit

failures like those of the late 1960s and early 1970s. However, it is argued that APC

was set up as a committee to allay public concerns about the effectiveness of

auditing and possibly also to prevent some other body taking control of setting of

standards in auditing (Gray & Manson, 2008, p.741). In addition, the members of

APC were mainly from large audit firms and they retained their position with the

firms that employed them, which results in the protection of the interests of these

firms. There were more evidences that can lead to the criticism that APC is not

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independent of audit firms and the establishment of APC can be considered to be

negative and self-interested.

In the late 1980s, the defects of the APC were more and more exposed by the media,

which leaded to the decision from the accounting bodies to replace the APC by the

Auditing Practices Board (APB) in 1991. However, critics suggested that the APB was

not actually different from the APC since the members were still from the big

accounting firms or large companies and they were unlikely to be performing in the

public interest. Besides, public were not allowed to the meetings and the minutes of

working parties were not available. Despite the disadvantages including not being

independent and not considering small business and audit firms, there are still

advantages.

The partners bring a wealth of experiences. They are likely to have knowledge of the issues involved in the audit of

significant entities.

They can call upon the excellent resources within their audit firms for adviceon technical issues.

If their agreement of a standard is obtained it might be less likely that the Big4 firm with which they are associated will oppose or be critical of the

standard. (Gray & Manson, 2008, p. 743)

Since the International Standards on Auditing (ISAs) issued by the International

Auditing and Assurance Standards Board (IAASB) were adopted, the main duty of

APB has changed to adoption and augmentation of the ISAs. Compared to APB,

although the members of IAASB are the same connected to the Big 4 audit firms, it is

not seriously criticised since its meeting agenda, minutes of meetings, issue papers

are published and its meetings are open to the public.

Apart from the ISAs, there are other regulations with regard to auditor

independence, such as the Code of Ethics for Professional Accountants issued by the

Ethics Committee of the International Federation of Accountants (IFAC) and the

Ethical Standards issued by APB.

According to the IFAC Code, there are five fundamental principles:

1. Integrity. It means that auditors should be honest when carrying out auditreports.

2. Objectivity. It means that auditors should be objective and their judgementsshould not be altered by conflict of interests.

3. Professional competence and due care. It means that auditors should bequalified with professional knowledge and skills and their work should becomplied with appropriately related standards.

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4. Confidentiality. It means that impropriate disclosure of the informationacquired during audit process to third parties should be prohibited.

5. Professional behaviour. It means that auditors should be well aware of thelaws and regulations and avoid acting illegally. (IFAC, 2008)

In December 2004, APB issued five Ethical Standards (ESs) and an additional

statement of Provisions Available for Small Entities for accounting bodies to comply

with in the UK and Republic of Ireland.

ES 1 - Integrity, objectivity and independence

This part of standards includes some basic ethical requirements. Firstly, for example,

audit firms should establish policies and procedures to ensure that the integrity,

objectivity and independence are guaranteed. Secondly, an audit engagement

partner is required. Lastly but not the least, communication of staff to the senior

levels within the firms is recommended.

ES 2 - Financial, business, employment and personal relationships

This part is focused on relationships. Not only personal relationships are considered,

but also financial and business relationships, which are more complicated to detect.

ES 3 - Long Association with the Audit Engagement

In this section, long association of an auditor is considered to be inappropriate.

Auditors should be changed after a continuous period of five years in a listed

company and ten years in an unlisted company.

ES 4 - Fees, remuneration and evaluation policies, litigation, gifts and hospitality

This part concentrates on fees, hospitality and other similar factors that shouldnt be

an influence on audit quality. For instance, contingent audit fees are not allowed.

ES 5 - Non-audit services provided to audit clients

There is a huge variety of non-audit services, including internal audit services,

information technology services, valuation services, actual valuation services, tax

services, litigation services, legal services, recruitment and remuneration services,

corporate finance services, transaction related services and accounting services.

According to ES 5, these services can only be provided by different members other

than those engaged in the audit if they will not result in a significant impact on the

audit work.

ES Provisions Available for Small Entities (ES-PASE)

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Since it can be very difficult for a small entity to comply with the ES 1 to 5, these

provisions are needed. Under ES-PASE, the requirements have been reduced and

some non-audit services are allowed. (The Auditing Practices Board, 2010)

With all these laws and regulations in operation, it seems that audit profession is

perfect. However, it should be ensured that all these rules have been completely and

carefully implemented. In order to enhance the audit quality, the following factors

should be considered.

People. The staff should be well-trained and qualified and even be reinforcedthroughout their period at the audit firm.

Client relationships. A good relationship between the auditor and client isneeded

Working practices. Better ways to work, such as strong team work, goodcommunication and a good plan will lead to better audit quality.

Monitoring quality processes. Internal and external monitoring is essential(Gray & Manson, 2008, pp. 756, 757)

In recent years, more and more auditing scandals, including notable scandals like

Lehman Brothers and Parmalat (Priddy, nd, p.59), were exposed to the public. As a

result, more attention is paid to the quality of audit. Organizations demand greater

accountability. The society expects the audit profession to do better. This is not easy

to be accomplished. All that can be done is to improve the laws and regulations and

the implementation of them ceaselessly in order to minimise the disadvantages.

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References

The Auditing Practices Board (2010). Ethical Standards. Available at:

http://www.frc.org.uk/apb/publications/ethical.cfmAccessed: 26/02/2011

Companies House (2009). Companies Act. Available at:

http://www.companieshouse.gov.uk/companiesAct/companiesAct.shtml Accessed:

26/02/2011

Gray, I and S. Manson (2008). The Audit Process Fourth Edition. Thomson Learning,

London.

IFAC (2008). Code of Ethics for Professional Accountants (revised July 2006).

Available at: http://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics#code-of-ethics-for-professiAccessed: 26/02/2011

Priddy, S (nd). The future evolution of audit. accountancy futures: audit and society,

pp. 56-60

http://www.frc.org.uk/apb/publications/ethical.cfmhttp://www.companieshouse.gov.uk/companiesAct/companiesAct.shtmlhttp://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics#code-of-ethics-for-professihttp://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics#code-of-ethics-for-professihttp://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics#code-of-ethics-for-professihttp://web.ifac.org/publications/international-ethics-standards-board-for-accountants/code-of-ethics#code-of-ethics-for-professihttp://www.companieshouse.gov.uk/companiesAct/companiesAct.shtmlhttp://www.frc.org.uk/apb/publications/ethical.cfm