Contribution of Audit Procedures towards Corporate Collapses and Ethical Issues in Auditing Profession

This report analyzes the contribution of audit procedures towards corporate collapses and ethical issues in the auditing profession. It covers the relevance of auditor’s independence and professional and ethical behavior, major improvements in auditing standards and practices, and recommendations for further improvements. The second task discusses ethical issues in the case of two audit seniors seeking promotion to audit supervisor.

Modern Business
Practices
2019

1
By student name
Professor
Date: 28th May, 2018.
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Contents
TASK 1..........................................................................................................................................................2
Executive Summary.................................................................................................................................2
Introduction.............................................................................................................................................3
Auditors of the companies collapsed......................................................................................................3
Analysis of contribution of audit procedures towards corporate collapses.............................................3
Auditor’s independence & professional and ethical behavior.................................................................4
Major improvements in auditing standards and practices......................................................................4
Recommendations for improvement in auditing profession...................................................................5
Conclusion...............................................................................................................................................5
TASK 2..........................................................................................................................................................6
Determination of Facts............................................................................................................................6
Definition of ethical issues.......................................................................................................................6
Identification of Principles, Rules and values...........................................................................................7
Specification of Alternatives....................................................................................................................7
Comparison of values and alternatives....................................................................................................7
Assessment of Consequences..................................................................................................................8
Decision making.......................................................................................................................................8
References...................................................................................................................................................9
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TASK 1
Executive Summary
This report is meant to provide an analytical insight into the fact that how the failure on the part
of the professionally qualified auditors to fulfill their duties in relation to the audit assignments
contribute towards corporate failures. The broad areas covered by the report focuses on the
issues like relevance of the auditor’s independence and the professional and ethical behavior, the
major improvements in the area of auditing standards and principles that were taken place since
the corporate collapses discussed in the report along with the major recommendations for further
improvements.
Introduction
The first corporate collapse forming the part of our report is the result of balance sheet
manipulation made by Satyam computers services Ltd that formerly came for the public
disclosure on the 7th day of January, 2009 when its founder B. Ramalinga Raju made the public
announcement of falsely inflated profits of the past few years and subsequently resigned. The
second Corporate Scam shows the solvency crisis faced Infrastructure Leasing and financial
Services Ltd. That fulfilled to repay its debt obligation triggering its liquidity crisis for which its
audit firms were finally blamed (Coate & Mitschow, 2017).
Auditors of the companies collapsed
The statutory auditor of Satyam computers services Ltd was Price Waterhouse Coopers (PWC) ,
that failed to carry out the strict audit procedure reflecting its erroneous professional judgments
and its finally its complete failure reflected inform of subsidized management representation for
its qualified audit opinion (Cayon, et al., 2017).
The Fallout of the IL & FS was the joint contribution of its three Big Four Auditors,i.e., EY,
KPMG and Deliotte that were found allegedly negligent in fulfilling their professional obligation
as revealed by the forensic audit conducted later on.
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Analysis of contribution of audit procedures towards corporate collapses
The major audit failures reflected through the Satyam scam were the inability of its auditor, i.e.,
Price Waterhouse Coopers (PWC) in the detection of raising of inflated bills to customers,
existence of cash and bank balances of $1 billion, debtors overstated worth $100 million,
presenting the operating margin of 24% as against the real margin of 3% in the second quarter. In
this case PWC failed to comply with the fundamental norms of audit procedure by violating
most elementary auditing standards and procedures.
The contribution of the Big three audit firms in case of audit of IL & FS can be termed under the
head of Professional misconduct as it was the act of omission on their part as a result of which it
failed to bring the true picture of the companies. The major failures to highlight were that in case
of these companies there were asset-liability mismatch, they were unable to detect the circular
rotation of funds amongst group entities, there was non-recognition of non-performing assets and
they were not making appropriate valuation of its assets, all these led to their downfall.
(Boghossian, 2017). In this case the auditors primarily acted in favour of the management of the
IL & FS. In other words, these firm hardly perform the appropriate duty and were found guilty of
gross negligence. In addition to that these audit firms also provided their advisory services that
acted as conflict of interest in discharge of their professional liability (Hellmann, et al., 2019).
Auditor’s independence & professional and ethical behavior
In the case of Satyam Computers it could be seen that the audit fee as per 2004-05 consolidated
balance sheet data were 92 lakhs that jumped to 1.61 crores in the next financial year, that clearly
reflected that the PWC simply compromised the fundamental principle of auditor’s independence
that led them towards the adoption of unethical practices in terms of their failure to detect the
malpractices involved in the Satyam group. This was revealed by the fact that when similar
entitities in the IT Industries like Wipro, Infosys etc did not show such a major hike in terms of
payment of Audit fee (Delone & Mclean, 2004).
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In the case of IL & FS it was discovered that the Audit Firm Deloitte was awarded with the
advisory services in lieu of providing the favorable view of its operations as a result of which it
prevented them from exercising the independent judgment and maintaining the professional
ethics as they completely relied on the managerial representations. Deloitte also showed its full
trust on the audit report of subsidiaries of IL & FS which were audited by eight other audit firms
without making a deep rooted analysis (Boghossian, 2017).
Major improvements in auditing standards and practices
After the discovery of Satyam Fall , the major improvements noticed in form of amendments in
the Companies Act, 2013 so as to fix the liabilities of the auditors and independent auditors. The
major improvements came in form of inclusion of provisions relating to analytical reviews and
risk assessment and internal control testing. Further the emphasis was placed on having a strong
audit committee with clear corporate governance policies and practices (Michaela, 2017).
As the IL & FS is a recent financial scam, hence it is being expected that more improvements in
the auditing standards and practices shall be made in near future having seen the disastrous
consequence of this scam.
Recommendations for improvement in auditing profession
A brief discussion of the above two Corporate Scams revealed the fact that major improvements
are desperately demanded so as to prevent the repetition of these scams. First of all the statutory
auditors should not be allowed to provide his consultancy services to the entity. Secondly, these
audit firms need to provide a statutory declaration that neither the audit firm nor any of its
partners is directly or indirectly interested in the financial affairs of the entity being audited.
Further there should be the provision of strict norms for the audit firm and its partners that they
should not come under the influence of the management of the entity which can significantly
affect their independence (Zeng, et al., 2019)
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Conclusion
In the nutshell, it can be concluded that both of above discussed corporate collapsed have
significantly contributed towards bringing major improvements in the principle auditing
standards and practices. It has raised an alarm for the regulatory bodies too to incorporate
innovative ideas in terms of introducing improvements in the auditing practices.
TASK 2
Determination of Facts
Andrew and Mike are two audit seniors working for Ford and Associates, who joined the firm
together almost at the same time though are highly competitive but have a great sense of respect
for each other. As they both have been seniors for last two years hence are seeking promotion to
audit supervisor, though both are aware of the fact that there is only post of audit supervisor. In
between Andrew has recently replaced Mike on the audit of one of its client naming Kent Ltd.
After taking over the assignment of Kent Ltd, Andrew came to know that Client had called their
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firm’s audit manager to tell that they were quite dissatisfied with the performance of Mike, who
missed a number of issues in relation to audit. But soon after he came to know that actually Mike
performed his duties well, but there might be differences between the Client and Mike. Andrew
is thinking that this assignment has in fact provided him an excellent opportunity to deliver his
best by resolving conflicts with client and obtain a good review so as to ensure his promotion
Definition of ethical issues
In the given case after starting with the Audit Assignment of Kent Limited, Andrew soon
realized that the Client has in fact misled the audit manager of Ford and Associates by
communicating that Mike’s performance was quite dissatisfactory just because of some personal
conflict with him. Because he finally found that Mike has brought into notice several significant
audit issues. But Andrew is Keen to have the position of audit supervisor for which Mike is
longing for too. Hence in the given case just in order to make a positive impression in the mind
of the audit manager of his firm, he is trying to resolve the issues with Client so that it can put
him in a better position in comparison to Mike in spite of the fact that Mike did his best and due
to some professional urgency he had been replaced with the Kent Ltd (Abdullah & Said, 2017).
Identification of Principles, Rules and values
The major principle in the given case is to provide an independent view of the state of affairs of
the Kent Limited without affecting the independent judgment of Andrew. While providing the
view Andrew should keep in his mind the very fact that his viewpoint is not at all influenced by
the management of the Kent Limited (Chron, 2017). The major rule and value to be followed
here is not to ruin the image of Mike and not ignoring his contributions as well as the findings
that has a significant contribution in completion of his audit assignment. Secondly, Andrew
needs to adopt an indifferent attitude while reporting to the Audit Manager.
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Specification of Alternatives
The first alternative available to Andrew is agreeing with the viewpoint of the client thereby
running the image of Mike before the Audit Manager of his firm and ensuring his promotion to
the position of Audit Supervisor. The second option shall be to put the real scenario before the
audit manager by fully recognizing the contribution of Mike and explaining the significant
findings brought into the picture by Mike during his engagement with the Kent Limited. Also
complete his assignment of Kent limited without being partial either to client
Comparison of values and alternatives
If Andrew go for the first alternative then in that case it shall just be against the principle of
professional code of ethics as in this case it shall give birth the conflict of interest for Andrew
between his personal interest and his professional duty. It is because Mike has not committed any
professional misconduct in discharging his audit obligation. Further it shall present Andrew as if
he had acted against its Firm. But if he opts for the second alternative then though it may deprive
him of his personal interest but shall significantly contribute towards his professional excellence
and shal establish him as a true professional. In such a case also it may help him to build a very
positive impact in the mind of the audit manager to consider his candidature seriously
(Hellmann, et al., 2019).
Assessment of Consequences
In case of adoption of the first alternative there is more chances that Andrew may be rewarded
with the position of Audit Supervisor as he shall primarily focus on bringing his achievements
noticed by the Audit Manager and make him ready to ignore the talent and achievements of
Mike. In case he adopts the second one then it shall basically cause favour for Mike, but shall
build a very positive image for Andrew not only in the mind of Audit Manager of his firm but
also in the heart of Mike too and shall contribute towards the creation of a healthy working
environment for the Audit Firm
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Decision making
From the above detailed analysis of the given case or problem and evaluation of the alternatives
along with the consequences associated with them it is being suggested Andrew should
undoubted go for the second option so as to justify his professional excellence. It is because
compromising professional ethics in lieu of personal benefit can only degrade the value of audit
assignment. Further the goal of the firm is always of higher priority than the individual goal of
the personnel engaged or working for the organisation. Andrew should not forget finally that he
and Mike both are working for Ford and Associates.
References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
Cayon, E., Thorp, S. & Wu, E., 2017. Immunity and infection: Emerging and developed market sovereign
spreads over the Global Financial Crisis. Emerging Markets Review.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
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430.html
[Accessed 07 december 2017].
Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in
Social Responsibility. s.l.:s.n.
Delone, W. & Mclean, E., 2004. Measuring e-Commerce Success: Applying the DeLone & McLean
Information Systems Success Model. International Journal of Electronic Commerce, 9(1).
Hellmann, A., Perera, H. & Patel, C., 2019. Contextual issues of the convergence of International
Financial Reporting Standards:. Advances in Accounting, incorporating Advances in International
Accounting, 2(26), pp. 108-116.
Michaela, R., 2017. Contemporary Issues in Accounting. second ed. London: Wiley.
Zeng, L., Zhao, M. & Liu, Y., 2019. Airport ground workforce planning with hierarchical skills: a new
formulation and branch-and-price approach. Annals of Operations Research, 275(1), pp. 245-258.
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