Impact of CBA Scandals on Audit Quality

This assignment analyzes the effects of several high-profile scandals involving the Commonwealth Bank (CBA) on audit quality in Australia. It delves into events such as money laundering, sales incentives for staff, climate risk lawsuits, and the removal of ATM fees, exploring how these controversies have potentially impacted auditing standards and practices. The analysis draws upon academic literature, legal documents like the Corporations Act, news articles, and official bank statements to provide a comprehensive understanding of the issue.

AUDITING

TABLE OF CONTENTS
Inherent Risk...............................................................................................................................1
Audit Evidence Mix....................................................................................................................4
REFERENCES................................................................................................................................7

Inherent Risk
A risk constituted by an omission or error in the financial statements of the company
occurred due to any factor except the factor of control failure is an inherent risk to any
organisation (Institute of Chartered Accountants in Australia, Accounting Handbook 2017). In
reference to the financial audit, inherent risk mainly occurs due following two factors:
 If the transactions are of complex nature
 Where, high degree of judgement is required regarding the financial statement.
Following are the inherent risks identified in CommBank:
Threshold cash transactions limit of $10000: Under this Australian banks are subjected to the
policies of national regulator AUSTRAC, which states that the cash amount over $10000, need
to be reported (CBA, Money laundering scandal: how it happened, 2017).
 This policy lead to the cuckoo smurfing laundering technique. Through this technique
two men namely Arlsan Shaffi and Salman Khan were found alleged to launder
$1784408 by making deposits into 101 Commbank accounts. This lead to the increase in
deposits of Comm Bank in 2012.
 Because of the above scenarios, Comm bank was accused of breaching various money
laundering laws by AUSTRAC.
 AUSTRAC has also taken the action against the bank in which bank could be fined
millions of dollars. Due to this action, shares of the bank has also declined.
 This could have been identified earlier if auditor had focused on sudden increase in
deposits of comm bank and had tried to find out the reasons behind the same.
Due to this scandal once deposits of the bank increased that portrayed sound financial
performance but after the detection of the fraud, Comm Bank faced a huge financial as well as
reputation loss.
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Applicable accounting standard: For auditing deposits of Comm bank, auditor need to look
after the provisions of AASB107. In this case the auditor should also check the disclosure
regarding the contingent liability that can occur at the time of sentencing of the law suit filed
against the Bank by AUSTRAC.
Audit objective: Inherit risk of threshold cash transaction relates to the audit objective of
Accuracy and completeness.
Change in the remuneration of front line staff: In the latest article, Comm bank has
announced the change in the way of remuneration to their front line staff (CBA removes sales
incentives for front line staff, 2017). It has declared to move approximately 2000 representatives
to a new remuneration plan. This may be identified as an inherent risk for Comm bank as change
in remuneration plan can attract many calculation errors. Before the calculation errors,
understanding of new remuneration plan may be different for all the managerial staff. This can
have following causes:
 Misunderstanding of remuneration plan will lead to misstatement of employee
remuneration.
 In case of excess payment to employees, flow of cash will be higher which will
ultimately affect the profit of the firm.
 Low payment of actual remuneration may attract law suit to the Comm bank.
 If found unattractive remuneration plan, Comm Bank can lose its productive employees
that will affect the productivity and the services of the bank.
In order to avoid these risks, bank could make various provisions in advance to recover
from such losses if any, occurred in the future.
Applicable accounting standard: In the following process of change in remuneration plan,
auditor need to check the fulfilment of requirements under AASB 19, employee benefits
(Corporations Act. Butterworths or Australian Government Printer, 2017).
Audit objective: Inherit risk of scrap change in the remuneration of front line staff relates to the
audit objective of rights and obligation of employer.
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Scrap ATM fees: In the recent article, Australia's four big banks including Comm Bank has
decided to ditch the fees they used to charge from their non- customers for using their ATMs.
Comm bank declared that it has scrapped $2 charges which he used to charge from its non
customers to use its 3400 ATMs (Australian Banks Scrapping ATM fees, 2017). This can be
identified as an Inherent risk as it can affect revenue of the bank.
 Individually the amount looks small but when considered to the number of transactions
the total amount could be large.
 As per the Reserve Bank of Australia, in a year approximately people make more than
250 million ATM withdrawals from banks other than their own.
 When talking as a whole, according to the analysts, this will cost about $130 million to
the bank along with the shrink in revenue.
 Further, Bank need to provide disclosure regarding the scrap of ATM fees and should
also disclose the reason behind sudden decline in the revenue as this could affect the
decisions of the potential users of the financial statements of Comm Bank.
Applicable accounting standard: These disclosures should be made in accordance with the
AASB 1054, Australian Additional Disclosure.
Audit objective: Inherit risk of scrap ATM relates to the audit objective of rights and obligation
of employer.
Lawsuit Over Climate Risk: After the accusation of cuckoo smurfing, breaching of laws,
Comm Bank has also been accused of failing to disclose investment risks associated with change
in climate. A husband and wife have filed a case against Commonwealth bank on 8th August
2017 with the help of advocacy group Environmental Justice Australia (Commonwealth Bank in
new lawsuit over climate risks, 2017). This could be identified as an inherent risk as it can cause
a huge loss to the Comm bank.
 This is the first case in the history where a bank is pursued for failing to report climate
change risk.
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 According to the filed case, argue is that the change in climate can have a material impact
to the financial risk to the bank, its customers and its business. And these types of risks
need to be disclosed in the annual reports by the bank.
 Earlies climate change was only treated as a corporate social responsibility of the
reporting entity, but now it is also affecting the financial line of the reporting entity.
 This case is based on the inadequate disclosure of investments risks that are associated
with change in climate.
 According to the EJA lawyer David “aspect of public interest in this case is strong
because in the history of financial institutions, consideration of climate risk wasn't seen
before in the courts of Australia.” (Lawsuit Over climate risk, 2017)
Comm bank needs to make the provision for future for the contingencies of this case.
Applicable accounting standard: In connection with this case, auditor need to check the
requirements and provisions of AASB 1054, Australian additional Disclosure.
Audit objective: Inherit risk of Lawsuit over climate risk relates to the audit objective of
completeness.
Audit Evidence Mix
For the purpose of planning an Audit of Comm bank in relation to the risks identified in
the above question, audit evidence mix required will be:
Inspection:
Auditor need to have a detailed inspection, whether the identified risks are material for
Comm bank or not (Deng, Lu, Simunic and Ye, 2014). If material then there is a need to inspect
the situation thoroughly and to find out the level of risk. In case of 1st inherent risk i.e. threshold
cash transaction limit, there is a need to inspect the dummy accounts and the amount transferred
to those accounts. In case of change in remuneration auditor need to inspect the impact of change
in way of remuneration. Changing policy will reduce the amount of remuneration or will
increase the amount. And how such changes will affect the financial position of the Comm Bank.
In case of Scrap ATM fees, inspection regarding to the approximate ATM withdrawal
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transactions of non bank customers are need to be identified and the loss to be determined due to
scrap in ATM charges. And lastly in case of lawsuit over climate risk, auditor need to identify
the level of financial risk associated with the climate change.
Computation:
After identifying and inspecting about all the identified risk, computation of the amount
associated with the risk need to be determined. As to how much these risks will affect the flow of
funds from the organisation (Omid, 2015). This will include the best possible judgements and
estimations of the amount. For estimating the amount of risk, auditor may refer to previous such
cases if any or in case of law suits can have a talk with the other parties in order to know the
amount that other party is about to sue against the Comm bank.
Analytical review procedures:
Analytical review procedure is a very effective means for detecting the errors. It may
vary from simple comparison to complex analysis procedures like regression analysis (Plumlee,
Rixom and Rosman, 2014). Audit includes studying of relationship among data's and unusual
fluctuations that occurs due to significant differences which exists but were not expected (Arens,
and et.al, 2016). For detecting the amount of change in the revenues due to scrapping ATM
charges, auditor may use test of controls and substantive procedures like analysing the
comparison of financial information of prior years, or with budgets and forecasts, or by
calculating significant ratios and trends. Analysis of investigation of fluctuations can also be
done.
Level of risk in above identified inherent risks
 In case of “threshold cash transactions limit”, the level of risk is extensive. This has
caused an earlier resignation of the CEO of the Commonwealth Bank which will give the
negative impact to the shareholders and customers of the bank. This also includes the
disclosure of contingent liability of the court case, the amount associated with the
contingent liability is high therefore in this identified inherent risk, the level of risk is
high.
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 In the case of “change in remuneration of line staff”, risk can be only related to the
misunderstanding of new remuneration plan and wrong calculations and estimations.
Therefore, the level of risk is low in this situation. Though in case of low remuneration
than actual remuneration, employee can sue the organisation but that is totally uncertain
and cannot be recognised as a high risk.
 In case of risk associated with “scrap ATM fees”, the fluctuation in the revenue of the
Bank can be significant. Due to this, profit margin of the company can be reduced to a
significant level that can affect the financial position of the company and the interest of
investors as well. Though, the cost of scrapping the ATM charges is low but with an
additional cost there will be shrink in revenue as well. Therefore, the level of risk
associated here is Moderate.
 In case of “lawsuit over climate risk”, in this inherent risk of Comm Bank it can be said
that the level risk here is high. This is because this the 1st time in the history when a
financial institution has been accused for the disclosure of climate risk. This case will
cause a negative impression of Comm bank in the public. Due to this allegation, the share
prices of the organisation has seen a rapid decline. This has also aroused a contingent
liability toward the company for a significant amount. Under this the Comm bank was
unable to meet the disclosure requirements due to which the financial statements of the
organisation did not portray true and fair view. This qualification to the annual reports of
the Comm bank will affect adversely to the organisation.
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REFERENCES
Books and Journals
Arens A. A., and et.al, 2016. Auditing, Assurance Services & Ethics in Australia – An Integrated
Approach, 10th edition, Pearson Australia, Frenchs Forest, N.S.W.
Deng, M., Lu, T., Simunic, D. A. and Ye, M., 2014. Do joint audits improve or impair audit
quality?. Journal of Accounting Research. 52(5). pp.1029-1060.
Institute of Chartered Accountants in Australia, Accounting Handbook 2017, John Wiley and
Sons, Milton.
Omid, A. M., 2015. Qualified audit opinion, accounting earnings management and real earnings
management: Evidence from Iran. Asian Economic and Financial Review. 5(1). pp.46.
Plumlee, R. D., Rixom, B. A. and Rosman, A. J., 2014. Training auditors to perform analytical
procedures using metacognitive skills. The Accounting Review. 90(1). pp.351-369.
Online
Australian Banks Scrapping ATM fees, 2017. [Online] Available through
:<https://www.finextra.com/newsarticle/31110/aussie-banks-scrap-atm-fees>. [Accessed
on 21st October 2017].
CBA removes sales incentives for front line staff, 2017. [Online]. Available Through :<
https://www.finextra.com/pressarticle/71130/cba-removes-sales-incentives-for-front-line-
staff>. [Accessed on 21st October 2017].
CBA, Money laundering scandal: how it happened, 2017. [Online]. Available Through
:<http://www.afr.com/business/banking-and-finance/financial-services/commonwealth-
bank-safe-haven-for-criminal-activity-20170804-gxp54g>. [Accessed on 21st October
2017].
Commonwealth Bank in new lawsuit over climate risks, 2017. [Online] Available
through
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:<https://www.reuters.com/article/us-australia-cba-climatechange/commonwealth-bank-
in-new-lawsuit-over-climate-risks-idUSKBN1AO0C3>. [Accessed on 21st October 2017].
Corporations Act. Butterworths or Australian Government Printer, 2017. [Online] Available
through :<http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>. [Accessed on
21st October 2017].
Lawsuit Over climate risk, 2017. [Online] Available through :<lawsuit-over-climate-risks-
idUSKBN1AO0C3>. [Accessed on 21st October 2017].
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