Auditing: Analysis of One Tel's Downfall and Role of Management and Auditors in Promoting Ethical Behavior

This article analyzes the downfall of One Tel and the role of management and auditors in promoting ethical behavior. It discusses the statement of G.Medcraft, purpose and audit reports for One Tel, and the role of management and auditors in promoting ethical behavior, common good, and stewardship.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Introduction:..................................................................................................................2
1. Analysis of the statement of G.Medcraft coupled with purpose and audit reports for
One Tel:........................................................................................................................2
2. Analysis of the role of the management of One Tel and auditors promoting ethical
behaviour, common good and stewardship:.................................................................6
Conclusion:...................................................................................................................9
References:................................................................................................................10

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Introduction:
The process of auditing is explained as objective examination and analysis of
the financial statements of an entity in order to assure fair and reliable representation
of the claimed transactions. This process could be conducted internally and
externally as well. The internal procedure would be conducted on the part of the
staffs, while external procedure could be performed on the part of outside consultant
(Ahmed and Ndayisaba 2016). In addition, the financial statement users often watch
out for the audit reports before they indulge in reviewing the financial reports of the
firms. Hence, it is necessary for the auditors to be separate from their client firms in
order to provide unbiased audit opinion to conform to the auditing standards.
In this particular assignment, a critical dissection would be made to ascertain
the accountability of the company management and auditors. This is because certain
corporate downfalls have been observed to take place because of the unscrupulous
organisational practices and the auditors associated with them. One such downfall
identified in this assignment is the collapse of One Tel, since it had adopted various
unethical measures, which were supported on the part of its auditors. As a result,
this assignment would lay emphasis on highlighting the contributory factors leading
to the downfall of One Tel.
1. Analysis of the statement of G.Medcraft coupled with purpose and audit
reports for One Tel:
Reasons behind the statement of G.Medcraft:
The article provided clearly states that G.Medcraft is the past chairperson of
“ASIC (Australian Securities and Investments Commission (ASIC)”. The individual

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has raised concerns about the responsibilities and obligations of the auditors while
performing their audit operations. In addition, the individual opined that corporate
collapses like Enron might hit the Australian economy and this could be avoided only
with the dramatic change in the auditing standards of the big four accounting
organisations (Abc.net.au 2018). One procedure through which such situation could
be prevented is to ensure effective conduction of duties on the part of the auditors
and assurance needs to be provided about the financial reports free from material
misstatements. On the contrary, the international corporate downfalls have caused
the financial statement users to lose confidence and trust on the entities, as the
auditors were not successful in discharging their obligations appropriately. In this
context, Albeksh (2016) remarked that sufficient evidence needs to be accumulated
on the part of the auditors for ensuring the reliability of the financial information of the
organisations to conclude that they do not contain material misstatements.
Another significant reason for which Mr. Medcraft made this statement is the
detection of errors and frauds in the financial reports of the corporation for adopting
suitable actions. The individual has identified that innumerable investigations were
carried out in the previous six years, out of which 80 people were sent to prison, 600
firms were banned and amount of $1.3 were provided to the investors as returns
(Abc.net.au 2018). For ensuring that such situations do not repeat in future, it is
crucial for the auditors to follow the norms laid out in “Accounting Professional and
Ethical Standards (APES 110)”. Moreover, it is clearly evident from the article that
there was lack of professionalism and scepticism in the role of the auditors. Based
on this evidence, the big four accounting firms are needed to enhance their
standards of auditing, as such move would assure the lost confidence and trust
among the financial statement users on both the entities and the auditors.

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Purpose and audit report in the context of One Tel:
The intention of preparing an audit report is to give independent judgement
regarding the lucidity and fairness in the financial statements of a firm to the
respective users (Arnold and Bonython 2016). In case of One Tel, Ernst & Young
has prepared the audit report and the intention is considered to be identical as
above. It is expected that Ernst & Young would develop the audit report in such a
manner for revealing the true financial condition of the business to the users in order
to enable them in undertaking decisions. There are both external and internal users
of financial statements for One Tel. The internal users could be identified as
managers, staffs and owners and the external users include suppliers, banks,
customers, investors, government and communities (Clarke and Dean 2014).
Ernst & Young clearly stated in its audit report that the financial information of
One Tel is free from material misstatements. However, the audit judgement is not
qualified in terms of nature. The audit report further stated that One Tel has complied
with the prevailing guidelines as laid out in AASB, while the auditor has conformed to
the norms of APES 110 as well at the time of performing the audit activities for One
Tel.
Degree of adherence to the purpose and audit report:
It has already been discussed that both the financial reports and audit reports
of One Tel are developed in compliance with the essential guidelines laid down in
the auditing and accounting standards of the nation. However, the reports obtained
from outside investigations state that there were huge variations in the real financial
position of One Tel in contrast to the one represented in its annual report. It has
been observed that the organisation was geared specifically in gaining money

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through share market speculation. Another renowned market report identified that
Keeling and Rich received bonuses, which were tied closely to the shares of the firm
rather than profit or any other indicator (Coleman 2016).
One Tel has made rapid expansion beyond its financial capability due to the
misguided decision of the management. As the network providers in Europe have
changed, such change has adverse effect on the financial position of One Tel and
specifically, the organisation could not proceed due to the international downfall of
dotcom ventures (Dakhelalla 2014). In addition, another deficiency could be
observed in business model, since it has offered services at a price lower than its
cost to the customers. The two tables below signify the global growth rate of One
Tel; however, the achievement was made by lowering the shareholders’ returns.
Table 1: Increase in revenue and subscribers of One Tel from 1996-2001
(Source: Lessambo 2014)
Table 2: Level of profit/loss of One Tel from 1999-mid 2000
(Source: Leung et al., 2014)
The first signal, from which the troubling financial position of One Tel was
identified, was the resignation of Rich and Keeling. News Corporation and PBL

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started conducting examination on the books of accounts of the firm and promise
was made of providing $132 million to reassure the markets. However, after further
investigation, they have detected that $400 million was required for ensuring
sustainability of One Tel and hence, they were compelled to withdraw the offer. This
situation clearly sheds light on the inability of Ernst & Young to detect material
misstatements in the financial information of One Tel and therefore, it failed to follow
the ethical norms of APES 110 to prepare the audit report. Due to this, One Tel had
reached insolvency in June 2001 and eventually, it was liquidated.
2. Analysis of the role of the management of One Tel and auditors promoting
ethical behaviour, common good and stewardship:
Role of the management of One Tel:
The management of the business firms play a considerable role in auditing
process except the auditors. Thus, the management needs to develop its financial
statements by complying with the needed standards of accounting (Nuryanah and
Islam 2015). On the contrary, the management of One Tel had carried out various
unethical measures and they are summarised as follows:
Ethical behaviour:
Various principles of corporate governance are laid down in ASX so that the
organisations maintain their ethical integrity. The initial recommendation is
independent directors need to be present in the board of directors of an organisation
(Pandit, Conway and Baker 2017). In case of One Tel, the recommendation was not
followed, since its founder has significant influence on the board opinions about the

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overall organisational performance. Thus, it is evident that only one director was in
full control over the board and thus, the firm failed to maintain ethical values.
Two different persons need to be accountable for the positions of the chief
executive officer and the chairperson (Ramsay 2015). As observed in One Tel, only
one person formulates the opinions of the board and as a result, the decision-making
ability and independent functioning of the board was hampered. It was clearly laid
out in ASX; the board of a firm is to be formulated in a way that raises its entire
value. It is crucial for the board members to have relevant knowledge about the firm,
which would help them in reviewing management performance (Riaz and Kirkbride
2017). For One Tel, the activities and composition of the board implied that the board
members obtained incomplete and selective information regarding significant
business aspects, as the job responsibilities were not clear to them. Hence, the
ethical values of One Tel were not maintained.
Common good:
As One Tel had lack of common goal to be achieved, as its focus was on
increasing profits, there was absence of this aspect. In addition, the directors were
not aware of their old clients along with lack of knowledge regarding effective
management and delegation of authority and as a result, the organisation was
liquidated. There were absence of future planning and common vision in One Tel.
The old customers were not paid adequate attention, since the directors have
concentrated on profit-making by creating new customers (Sun and Farooque 2017).
Due to this, there was significant decline in goodwill of One Tel.
Stewardship:

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This implies supervising or taking care of a business entity. For One Tel,
Keeling and Rich had intended to increase business profits, which had lead to
ineffective compliance with their obligations. They aimed to increase profit through
market diversification for earning profits; however, they ignored the cash availability
required to ensure liquidity. Therefore, these acts are not made to ensure the overall
organisational interest.
Role of the auditor:
It has been observed that Ernst & Young had failed to conform to the auditing
standards of APES 110, which are evaluated in the context of the below-stated
aspects:
Ethical behaviour:
For One Tel, Ernst & Young had not provided any information to the
shareholders regarding its true financial condition for assuring personal benefits.
Thus, the objectivity principle highlighted under “Section 120 of APES 110” is not
followed. Moreover, the auditors need to formulate their internal control mechanisms
(Wheeler 2016). In case of One Tel, there was absence of the usage of internal
control mechanism of the auditor. Instead, it has used the mechanism of One Tel
leading to violation of the audit profession. Hence, as per “Section 130 of APES
110”, the principles of due care and professional competence were not followed.
Common good:
The auditors are needed to provide accurate and trustful information to the
users for fulfilling their requirements. In case of One Tel, the auditor had not laid

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stress on the requirements of the users due to its personal benefits and this has
violated the common good principle.
Stewardship:
Ernst & Young failed to make any effort in checking the invoices of the
business transactions of One Tel. The auditor failed to make crosschecks to the
debtors, assets and inventory valuation balances. In addition, no physical verification
was made rather than relying on the prepared financial statements of One Tel
(Yahanpath and Islam 2016). Hence, as per “Section 150 of APES 110”, Ernst &
Young did not comply with the professional behaviour principle.
Conclusion:
The above discussion clearly lays out both One Tel and Ernst & Young did not
perform their respective obligations and duties. One Tel has made rapid expansion
beyond its financial capability due to the misguided decision of the management. As
the network providers in Europe have changed, such change has adverse effect on
the financial position of One Tel and specifically, the organisation could not proceed
due to the international downfall of dotcom ventures. The auditor failed to make
crosschecks to the debtors, assets and inventory valuation balances. In addition, no
physical verification was made rather than relying on the prepared financial
statements of One Tel and thus, it has breached the principles laid out in the auditing
standards.

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References:
Abc.net.au., 2018. [online] Available at:
http://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-poorauditing/
9114490 [Accessed 11 Apr. 2018].
Ahmed, A.D. and Ndayisaba, G.A., 2016. Effect of corporate governance on ceo
pay-risk taking association: empirical evidence from australian financial
institutions. The Journal of Developing Areas, 50(4), pp.309-344.
Albeksh, H.M., 2016. Compliance of Auditors to Ethics and Rules of Professional
Conduct and Its Impact on Audit Quality. Imperial Journal of Interdisciplinary
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Lessambo, F.I., 2014. Corporate Governance, Accounting and Auditing Scandals.
In The International Corporate Governance System (pp. 244-263). Palgrave
Macmillan, London.

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Assurance Services 6e. Wiley.
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