Auditor’s Public Interest Responsibilities and Audit Quality

The report shows that the fault of the auditors in properly identifying, disclosing and adjusting the material misstatements an affect different decision-making process of the Wesfarmers Limited’s key stakeholders. The audit profession demands the commitment of the auditors to perform the audit procedures in accordance with the best interest of the public as they are the representative of the key stakeholders of the companies. In the presence of all of these compliances with the rules and regulations of auditing, it will be possible for the Australian auditors to avoid the occurrence of the scandals like Enron in Australia.

Running head: AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Auditor’s Public Interest Responsibilities and Audit Quality
Name of the Student
Name of the University
Author’s Note

1AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Executive Summary
The report shows that the fault of the auditors in properly identifying, disclosing and
adjusting the material misstatements an affect different decision-making process of the
Wesfarmers Limited’s key stakeholders. The audit profession demands the commitment of
the auditors to perform the audit procedures in accordance with the best interest of the
public as they are the representative of the key stakeholders of the companies. In the
presence of all of these compliances with the rules and regulations of auditing, it will be
possible for the Australian auditors to avoid the occurrence of the scandals like Enron in
Australia

2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Table of Contents
Introduction...............................................................................................................................3
Key stakeholder analysis and Explanation on How they would be affected with Material
Misstatements............................................................................................................................3
Concepts of Independence and “Whistleblowing” and Public Interest Requirements
Mentioned in the APES 110 Code of Ethics for Professional Accountants................................5
Lessons that the auditors Can Learn from the Enron Scandal and from the Behaviour of
Arthur Andersen.........................................................................................................................6
Audit Quality and What Auditors need to do to address the “Warning” Noted in the
Statement Made by Greg Medcraft...........................................................................................9
Conclusion................................................................................................................................12
References................................................................................................................................13
Appendices...............................................................................................................................16

3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Introduction
Over the years, there are many instances all over the world where the large business
organizations faced brutal collapse or unexpected liquidation due to several disputes,
mistakes and errors in accounting and auditing practices; and the collapse of Enron can be
considered as the greatest among all of them (Johnstone, Gramling & Rittenberg, 2013). In
most of the case, the involvement of the auditors can be found in providing the smoothness
to the accounting frauds or manipulations; and this aspect raises question about the public
interest responsibilities of the auditors because they auditors have been favouring the audit
clients’ interest due to the presence of this personal interests (Maroun & Atkins, 2014).
However, one major demand of this particular profession is to comply with the
requirements of audit independence, audit scepticism and audit ethics as these are
necessary tools for the auditors to maintain the dignity of the profession (Cohen & Leventis,
2013). The main aim of this report is to conduct a discussion on the needed aspects of
auditing related to the auditors’ public interest requirements. The topics of the discussion
are audit materiality, independence, whistle blowing, Enron scandal and the warning note of
Greg Medcraft.
Key stakeholder analysis and Explanation on How they would be affected with Material
Misstatements
The following discussion shows the analysis of the key stakeholders of Wesfarmers
Limited that is an ASX listed Australian Retail Company:
Suppliers: The appendix of the report indicates towards the long-term commitments of
Wesfarmers towards their suppliers as they are one major key stakeholder of the firm
(sustainability.wesfarmers.com.au, 2019). The company has adopted several strategies to

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
engage with the suppliers. On the other hand, suppliers need certain specific information
about the business of Wesfarmers to make decisions like credit decision and others.
Significant threat develops when there are material misstatements in the financial
statements of Wesfarmers due to the auditors and it creates negative impact on the
decision-making process of the suppliers (Waligo, Clarke & Hawkins, 2013).
Shareholders: It can also be seen from the appendix of the report that Wesfarmers listens
to their investors throughout the year as they are another key stakeholder of the company
(sustainability.wesfarmers.com.au, 2019). One major initiative of Wesfarmers towards the
engagement with this stakeholder group is the release of all necessary financial information
about their financial performance and financial position so that the investors can make the
decisions about the economic resources of the company. Significant risk of incorrect
business decision making develops due to the failure of the auditors in appropriate
addressing the material misstatements in the accounting books of the company (Jones,
Wicks & Freeman, 2017).
Government: The appendix of the report states that Wesfarmers ensures their compliance
with the rules and regulations of Federal and State Government as Government is a crucial
stakeholder of the company (sustainability.wesfarmers.com.au, 2019). It needs to be
mentioned in this context that materially misstated financial statements affects the
company’s profitability and it can reduces the tax payment of the company to the
government. This aspect develops the significant risk of decrease in income of government
due to the failure of Wesfarmers in tax payment (Eskerod, Huemann & Savage, 2015).
Customers: It can be seen from the appendix that the customers are one major key
stakeholder group of Wesfarmers and they have concern over specific business activities of

5AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Wesfarmers (sustainability.wesfarmers.com.au, 2019). For this reason, the presence of
material misstatements can affect the decision-making process of the customers in these
areas (Marić, 2013).
Employees: As per the appendix, Wesfarmers has an employee base of around 217,000
people and thus, they are considered as a key stakeholder group in the company
(sustainability.wesfarmers.com.au, 2019). The presence of material misstatements in the
financial statements can jeopardize the career development as well as source of earnings of
these employees (Cooper, 2017).
Concepts of Independence and “Whistleblowing” and Public Interest Requirements
Mentioned in the APES 110 Code of Ethics for Professional Accountants
Auditor independence can be regarded as that specific obligation on the auditors
that demands the commitments of the auditors to conduct the audit of the financial
statements in the most objective manner so that they can avoid the impact of any conflict of
interest and undue influence on the audit opinion (Sinha & Hunt, 2013). Two types of
auditor independence can be seen; they are independent from mind and independent from
appearance. It needs to be mentioned that audit independence can be considered as a
major tool to increase the quality of the overall audit procedures (Wu, Hsu & Haslam, 2016).
Auditor’s independence has major positive influence on the process of
whistleblowing by the external auditors. Whistleblowing can be considered as a specific
situation when the external auditors discovers unethical and illegal business activities and
directs the internal staffs to report against the same in the presence of sufficient proofs and
evidences (Sagara, 2013). In this whole process of whistleblowing, the external auditors of
the companies can take the assistance of the internal or the external regulatory authorities.

6AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Thus, it can be seen that both the auditor independence and audit whistleblowing plays a
major role in ensuring the ethical accounting practices within the organizations (Wainberg &
Perreault, 2015).
In the situations of audit whistleblowing and audit independence, “APES 110 Code of
Ethics for Professional Accountants” plays a crucial part as it provides the auditors with the
necessary direction to stay ethical (apesb.org.au, 2019). It needs to be mentioned that the
previous auditors of the clients have such information that is crucial in the decision-making
process on audit nomination by the new auditors and thus, they must obtain this
information in the presence of the permission of the audit client as per “AUST210.11.1 of
APES 110” (apesb.org.au, 2019). However, the current auditors cannot demand this
information verbally as they need to follow proper protocol where writing request needs to
be provided to the previous auditors for the nomination information in the presence of the
client’s permission. This regulation is considered as crucial for audit independence and audit
whistleblowing as the new auditors can know about the fraud and unethical activities of the
companies. At the same time, the audit profession demands the commitment of the
auditors to perform the audit procedures in accordance with the best interest of the public
as they are the representative of the key stakeholders of the companies (apesb.org.au,
2019).
Lessons that the auditors Can Learn from the Enron Scandal and from the Behaviour of
Arthur Andersen
Lessons from Enron: The obtained information related to the collapse of Enron indicates
towards the crucial fact that the management of the organization was majorly responsible
for the accounting frauds like unnatural gain creation, off-balance sheet fraud and others

7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
where they received major assistance from their auditors, Arthur Andersen (Covitz, Liang &
Suarez, 2013). Thus, it can be understood that there were certain major deficiencies in both
the accounting and auditing standards and principles and these deficiencies need to be
eradicated. Thus, the important lesson from this is that it is needed to introduce as well as
implement better regulations and principles in both the accounting and audit profession and
this specific objective can surely be achieved with the assistance of the compliance with the
global auditing and accounting principles (Covitz, Liang & Suarez, 2013).
It can be seen from the above part of the discussion that the auditors of the Enron
provided the management with major assistance in continuing the accounting falsification
and this was the sole reason behind the appointment of Arthur Anderson by the
management of Enron (da Silveira, 2013). This whole aspect contributed towards the major
deterioration of the quality of audit processes and procedures in the company. Thus, the
crucial lesson that can be obtained from this is that the government agencies should be
responsible for conducting the audit of the companies instead of the private audit firms
(Abid & Ahmed, 2014). At the same time, all the responsibilities related to the appointment
of the external auditors also need to be handed over to the government agencies as this
aspect will restrict the practice of the appointment of internal auditors from the team of the
external auditors. The Enron scandal also shows that the auditors of Arthur Andersen were
agreed to assist the management of Enron in the exchange of huge amount of fees. This
particular aspect can be restricted by restricting the auditors in providing any kind of non-
audit as well as consultancy services to the audit clients in exchange of huge amount of
audit fees (Abid & Ahmed, 2014). This aspect will be majorly helpful in increasing the audit
quality by eliminating the self-interest threat of audit independence.

8AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Another crucial aspect that the scandal of Enron highlighted was the lack of ability of
the auditors to perform the audit procedures in the most objective as well as professional
manner (Dibra, 2016). Thus, even in the presence of sufficient skills, knowledge and
expertise, the auditors of Enron did not use the auditor independent oversight in the
presence of their self-interest in the audit client. Thus, another major lesson obtained from
the collapse of Enron is to ensure the application of auditor independence oversight and it
can be used a major tool to increase the overall audit quality (Dibra, 2016). It needs to be
mentioned that the auditor independent oversight is positively associated with professional
scepticism in auditing due to the fact that both of these aspects demand the commitment of
the auditor to obtain an alert mind for the recognition of material misstatements in the
financial statements.
Apart from the auditors, the collapse of Enron has provided a crucial lesson to the
audit client organizations. The management of Enron did not take any initiative to ensure
the true and fair disclosure of the financial information which was a major reason for the
collapse of the whole organizations (Edel Lemus, 2014). For this reason, the crucial lesson
for the audit clients is that they must ensure the true and fair disclosure of their financial
information as true and fair disclosure is required for the auditor with the aim to apply the
auditor independent oversight and professional scepticism. At the same time, this particular
aspect that certain other benefits such as it helps in increasing the audit quality and it assists
the companies in gaining the trust of their shareholders (Edel Lemus, 2014).
Arthur Andersen: It can be seen from the obtained information related to the collapse of
Enron that Arthur Andersen was the audit partner of Enron that was responsible for
providing the necessary assurance on the material misstatements in the financial

9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
statements (McLean & Elkind, 2013). However, it was then found that Arthur Andersen was
majorly guilty for establishing business relationship with the audit client in the exchange of
huge amount of audit fees. At the same time, Arthur Andersen was the major companion of
the management of Arthur Andersen in the accounting manipulation of the financial
statements (McLean & Elkind, 2013). It was also mentioned that the management of Enron
offered jobs to the audit executives of the company. Apart from this, some of the crucial
audit documents of Enron were destroyed by the audit members of Arthur Andersen ahead
of the investigation of the federal government. It can be seen from the discussion of this
that the auditors of Arthur Andersen were not ethical as well as not professional in the audit
operations of Enron and this aspect ensured the collapse of the company (McLean & Elkind,
2013).
Audit Quality and What Auditors need to do to address the “Warning” Noted in the
Statement Made by Greg Medcraft
In the process of auditing, audit quality is considered as a crucial aspect that the
auditors must maintain with the aim to provide the necessary assurance on the status of
material misstatements in the financial statements. Audit quality can be considered as the
specific substances or matters assisting the auditors in performing the audit operations in
the most objective as well as professional manner. It is the requirement of the audit quality
that the auditors are needed to ensure the proper communication of the material
misstatements found in the financial statements in the audit report with the aim to retain
the audit quality. A quality audit is necessary for the auditors in order to ensure the issue of
the correct audit opinion. For this reason, Greg Medcraft has provided a warning to the big

10AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
four audit companies that they are needed to enhance their auditing standards in case they
do not want another Enron scandal takes place in Australia (abc.net.au, 2019).
In his warning, Greg Medcraft also mentioned the fact that the auditors of Australia
are needed to ensure performing the necessary audit operations in the most responsible as
well as accountable manner so that they can properly recognize, disclose and adjust the
material misstatements in the financial statements of the large Australian companies
(abc.net.au, 2019). For this reason, the auditors are needed to ensure the collection of the
necessary audit evidences and audit information on the fact that whether there is any
material misstatements in the financial statements of these companies or not. For this
reason, the Australian auditors have the obligation on them to ensure the true and fair view
of the financial statements of the companies and it can be found in “APES 110, Section 2”
(apesb.org.au, 2019). The earlier part of the discussion helps in showing the fact that the
deterioration in the audit quality led to the audit failure in Enron and it ultimately ensured
the collapse of the same. This same can be found from the statement of Greg Medcraft. For
this reason, it is needed for the auditors in Australia to bear the full accountability and
responsibility of their audit operations so that they can express the correct assurance to the
key stakeholders of the audit clients.
The article has information about the investigation as well as surveillance programs
of ASIC on the key audit sample of PwC, KPMG, Deloitte and EY (abc.net.au, 2019). It needs
to be mentioned that the main reason behind the arrangement of these actions was to
ensure the fact that whether these big four audit firms were responsible as well as
accountable in the audit procedures of the large Australian companies. The result of these
surveillances and investigations showed that in 23% of the cases, these audit companies

11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
failed to give the required assistance in truthfulness and fairness of the financial
information. Now, this can be considered as a subject of worry for the Australian auditors as
it indicates towards the lack of professional scepticism by these auditors; and this lack of
professional scepticism reduces the ability of these auditors to face and handle the
challenging audit situations. For this reason, the auditors of Australia must not compromise
the application of professional scepticism in any situation with the aim to increase the audit
quality and avoid the occurrence of the scandals like Enron and others. Moreover, the
auditors are needed to display their professionalism by complying with the required rules
and regulations of auditing.
With the aim to increase the audit quality by decreasing the audit threats, the
auditors must be able in assessing the situations where they need to apply the audit
safeguard. In this context, “APES 110, Section 290.155” can be mentioned as it provides the
message to the auditors that they cannot use the safeguard of revolving the audit partner of
a company in case that company only has few members that can perform all the procedures
of auditing (apesb.org.au, 2019). However, exception is there as the audit partners can
remain the key audit partner for above seven years when there is exemption on that
company not to rotate the audit clients. Thus, as per “APES 110, Section 100.2(c)”, the
auditors are responsible for applying the safeguards in only those situations where the audit
threat crosses the safe level and the threat is needed to taken into account for reduction
(apesb.org.au, 2019).
On the basis of the above discussion, it can be said that it is the responsibility on the
big four audit firms of Australia to take the necessary initiatives in order to enhance the
audit quality. At the same time, they must be more careful, responsible and accountable in

12AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
the auditing of the large Australian corporations due to the fact that the accounts of the
large Australian corporations are prone to corporate frauds which can lead to the collapse
of the company and can create major financial crisis. After that, the ethical regulation and
principles of “APES 110” needs to be considered by the Australian auditors with the aim to
increase the overall audit quality; these principles are integrity, confidentiality, objectivity,
professional competence and due care and professional behaviour (apesb.org.au, 2019). In
the presence of all of these compliances, it will be possible for the Australian auditors to
avoid the occurrence of the scandals like Enron in Australia.
Conclusion
It can be seen from the above discussion that the auditors of Australia are needed o
ensure the increase in the audit standards while performing the audits of the large business
organizations in order to avoid the occurrence of the Enron like scandals in Australia. The
above discussion indicates towards the fact that Wesfarmers have certain key stakeholders
that can be affected in the presence of incorrect identification, disclosure and adjustments
of material misstatements in the financial statements. At the same time, the content of the
report helps in reaching the conclusion that both auditor independence and audit
whistleblowing is needed for ensuring the public interest requirements of the audit
profession and to restrict the presence of illegal and unethical business operations within
the companies. Moreover, every lesson from the collapse of Enron is necessary for the
auditors to ensure the increase in the overall audit quality. At the same time, the discussion
of the report also indicates towards the necessity of the auditors to ensure the compliance
with all the required rules and regulations of auditing so that they can avoid the occurrence
of the scandal like Enron and another financial crisis.

13AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
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Appendices