Auditor’s Public Interest Responsibilities and Audit Quality

The present report has performed a stakeholder analysis of Commonwealth Bank which shows that the presence of material misstatements can lead to the adverse effects on the key stakeholders. This report also sheds light on the statement of Greg Medcraft that is on the ways to increase the audit quality of the big four audit firms. For this, this report discusses about the topics like audit independence and audit whistleblowing.

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 present report has performed a stakeholder analysis of Commonwealth Bank which
shows that the presence of material misstatements can lead to the adverse effects on the
key stakeholders. This report also sheds light on the statement of Greg Medcraft that is on
the ways to increase the audit quality of the big four audit firms. For this, this report
discusses about the topics like audit independence and audit whistleblowing.

2AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Table of Contents
1. Introduction............................................................................................................................3
2. Effects of Material Misstatements on the Key Stakeholders.................................................3
3. Independence, Whistleblowing and Public Interest Requirements......................................5
4. Lessons from Enron Scandal and Arthur Andersen...............................................................6
5. Audit Quality and Audit Strategies to Address Warning........................................................9
6. Conclusion............................................................................................................................12
7. References............................................................................................................................14
8. Appendices...........................................................................................................................17

3AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
1. Introduction
Auditing can be considered as an important process of the companies as it helps in
showing that whether the financial statements of the companies are free from material
misstatements or not (Louwers et al., 2015). Auditing can be defined as the set of activities
for on-site verification like the inspection and examination that the auditors conduct. It
needs to be mentioned that there are certain objectives of this report (Knechel & Salterio,
2016). The present study will involve in the identification of the key stakeholders of
Commonwealth Bank with the aim to explore the impacts of material misstatements on
them. After that, this report also undertakes the analysis as well as evaluation of the public
interest requirements of the auditors by discussing the matters like independence and
whistleblowing. After that, this report considers the analysis of the major lessons that both
the auditor and the other can obtain from the collapse of Enron. After that, this report
stresses on the quality of the audit operations.
2. Effects of Material Misstatements on the Key Stakeholders
In this context, it needs to be mentioned that Commonwealth Bank has certain key
stakeholders and some of them will be majorly affected in case there is major material
misstatements in the bank’s financial statements. The following discussion shows the
impact of material misstatements on these key stakeholders.
Investors Community
It can be seen from the appendix of this report that Commonwealth Bank considers
the Investors Community as one of the major key stakeholders of their business and they
are the institutes and individual having stake in the company (commbank.com.au, 2019). It

4AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
is the responsibility of Commonwealth Bank to ensure the delivery of financial information
of them through financial reporting, briefing and meetings. Now, in case the auditors of the
bank flops in recognizing, disclosing and adjusting the material misstatements in the
financial statements, the bank will end up providing these stakeholders with the incorrect
financial information and this will affect the investment decision-making process of the
shareholders (Lennox & Li, 2014).
Suppliers
It can be seen from the appendix of the report that Suppliers are another key
stakeholder group of the bank and the bank includes the international, national and local
suppliers. It can also be seen that the bank has certain strategies to engage to these
stakeholders like suppliers meetings, risk assessment and others (commbank.com.au, 2019).
The requirement for the suppliers is the assessment of the bank’s ability to repay the credits
and debts. For this reason, it is needed for these stakeholders to assess the liquidity position
of the company and they look into the financial information of the bank in the financial
statements. In this position, the presence of material misstatements in the statements can
affect the suppliers’ ability to assess the ability of the bank to repay the credits ( Cao,
Chychyla & Stewart, 2015).
Government and Regulators
It can also be seen from the appendix that Government and Regulators are another
key group of stakeholders of Commonwealth Bank (commbank.com.au, 2019). It is needed
for these stakeholders to assess the bank’s ability to ensure the payment of tax. In this
position, the presence of material misstatements can affect the bank’s ability to make the
taxation payments (Czerney, Schmidt & Thompson, 2014).

5AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
Employees
As per the appendix, Employees are one key stakeholder group of Commonwealth
Bank and the career as well as earnings of these stakeholders large depends on the ability of
the bank to continue as a going concern (commbank.com.au, 2019). The ability of the bank
to continue as a going concern can be affected in the presence of material misstatements in
the financial statements (Quadackers, Groot & Wright, 2014).
3. Independence, Whistleblowing and Public Interest Requirements
When discussing about auditor indepdence, it needs to be regarded as the
indepdence of the external auditors from the audit client. One can characterize the auditor
independence with certain aspects like integrity and approach of objectivity while
performing the audit procedures (Ojo, 2015). As per the main requirement of the auditor
independence, there must not be any undue pressure or influence in the auditors while
performing the audit operations and it is needed for them to ensure performing the audit
operations in the most objective way (Amar, 2014).
It is the requirement for the auditors to take into account the aspect of
whistleblowing in the audit process. While performing the audit, if the external auditors
think that the fraudulent and unethical business activities are taking place within the
organisation, they needs to report this aspect to the internal or external regulatory
authorities (Wainberg & Perreault, 2015). This whole process is called as Whistleblowing
and whistle blower is the person who reports this fraudulent or illegal activity to the
regulators. One important aspect that needs to be mentioned in this aspect is that the
whistle blowers are needed to acquire the needed evidence before reporting the unethical
behaviour to the respective authorities (Alleyne, Haniffa & Hudaib, 2016).

6AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
When maintaining the aspects like whistleblowing as well as auditor indepdence,
one major obligation on the auditors is to follow the principles as well as standards of APES
110 Code of Ethics for Professional Accountants (apesb.org.au, 2019). It is mentioned under
Section AUST210.11.1 of APES 110 that the existing auditors of the companies have the
information related to new audit nomination and they are needed to provide the same to
the new auditor who is asked to replace the nomination (apesb.org.au, 2019). For this
reason, the need for the potential auditor is to ask for the information to the auditor in the
presence of the client’s permission. In the presence of the proper approval, it is needed for
the new auditor to ask for the information to the existing through writing (apesb.org.au,
2019). The absence of the needed permission can lead to the cancellation of the audit
nomination. These are the crucial standards that the auditors are needed to follow. After
that, it is mentioned in Section 100.1 of APES 110 that this particular regulation has ban the
auditors from taking into consideration the interest of only the audit clients and the audit
employer (apesb.org.au, 2019). These are the essential regulations that the auditors are
needed to follow under the public interest requirements.
4. Lessons from Enron Scandal and Arthur Andersen
Fraud in Accounting
One crucial aspect that the Enron Scandal has been able in highlighting that the
involvement of the management of the company various types of accounting fraudulent
activities; such as finance through off-balance sheet items, false value asset developments
and the generation of false amount of gains; and the main reason behind the appointment
of Arthur Andersen was the assistance of them in these total accounting frauds. This whole
aspect indicates towards one crucial lesson for the auditors and it is that the government

7AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
agencies must obtain the authority for conducting the audit operations for the companies
instead of the private firms (da Silveira, 2013). At the same time, with the aim to reduce the
self-interest threat of audit independence, the audit authorities need to ban the auditors
from providing any kind of non-audit as well as consultancy services.
Audit and Accounting Standards
It needs to be mentioned in this context, the management of Enronalong with their
audit partner, Arthur Andersen, did not have the needed compliance with the required
auditing as well as accounting standards; and this aspect contributed towards the unethical
activities in the accounting and auditing operations of the company. From this situation, one
crucial lesson that can be obtained is that there is a greater need for the introduction as well
as implementation of strict accounting as well as auditing regulations for stopping these
unethical actions (DiStaso & Scandura, 2014).
Incentive for the Auditors
One specific aspect that the collapse of Enron has been able to convey is that the
auditors of the companies become demotivated in the presence of severe penalties for
them while the presence of incentives can work as a motivational factors for them. It also
needs to be mentioned that the most of the auditors still have compliance with the
principles and standards of objectivity as well as professional competence. In this process,
the audit authorities can use auditor insight as a tool for increasing the audit overall audit
quality (Nguyen, 2014).
Independent Oversight

8AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
The results of the scandal of Enron has shown the whole audit profession the fact
that the auditors of the company failed in the application of auditor independent oversight
in the audit, but the application of auditor independent oversight is a major component that
needs to be there to ensure the overall good quality of the audit operations. However, it is
not possible for the auditors to apply independent oversight when they do not have the
needed skill, experience and knowledge to perform the audit procedures in the quality
manner. In order to ensure the audit quality by the application of auditor independent
oversight, there needs to be sufficient inspection programs that will ensure the examination
of the judgments that the auditors have used for developing the audit opinion (Albeksh,
2016).
External Auditor and Audit Committee
Another major insight that can be gained from the Enron collapse is that there was
not any initiative from the management of Enron to ensure the true and fair disclosure of
their financial information due to the presence of several accounting manipulation. For the
application of auditor independent oversight to retain the audit quality, the need for the
companies is to ensure the true and fair disclosure of the financial information. It is possible
to use auditor independent oversight to increase audit quality only when the companies
ensure the true and fair disclosure of the financial information (Jones & Stanton, 2013).
Audit Internal Control
Ineffective internal control was another major reason for the collapse of Enron as
the company did not ensure the presence of any mechanism to ensure the truthfulness and
fairness of financial reporting. The lesson that can be obtained from this is that the

9AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
companies are needed to ensure the presence of strong internal control for retaining the
audit quality (Hosseini & Mahesh, 2016).
Behaviour of Arthur Andersen
At the time of performing the audit of Enron, Arthur Andersen was considered as the
second oldest audit firm. The liability of the audit firm was to ensure the fairness and
correctness of Enron’s financial statements along with the internal bookkeeping. On the
basis of the audit report of Arthur Andersen, the investment decisions were taken by the
company’s investors, since the presence of the assurance that the financial statements are
free from material misstatements (McLean & Elkind, 2013). However, Arthur Andersen had
business partner relation with Enron during the audit tenure that became obvious after
Enron appointed some of the executives of Arthur Andersen. In the presence of this reason,
Arthur Andersen did not feel the obligation to examine the partnership agreement through
the analysis of the financial report of Enron. Moreover, the auditors were guilty in March
2002 due to the destruction of certain audit documents of the company. All these actions
indicate towards the unprofessional as well as unethical behaviour of Arthur Andersen as
they received huge money from Enron as audit fees (Markham, 2015).
5. Audit Quality and Audit Strategies to Address Warning
According to the international standpoint, the perfect definition of audit quality has
not yet been developed. For ensuring the quality of the external auditors, the entire audit
processes need to be accurate while ensuring the presence of professional scepticism to be
performed in the presence of the adherence to the existing audit standards. However, the
presence of certain other aspects endures the audit quality; they are knowledge of the

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industry, nature as well as extent of audit insight, observations developed from the audit
processes and others.
According to the statement of Greg Medcraft, collapses like Enron may occur in
Australia, unless the big four audit firms take inititiatives to improve their audit standards.
For this reason, the accounting books of the top Australian corporations require correct
auditing with the aim to avoid the next financial crisis (abc.net.au, 2019).
In case the auditors fail in effectively perform the audit works, possibility of the
occurrence of the incidents like Enron increases. Thus, in order to assure effective audit
works, the need for the auditors is to fulfil their duties in correct manner to gain the
assurance that there is not any material misstatement in the financial statements of the
audit client. As per the requirement of Section 2 of APES 110, there needs to have the
auditor’s assurance on the fact that the disclosed financial information are true and fair and
the financial statements are not materially misstated (apesb.org.au, 2019). Greg Medcraft
identified the fact that one main reason for Enron scandal was audit failure and this
contributed to the financial crisis (abc.net.au, 2019). For this reason, accountability must be
there from the auditors’ side for providing correct financial information by performing the
audit procedures thoroughly (Beattie, Fearnley & Hines, 2013).
It can be seen from the analysis of the news article that ASIC has gathered certain
key audit samples of the big four audit firms that are PwC, Deloitte, KPMG and E&Y for 18
months until December 2016. After the analysis of these samples, ASIC detected wrongness
in 23% of the cases where failure of the auditors was seen in disclosing the material impact
of the significant events on the financial statements. This aspect indicates towards the
absence of professional scepticism in these audit companies when they are facing any kind

11AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
of challenging audit situations. It cannot be considered as favourable in the presence of the
possibility that the situation can become worse (Byrnes et al., 2018).
It is required to be noted that one major reason for the collapse of Enron was the
accounting fraud in 2002 and this fall of Enron hugely contributed towards the downfall of
Arthur Andersen as the audit firm provided major assistance in these accounting
manipulations. In Australia, Seven Media and Nine Entertainment Company ensured the
write down of their asset values identified by ASIC and raised concerns about the valuation f
these assets (abc.net.au, 2019).
One particular aspect is evident from the statement of Greg Medcraft that ASIC
performed 7000 surveillances and more than thousand of inspection; as a result, more than
600 firms were banned, 80 people were imprisoned and $1.3 billion was refunded to the
investors in the past six years (abc.net.au, 2019). In addition, Greg Medcraft handed over his
unfinished business’s list to the federal government. In addition, it became necessary for the
enforcement of criminal charges in the place of civil charges; and this recommendation was
identified from the enquiry of the government and the financial system (abc.net.au, 2019).
Thus, with the aim to address the audit independence threat, the need is to maintain the
audit quality and thus, safeguards need to be applied in the presence of proper auditing
activities (Fiolleau et al., 2013).
As mentioned in Section 290.155 of APES 110, in case an organization has a handful
of persons having the needed experience as well as competence for carrying out the audit
responsibilities of the audit partner, it is not possible to apply the audit safeguard of audit
partner rotation(apesb.org.au, 2019) . In case the company obtains exemption from the
independent audit regulator on the rotation of the audit partner as per the jurisdiction, it is

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possible for the person to remain as an audit partner for more than seven years
(apesb.org.au, 2019). However, it is needed to conduct independent external audit review
as alternative safeguard (apesb.org.au, 2019).
As mentioned in Section 100.1 of APES 110, it is required for an auditor to act in the
best interest of the public so that they can get the necessary assurance on the financial
information disclosure (apesb.org.au, 2019). For this reason, an audit member needs to be
responsible to meet the needs of the public and stakeholders. It is also mentioned in Section
100.2(c) of APES 110 that for the elimination of threats, it is important to apply the
necessary safeguards. Apart from this, safeguards need to be applied when the audit threat
crosses the safe level and there is not negotiation in the audit standards (apesb.org.au,
2019).
Hence, it can be seen from the remark of Greg Medcraft that the auditors in
Australia need to be more professionally competent at the time to conduct the audit work
to avoid the collapses like Enron in Australia (abc.net.au, 2019). For ensuring this, they must
have the required knowledge, skills and experience for providing reasonable assurance on
the accounting information of the companies. In addition, confidentiality needs to be
maintained by the auditors as they cannot provide the business information of the audit
clients to any third party and it is mentioned in Section 100.5(d) of APES 110. On the overall
basis, the auditors are needed to comply with the necessary standards so that they can
avoid the discredit of the profession (apesb.org.au, 2019).
6. Conclusion
After taking into consideration all the aspects of the above discussion, it can be said
that Commonwealth Bank has different key stakeholders and it is evident from the above

13AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
discussion that the presence of material misstatements in the financial statements can
create major adverse impact on these key stakeholders. After that, the report also states
that both the audit independence and audit whistleblowing play crucial part in uncovering
the unethical as well as illegal activities within the business organizations. When considered
the discussion on the lessons, it needs to be mentioned that each lesson is important for the
auditors to increase the audit quality and to avoid the occurrence of the same kind of
corporate collapses in the country. For this reason, Greg Medcraft has issued a warning to
that big four audit firms that unless they improve the overall audit standards, it may happen
that Australian witnesses the corporate collapses like Enron. For this reason, it is needed for
the whole Australian auditor community to comply with the necessary regulations and
standards of auditing to increase the audit quality.

14AUDITOR’S PUBLIC INTEREST RESPONSIBILITIES AND AUDIT QUALITY
7. References
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8. Appendices