Audit Quality and Social Consequences of Audit Failure: A Case Study of Carillion Plc

This report discusses the audit quality of Carillion Plc, potential factors that compromised audit quality, and the social and economic consequences of audit failure. It also covers the going concern concept and indicators. The report highlights the importance of adequate time, resources, and personnel to conduct a quality audit. It also emphasizes the need for auditors to be independent and have a good knowledge of the business and its activities. The report concludes that a better auditing report makes it easier for stakeholders to make a conclusion about the company.

Running Head: Auditing
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Project Report: Auditing

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Contents
Introduction.......................................................................................................................3
Company overview...........................................................................................................3
Audit quality and potential factors comprised audit quality.............................................3
Social and economic consequences of audit failure.........................................................5
Going concern and indicators...........................................................................................6
References.........................................................................................................................8

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Introduction:
The report has been prepared on Carillion Plc. The company has faced some auditing
issues in 2014-2016. The company had to face various issues due to investment into
numerous risky contracts and the projects. The company has been warned in 2017 for some
issues regarding the profits and financial circumstances. These warnings were just the initial
stage of difficult pitch on which the company had to go through. The report takes the
concern of audit quality of the company, potential factors of the company due to which audit
quality has been comprised, social and economical consequences of the company and the
accounting indicators and concepts of the company.
Company overview:
Carillion plc is a multinational company which has been established in England to
manage and construct facilities and services. Headquarter of the company is in
Wolverhampton. The annual report of the company briefs about the 900 million pounds
pension amount and a pension deficit of 600 million pounds. Internal parties of the company
were supposed to analyze and evaluate the scam of the company but no internal stakeholder
of the company was aware about the scandal (Reuters, 2018). However, the external parties
of the company i.e. investors, creditors and the government were also not in a possession of
evaluating the financial performance of the company as the annual report of the company has
been comprised in such a way that no stakeholder could analyze the issue.
In order for the financial statements to be used as an appropriate means of economic
decision-making, there must be assurance that the financial statements contain the correct
data and not misleading in decision making. It would make the annual report and financial
statement of the company more reliable.
Audit quality and potential factors comprised audit quality:
According to the The guardian (2018) there are various factors which have
impacted on the audit quality of the company. Some of them has been discussed and
evaluated here which explains that how the audit quality of the company has been comprised.
Intimidation during audit is high. This is because in cases of fraud and incompetence, audit
process and quality will unearth this. Potential factors that will influence the audit quality
include the time given to conduct an all inclusive audit report, resources and personnel to

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conduct a quality audit. Threat may be witnessed by the auditors upon comprehensive
Intimidation threat:
Firstly, it is required for an auditor to have a good knowledge of the business and
its activities. Lack of knowledge about the business makes it tough for the auditor to evaluate
all the relevant factors thoroughly. In case of Carillion plc, auditor had not focused on the
type of business and the activities and due to which the main parts have been skipped from
his side (Financial reporting analysis, 2018). The time factors would also be managed by the
auditors as they have to accomplish the auditing process in a lesser time and thus they should
manage the factors in a proper way.
For a company like Carillion, a multi-national that is involved in construction and
facility management, time required to audit its books of finance should play a comprehensive
role. Time is a major role during auditing, it should be important to note that time should be
adequate enough to produce the right results in the auditing process. Inadequate planning in
audit process should be good enough to ensure that the auditing process goes in the right
manner (The telegraph, 2018). Gathering of audit evidence should take place in sufficient
plan in order to provide quality audit.
The auditor's report is crucial in an audit because it could inform about what the
auditor is doing and the conclusions obtained. The auditor has a responsibility to assess
whether there is any doubt about the company's ability to maintain its viability over a period
of time and to prove the reasonableness of the financial statements presented by the client.
Therefore, in the audited financial statements, the auditor must express an opinion on the
fairness of the financial statements audited (Hall, 2002). In case of Carillion plc, auditor had
not focused on the financial statements of the company properly and due to it, the auditor’s
opinion is not fair.
The auditors face various practical issues while auditing the financial reports and
annual report of an organization. The control risk and the inherent risk are also required to
evaluate and manage by the auditor. An auditor is required to focus on technology, planning,
time, staff competence, relevant documents, proves of financial transactions etc so that a
better auditing report could be prepared (Eliot, 2016). A better auditing report makes it easier
for the stakeholders to make a conclusion about the company. In case of Carillion plc, auditor
had not focused on the various factors of the business and it had lead to the scam in the
company.

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Auditors are also required to manage and make the necessary amendments in the
financial reports of an organization according to the accounting regulations and the
accounting standards. Direction and supervision is important as it is part of a quality audit
and audit process. The auditors should be enough experience and have enough knowledge
about the supervision and auditing process so that the better auditing reports could be
prepared (Kapferer, 2012).
The routine procedure should also be followed by an auditor to manage the process of
auditing and evaluate the financial process of the company at a better way. In case of
Carillion, it has been found that if the auditors were completed their job with proper timing
and process than the financial statement of the company could be audited properly and the
scam would not taken place. In performing the audit duties and concerning on the audit
quality of a company, it has been found that the auditors are required to evaluate all the
related factors so that there is no option for any kind of scam in a business.
In performing him duties of auditing, an auditor is not only required to be expertise in
the audit process but auditor should also be independent while the process so that he could
work without any pressure and threat. Independent auditors are always better than the
dependent auditor.
Social and economic consequences of audit failure:
There are various social and economical consequences which also impacts on the
audit quality and leads to the failure. Various social and economical consequences such as
loss of employment, loss of public services, level of regulations, earnings losses, people lives,
lack of independence, auditors in competencies, general public, GAP auditors, GAAP issues
etc impacts on the audit quality of an organization and due to these factors, it becomes tough
for an auditor to present a fair auditor’s report.
In case of Carillion plc, it has also been evaluated that the auditors were affected
by the social and economical factors as well. These have lead to the audit of the company o
failure. It is an issue that the stakeholders in any business take the process and the factors
very casually. Incompetence on the side of the auditor could lead to economic losses for a
company as fraud which could not be detected. Once fraud is not detected, it is assumed that
a company has healthy financial position but the position of the company’s position would
come to be unearthed later (Gray, Manson and Crawford, 2015). It would lose its economic

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stability as shares will stumble and many would sell their stock. The social consequence of a
company due to loss of an auditor is loss of reputation and good name that lead to economic
losses.
If an auditor does not offer a fair auditor’s report about the financial position of a
company than these financial statements lead to the decisions of creditors, banks and other
stakeholders of the company in a wrong direction. Great confidence in the auditor is often
overwhelmed by scandals by auditors. The social consequences brief the audit quality of
Carillion plc has been lower and it has impacted on the company as a whole (Jubb, 2008). If
the auditors would have evaluated the scandal at initial stage than the loss amount could be
reduced. Stakeholders of an organization would always consider the auditor's Opinion which
is contained in the auditor's report to evaluate and analyze the investment position of the
company.
Further, the loss of public services is always equivalent to loss of economic
potential of a company. Auditing is the field that has advanced the most. It returned its
leading role to the public accountant in modern organizations by freeing it from the financial
and accounting classification (Biegelman and Bartow, 2012). It has impacted on the
company’s auditor’s report as the auditors have not focused on the social factors of the
company and which has directly lead to the auditing process of the company towards a
failure.
The auditor has a responsibility to assess whether there is any doubt about the
company's ability to maintain its viability over a period of time and to prove the
reasonableness of the financial statements presented by the client. Therefore, in the audited
financial statements, the auditor must express an opinion on the fairness of the financial
statements audited (Hightower, 2009).
After the globalization, it has been important for the organizations to evaluate and
analyze the new standards of accounting and follow the international accounting standards. In
case of Carillion plc, it has been evaluated that the audit quality of Carillion plc has been
lower and it has impacted on the company as a whole. If the auditors would have evaluated
the scandal at initial stage than the loss amount could be reduced. Stakeholders of an
organization would always consider the auditor's Opinion which is contained in the auditor's
report to evaluate and analyze the investment position of the company.

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Going concern and indicators:
Going concern concept assumes that a business would run beyond the next fiscal
year so that an organization could accomplish its current and future plans. It is a fundamental
accounting concept which explains that every business runs with a thought that it would
never be closed. A going concern business is a business that is operating currently, making
profits from its operations and is deemed to operate in the foreseeable future (Crumbley,
Heitger and Smith, 2011).
An auditor’s opinion must be modified. It is necessary to node that unmodified
auditor’s report is the report where the auditor’s opinion has not been modified. On the
contrarily, an auditor’s report is modified because of the emphasise of the matter paragraphs
then auditors paragraph will be considered as not modified (Freedman and Jaggi, 2010).
Auditors may mention that the auditor’s opinion has not been modified due to inclusions of
certain matters in an opinion. Thus, the auditor's report for the company is needed to increase
the users' confidence in the financial statements that the financial statements are neutral, so
public confidence in the financial statements will increase.
Tangible and intangible asset recognition is important for an auditor in a business
as it is the main asset of the company and the most of the scandals are done on the basis of
assets (tangible and intangible). The accounting policy note of the company briefs that the
company has followed proper IFRS rules but the calculations and the proper disclosure has
not been done by the company of financial figures and the transactions of the company
(Codification of statements on auditing standards, 2010).

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References:
Biegelman, M. and Bartow, J. 2012. Executive roadmap to fraud prevention and internal
control. Hoboken, N.J.: Wiley.
Codification of statements on auditing standards. 2010. New York, NY: American Institute of
Certified Public Accountants.
Cosserat, G. and Rodda, N. 2012. Modern auditing. Chichester: John Wiley and Sons.
Crumbley, D., Heitger, L. and Smith, G. 2011. Forensic and investigative accounting.
Chicago: CCH.
Eliot, G. 2016. The mill on the Floss. New York: Open Road Integrated Media.
Financial reporting analysis. 2018. Investigation into the audit of the financial statements of
Carillion plc. (online). Available at:
https://www.frc.org.uk/news/january-2018-(1)/investigation-into-the-audit-of-the-financial-
stat (Accessed as on 17th April 2018).
Freedman, M. and Jaggi, B. 2010. Sustainability, environmental performance and
disclosures. Bingley: Emerald.
Gray, I., Manson, S. and Crawford, L. 2015. The audit process. Andover, Hampshire, U.K.:
Cengage Learning.
Hall, J. 2002. Information systems auditing and assurance. Cincinnati, Ohio: South Western
College.
Hightower, R. 2009. Internal controls policies and procedures. Hoboken, NJ: Wiley.
Jubb, C. 2008. Assurance & auditing. South Melbourne: Thomson Learning..
Kapferer, J. 2012. The new strategic brand management. London: Kogan Page.

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Reuters. 2018. KPMG's audits of Carillion to be investigated: UK watchdog. (online).
Available at: https://www.reuters.com/article/us-carillion-collapse/kpmgs-audits-of-carillion-
to-be-investigated-uk-watchdog-idUSKBN1FI0MB (Accessed as on 17th April 2018).
The guardian. 2018. KPMG to be investigated over Carillion auditing. (online). Available at:
https://www.theguardian.com/business/2018/jan/29/kpmg-carillion-frc (Accessed as on 17th
April 2018).
The telegraph. 2018. Carillion auditor KPMG faces scrutiny for approving books months
before collapse. (online). Available at:
https://www.telegraph.co.uk/business/2018/01/15/carillion-auditor-kpmg-faces-scrutiny-
approving-books-months/ (Accessed as on 17th April 2018).