Factors causing the Collapse of Corporate Organisations: Case of Harris Scarfe

Auditing 1
Factors which can cause the Collapse of Corporate Organisations: Case of Harris Scarfe
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Auditing 2
Factors which can cause the Collapse of Corporate Organisations: Case of Harris Scarfe
Assessment 2: Individual Essay, Part One
The Auditing Issues
Auditing is a vital activity in a company setup and if not done properly, a company
can suffer major financial losses and even collapses like the Harris Scarfe in Australia which
was shut down in 2000 (Sookhak et al. 2014). Harris Scarfe collapsed due to poor
management, poor internal control and poor auditing and accounting activities. The internal
auditors were not independent, and their decision was being influenced by some of the
management members (Jostern 15th May 2013)). An example is when the Harris Scarfe
accountant, Mr. Wight alleged that he was told to make false accounting reports by Hodgson
who was one of the Harris Scarfe management members. The collapse of Harris Scarfe has
brought the discussion about the role of auditors in a company growth (Clayfield 16th August
2011). Therefore, the paper has looked at three audit issues that led to the closure of Harris
Scarfe one of the biggest companies in South Australia. The issues to be discussed are
auditing ethics, independence of auditors, and the composition and the roles of audit
committee.
Independence
According to Hashem et al. (2015 p. 98), the auditor independence is where both the
external and the internal auditors are allowed to perform their duties without interference
from the company management they are working for or any other party of interest.
Independence of auditor is an issue that cannot be ignored by any business interested person.
Rasheed (2014 p. 367) states that if the auditor’s reports are influenced by other people then
those reports are not accurate and can lead the company in path of collapsing. It is the
responsibility of the auditors to ensure that they are not influence by the interested people
who may be harmed by the audit reports. Harris Scarfe suffered financial losses because

Auditing 3
some of the management did not allow the auditors to perform their work independently
(Kavrar and Yılmaz January 2017). A good case is where Mr. Wight testified that he was
compelled by Mr. Hodgson who was one of the Harris Scarfe management to prepare false
auditing reports for that company`s financial year. The work of the auditors is to act as
oversight and report any suspicion of mismanagement of funds and this cannot be done if
they are not independent (Sookhak et al. 2014). Therefore, to prevent collapse of companies
to today`s market, the management should not interfere with the auditors` work.
Auditing Ethics
Every department in an institution must run in accordance with the code of ethics that
have been dictated by the institution in question and the state in which that organisation is
based. In that manner auditing processes must also be done in compliance with the code of
ethics in auditing profession (Sookhak et al. 2015). One of the ethics is independence which
has been discussed as the first issue in the part above. Other ethical codes that auditors should
follow as prescribed in the Australian law include competency, integrity, objectivity and
confidentiality (Griffin and Wright 2015). Competency requires the auditors to take part in
auditing activities that they are knowledgeable on, they should not take part in auditing
activities that they do not know. Integrity requires the auditors to perform their work based on
trust, and write their recommendation based on their judgment not influence form other
people (Fernie and Sparks 2014 p. 10). Objectivity requires the auditors to conduct their
activities in an objective manner and assess the reports without the influence form the
interested parties in the audit process. And lastly, confidentiality requires auditors to only
show the contents of the auditing report to the relevant people and not every person who want
to see the report (Sookhak et al. 2015). Auditors from Harris Scarfe did not follow the code
of ethics and that is one of the reasons why the company collapsed. Wight could have not

Auditing 4
agreed to be influenced by his boss because ethically, he should not agree to influence by
external forces.
Composition and roles of Audit Committee
The composition of an Audit Committee is also an important factor when an
organisation needs a trustworthy financial reports. According to Kshetri (2013 p. 372), the
audit committee should have three to five people who are very independent and make sound
decisions without personal or external influence. However, the composition of the Harris
Scarfe audit committee was not that good that is why the company had financial problems.
The figure below shows the composition of Harris Scarfe Company
Harris Scarfe Company Audit Committee in 1998 to 2000 (Kavrar and Yılmaz January 2017)
The table has shown that the Harris Scarfe Company Audit Committee was majorly
made of directors who were not independent hence the decision by the committee would be
easily be interfered with. Kasim and Sanusi (2013) reported that the major role of an Audit
Committee in any company is oversight. The committee can also investigate how the
company`s money is spent and make necessary recommendations. Therefore, if the
composition of the Audit Committee is not according to the regulations that dictate the
formation of an Audit Committee, the roles and functions of the committee will be affected
badly (Rönnberg, Lindgren and Segerholm 2013). The composition of the Audit Committee
should be in a way that the committee members should discuss the financial reports with both
the internal and external auditors in absence of the management and non-independent
directors (Kavrar and Yılmaz January 2017).