The Role of Auditors in Mitigating Accounting Scandals: A Case Study

This report delves into the critical role of auditors in mitigating accounting scandals, using the cases of Rolls-Royce and Olympus Corporation as primary examples. It examines the unethical practices that led to financial fraud, including falsified accounts, bribery, and concealment of losses. The report analyzes the actions of the auditing firms, KPMG and Ernst & Young, assessing their failures in adhering to auditing standards and identifying instances of lack of audit capability. It further explores the initiatives taken by these firms and discusses the improvements in auditing standards and principles implemented since these scandals, such as new reporting models, stricter regulations, and the Sarbanes-Oxley Act. The report concludes with recommendations for strengthening the auditing framework to prevent future occurrences of such financial misconduct, emphasizing the need for enhanced auditor diligence and adherence to ethical standards.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Introduction......................................................................................................................................3
Auditing Scandal by Rolls-Royce...................................................................................................3
Auditor of Rolls-Royce................................................................................................................4
Initiative taken by KPMG............................................................................................................5
Auditing Scandal by Olympus Corporation....................................................................................5
Auditor of Olympus Corporation and initiatives taken by them.................................................6
Improvements that have taken place in the auditing standards and principles since then...............6
Recommendation.............................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Executive Summary
The issue that has been presented in this particular study is that the role of the auditors in
mitigating the accounting scandals has been asked to identify. The accounting scandals have
been a common occurrence and it has been found that the firms that have been involved with
such corruptions usually have been the big players of the industry. The accounting scandals that
have been chosen for understanding the role of the auditors and other related issues are the
particular scandals by Rolls-Royce and Olympus Corporation.
This particular study aims to provide an overview into the selected accounting scandals,
the roles of the auditors auditing the scandals and the ways in which the particular situations
could have been improved in order to avert or mitigate such an occurrence.

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Introduction
The accounting scandals have been a common occurrence in today’s economy. Such
scandals have shook the entire world economy and evidently reflected the fact that in spite of the
existence of auditing regulations and frameworks, the auditors do not adhere to such regulatory
procedures which often lead to firms undertaking unethical techniques for the fulfillment of their
personal interests.
The issue that has been presented in this particular study is that the role of the auditors in
mitigating the accounting scandals has been asked to identify. The accounting scandals have
been a common occurrence and it has been found that the firms that have been involved with
such corruptions usually have been the big players of the industry. The accounting scandals that
have been chosen for understanding the role of the auditors and other related issues are the
particular scandals by Rolls-Royce and Olympus Corporation.
Auditing Scandal by Rolls-Royce
The leading automaker company, Rolls-Royce had been charged guilty of crimes like
falsifying accounts, interference with the investigations that have been going on and illegal
payments in amounts of tens of millions of pounds for the securing the ownership of the
contracts in Thailand, Russia, Indonesia and China. The company had made a payment of £671
million to the Serious Fraud Office as a fine. The corruption charges that the leading automaker
company was accused of ranged back for more than over twenty years. The leading car brand
company had been bribing hugely for the purpose of gaining the ownership of the contracts and
had been carrying out such unethical operation from 1989 till 2013. A particular instance of the
financial corruption undertaken by the company had been the $100 million order in regards to
the supply of Trent 700 jet engines to the Garuda airlines in Indonesia in 1991. The general
prediction by the stakeholders had been that the deal in regards to the Garuda airlines belonged
to the US rival Pratt & Whitney. However, the proceedings of the deal rolled in favor of Rolls-
Royce. It had been later revealed that the senior executives involved in the particular deal of
Garuda Airlines had made a payment of $2.25 million along with a Rolls-Royce Silver Spirit car
to the agent for securing the deal of the Trent 700 engines. Furthermore, Rolls-Royce also had

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made a payment of $2.2 million to Air Asia for the purpose of securing the ownership to the
orders. Thus, it is evident from the above instances that the particular company had been
maintaining goodwill and had been securing the position of a top automaker in the industry by
undertaking unethical and corrupted measures (Bingham and Druker 2017).
Auditor of Rolls-Royce
The auditor of Rolls-Royce had been the famous KPMG group. The KPMG had been the
firm responsible for executing the audits of Rolls-Royce. The accounting scandal of such
enormous volume has allegedly led to the Financial Reporting Council look into the particular
auditing procedures carried out by the audit firm. It should be noted here that there have been
several instances where the auditing firm (KPMG) had mentioned in the auditor’s issues related
to materiality and other financial concerns. However, there have been no such strict measures
taken by the auditor firm to identify the illegal business operations carried out by the British
giants (Bowman 2014).
It can be further concluded that the issues that led to the accounting scandals had been
majorly the unethical use of third party intermediaries. The third party intermediaries generally
consisted of the distributors, brokers, resellers and intermediaries. Furthermore, it had been later
accepted by the company that the company had made use of a complex accounting system that
enabled it to record a 800 million pound loss as a profit in the financial report of the company
(Cannon and Bedard 2016).
Thus, all these evidences help in deducing the fact, that the evaluation of the financial
and the non-financial aspects of Rolls-Royce that had been carried out by the auditing firm, were
not proper. It should be noted here that the primary duty of an auditor lies in ensuring that the
financial statements of a company reflect the true and fair view of the financial condition of
business. Therefore, it can be concluded here that the KPMG as an auditor of Rolls-Royce had
failed to execute the primary duties of an auditor. Furthermore, this is an instance of audit
capability. This means that the auditing evaluation executed have not been proper, as the firm
has not engaged into looking in the proper areas that need to be examined or monitored (Cannon
and Bedard 2016)..

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Initiative taken by KPMG
The particular initiative taken by KPMG had been that the firm had mentioned in the
annual report of Rolls-Royce in 2014 that the company had made use of estimations and
assumptions that resulted in mildly cautious profit recognition. Moreover, the annual report of
2013 disclosed the fact by KPMG that the firm was at risk of bribery. However, the audit firm
did not delve further into the issues which clearly rules out the case as lack of audit capability.
the auditing firm should have been much more strict with the audit proceedings and further
looked into the areas which indicated the occurrences of bribery. Thus, the lack of adherence to
the proper auditing standards (as seconded by FRC) led to the financial scandal of Rolls-Royce
take such a vast form (William, Glover and Prawitt 2016).
Auditing Scandal by Olympus Corporation
The Olympus Corporation had been a respectable organization in Japan along with its
CEO Tsuyoshi Kikukawa until the date of April 1, 2011 when the former COO of the company
accused the management of a financial statement fraud. The company had incurred a humongous
amount of loss in regards to certain bad investments. This loss had been covered up by the three
consecutive presidents of the conglomerate along with a number of executives. The company had
even made a payment of 17 billion yen to a former employee who had proposed the unethical
cover up scheme. The whistleblower in this particular accounting scandal had been the non-
Japanese CEO who revealed the proceedings of the scandal to the entire world.
An instance of the fraud conducted in the Olympus Corporation can be summarized by
the over 2000 e-mails that had been exchanged between the CEO of the Olympus Corporation
and three other employees in regards to the technique that should be adopted in order to hide the
losses. These employees each had received a total of 1.1 billion yen as compensation. The
investigation committee also identified that the group had exchanged emails with the former vice
president of the Olympus Corporation, Hisashi Mori. Furthermore, it had been found out that the
former president of the company also had illegally acquired the Gyrus Group PLC by Olympus
Corporation (Hu 2014).

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Auditor of Olympus Corporation and initiatives taken by them
The auditors of the Olympus Corporation had been two well-known auditor firms that
were KPMG and Ernst & Young. Both the auditor firms though had refused to comment on the
issue pertaining to the protection of customer data. However, the occurrence of certain events
gives us insight into the financial scandal by the Olympus Corporation. To be more precise, the
auditing firm, KPMG had been relieved of its duties in the financial year of 2009. This indicates
the fact that there had been disagreements between the firm and the management of the
corporation which ultimately led to such outcomes. This had been seconded by the reports that
stated that there had been certain conflicts in opinions in regards to bad acquisitions between
KPMG and Olympus Corporation that led to the removal of the firm (Hu 2014).
Next, the auditing firm, Ernst & Young had been appointed as the external auditors of the
Olympus Corporation. However, there has been no strong accusation either by Ernst & Young
that could reveal the corrupt procedures carried out by the company. In spite of the availability of
enough evidence like the payment of $687 million as advisory fees in regards to the unfair
acquisition of the British medical firm, Gyrus, both the auditing firms did nothing to publish the
accounting scandal in the auditor’s report. This has been another instance of the lack of auditing
capability. Both the auditing firms have not adhered to the established auditing framework or the
auditing procedures which has resulted in such an outcome. Moreover, the firms also violated the
agency theory and the signaling theory (Hu 2014).
Improvements that have taken place in the auditing standards and principles since then
The improvements that have taken place after the financial scandal carried out by the
Rolls-Royce had been one of the international accounting bodies, ICAEW that are in charge of
framing and modifying the regulatory principles had established an completely new reporting
model for ensuring that the occurrence of such issues are not repeated in the future. The new
reporting model that has been prepared keeps the investors and the stakeholder of business well
aware of the happenings and events in the organization at a stipulated interval. The financial
reporting model that has been framed by the ICAEW also maintains a degree of clarity and
transparency that makes it easier for the stakeholders of business or the users of the financial
statements to interpret and understand the financial proceedings of the firm. ACCA, another

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accounting regulatory puts stress on the collection of enough audit evidence for resolving the
problem of lack of audit capability (Larcker & Tayan 2015).
As mentioned earlier in this report, the required investigations in the accounting scandal
had been carried out by the regulatory body, FRC. After, the Rolls-Royce case, the FRC has
made it a mandatory rule that an organization is required to change the auditing firm carrying out
its annual audit in every ten years (Larcker & Tayan 2015).
Another globally known regulatory body, CIMA has established a framework for
preventing risks arising out of the occurrences of such financial scandals. CIMA also has stated
in its report that the maintenance of the required ethical standards in regards to the business
operations that are carried out by a business firm not only is beneficial for the business unit but
also for the stakeholders of the particular business (Larcker & Tayan 2015).
On the other hand after the occurrence of the Olympus Corporation scandal, the Congress
had passed the Sarbanes Oxley Act. This further resulted in the creation of the Public Company
Accounting Oversight Board which restricted the control that the Certified Public Accountants
had (Jackson 2017).
Recommendation
The particular recommendation that can be arrived at after going through the discussion
in the preceding paragraphs is that the occurrence of such accounting scandals have further led to
the strengthening of the auditing framework. All the auditing and accounting bodies, all over the
world have acknowledged the fact that there have been a gap in the auditing framework and
procedures which led to the lack of auditing capabilities on the part of the auditing firms.
Moreover, it should also be realized by the auditor firms that it is their sole responsibility to
highlight the areas of doubt in the financial statements of the concerned company. This will not
only enable them to properly adhere to their duties but also save the stakeholders of business
who depend on the corporate entities for their earnings.

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Conclusion
The only conclusion that can be arrived at is that the role of an auditor is very important
in a corporate world. Thus, it is the primary duty of the auditor is to safeguard the stakeholders of
the company that they are auditing, ignorance of which will lead to such accounting scandals.
Moreover, the corporate bodies have to understand that adopting fraudulent techniques will
definitely harm the business in the end.

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References
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from the field. The Accounting Review, 92(4), pp.81-114.
Coffee, J. C. (2016). The Globalization of Entrepreneurial Litigation: Law, Culture, and
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reputation: The case of the Olympus fraud. Journal of Contemporary Accounting & Economics,
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Jackson, K. (2017). Japanese management and society in the ‘Age of Abenomics’.
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choices and their consequences. Pearson Education.
Masztalerz, M., 2014. Global Management Accounting Principles-Emperor's New Clothes.
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Mayer, C., 2017. Whose Responsible for Irresponsible Business? An Assessment.
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approach. McGraw-Hill Education