International Issues in Accounting and Auditing

International Issues in Accounting and Auditing

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International Issues in Accounting and Auditing

Introduction

Recent developments in accounting, auditing, and financial reporting places much emphasis on practical application of standards, authoritative pronouncements influencing practitioners within small, medium, and privately run businesses. Accountants and auditors should be applying technical accounting and auditing pronouncements with the aim of advising companies to relate with issues of implementation. The Securities and Exchange Commission initiated some whistle blower rules, which relate to a language that does not include external auditors. Many corporate attorneys are of the opinion that many loopholes which auditors can apply to get complaints against clients to the Securities and Exchange Commission to obtain fat rewards (Koniak, George, & Ross, 2010).

According to Bumiller, (2002), audit experts and software vendors have advocated for the continuous monitoring and continuous auditing, but still many wrong things happen with the corporate America. To monitor and test key controls in financial reporting to be continuous, may enable mistakes to be detected early and resolved before many material errors in financial statements are achieved. So much is happening in the international accounting scene, the Financial Standards Board sanctioned exposure of drafts on leases, revenue, and financial instruments. Many public opinions are coming in, and intense debates are expected in the near future. Some developments have also been seen that maybe have significant effects on the accounting world in the long term.

Since October 2004, many occurrences have taken place in the areas of international accounting and auditing. The topics dealt with implementing IASB and IFAC standards and corresponding challenges in regulation, international harmonization and convergence, issues related to applying fair value for financial reporting, risks and vulnerabilities, and it is of essence that constructive dialogue continues among stakeholder in the chain of financial reporting. Accounting and auditing scandals have hit press headlines in the recent past, and other negative developments in the practice of auditing and accounting. In this light, there is a new resolve to improve processes of standards setting, so that untainted accounting, auditing, and disclosures practices of firms together with their respective auditors are a thing of the past. Banking supervisors and central banks must enhance shape improvement in accounting and auditing issues that affect the institutions that they supervise (Mathews, 2007; Bauer, &, Fenn, 1973).

Auditing and accounting issues in times of economic distress include asset valuation and impairment, troubled debt restructurings, violations of debt operations, discontinued operations, going concern, subsequent events, and risks and uncertainties.

The Value of an Audit

The role of auditing has come to closer scrutiny in line with unprecedented international financial upheavals in the last couple of years with many stakeholders questioning the value of audit. Most of the attention has been directed to the large end of the profession involving banks and major financial institutions, but problems also exist within the small and medium enterprises. Auditing is more of a voluntary activity, and so there is need to show the value it imparts on businesses (Owen & Adams, 1996; Crowther, 2000).

The profession of accounting re examines the role of audit and puts up a strong case for the benefits that auditing provides to organisations, economy, and society as a whole. Auditing plays a key role as a source of public confidence within financial reporting. Auditing roles have long been considered as some kind of a routine chore or a simple statutory obligation for companies that are listed. Many high profile corporate failures have led to the Sarbanes –Oxley legislation in the USA, and scrutiny of competition level and choice in the audit market within the UK. These effects have put auditing activities in the spot light on the agenda of the media, regulators, and legislators. For medium sized firms with turnovers less than $500 million have leveraged the audit to return maximum value and insights to the companies, the level of relationships they have with the auditor, and the importance associated with the audit by the organisation and its stakeholders (Gray, Owen &, Maunders, 1987).

An audited financial report has standard financial information, other footnotes, and the opinion letter. The opinion letter is a surety of professional opinion on the financial report accuracy, and not an assessment of future prospects or financial condition of a company. The accuracy of the financial report provided by a company is determined by verification and scrutiny, where verification depends on the auditor’s ability to value the assets and the liabilities, known as checking account balance. So audits have a number of limitations, if assets that do not have a ready market such as privately held organisations, real estate, and hedge fund investments. Auditors will use the information available to them, thus mortgage relate d asset values will be based on faulty information and various assumptions. However, Wayne, (2004) most non profit organisations view auditing as a routine to go through quickly instead of as an opportunity to widen transparency and improvement of financial controls.

Bank and Financial Institution Failures

Norris, &, Liptak, (2010) states that a bank failure or financial institution failure happens when the bank or the financial institution cannot meet its obligations to its depositors, and other creditors, since it is insolvent and illiquid to meet its liabilities. Most banks failed in 2008, while in 1989 five hundred and thirty four failures were recorded. In 2008, bank and thrift failures were seventeen and seven of these completely collapsed, and were rescued by government. Some came close to failing and were rescued by other banks. The economic situation contributed some factors to the current losses and failures such as the changes in housing market, and increased origination of home loans. When the market got tighter, most securities and collateral debt obligations stopped trading. Increases in securitization of loans and accounting for these securities led to dramatic losses. This saucerisation left many lenders holding the bag, there were no buyers left when they had originated mortgages which they had an intention to sell (Jupe, 2009).

Corporate Fraud

Corporate failures due to fraud were registered in both private and public corporate governance failures. This occurred in the US, UK, and all over the world. Major incidents in the UK covered Maxwell, Guinness, Poll peck, BCCI, Coloroll, and Baring Bank. Major international incidents that involved corporate governance issues include Enron, WorldCom, Eurostat, Parmalat, Madoff, Xerox, Penn Station, Allied Irish bank, and Hollinger International.

Enron

Enron executives robbed the bank, and Arthur Anderson drove the getaway car. Arthur and Enron got involved in illegal; acts such as obstruction of justice and document destruction. Enron had a glittering performance between 1985 and 2001. The gas and pipeline company that moved to a financial and energy trading company. By 2000, it generated revenues of about $100 billion, and the stock market value was $60 billion. It was praised for its success and innovation. This is a classic case of counting chickens before the eggs hatched.

Their signs of distress started when they relied on non recurring items, such as asset sales. They changed their core business to energy derivatives trading, which saw their trading margins falling from 5.3% in 1998 to 1.7% in early 2001. The key players during this period were Jeff Skilling, Kenneth Lay, Andrew Fastow, and Michale Kopper. Arthur Anderson was the auditor and the whistle blower was Sharon Watkins. The final fall could be attributed to fraud and material misstatements, over gearing, extensive use of debt capital, insider trading such as making hay while the sun shines, money laundering, creative accounting, and an illustration of information asymmetry together with agency problems. However, Koniak, George, & Ross, (2010), the auditing profession was adversely affected, high standards of integrity and ethical issues of the US capital market. The company’s accounting system was not in cognisant with transparency, the restated accounts recorded profits that were never real.

SEC’s investigations to the auditors work were not beyond reproach. The company extremely cooked its books in an imaginable manner; with the directors working to cheat with the figures substantial amounts of debts were removed from the books, significant liabilities were never disclosed, the auditors destroyed the files, and the auditors feigned ignorance to the wrong things that were going on. The auditors had gross conflict of interest such as where shareholders were to appoint independent auditors, the senior management subjectively replaced their appointments; cosy friendly cartel like relationships infringed on corporate governance that saw consultancy and auditing being intertwined (Oliverio, 1999).

The solutions that were reached to bail out Enron were a total reorganisation of the auditing structure that saw the following measures being met: The audit committees were awarded stronger non executive powers, consultancy work and auditing was separated, rotation of auditors was implemented, and regulation of the auditing profession wised moved away from self regulation. Enron’s case had a profound effect on the US economy that saw some legislative changes being made such as the Sarbanes or the Oxley Act 2002 was enacted, Mr. Anderson was convicted of obstruction of justice, the public and the shareholders lost confidence in the auditing profession, on how Enrol fooled so many people. Regulation was enforced and replaced voluntary corporate governance. The problems in 2007 arose from the difficulties banks were facing to raise funds in the money market; they faced a liquidity problem since institutional lenders sceptic about the credit crunch in the US the global financial crisis or the recession (Kuschnik, 2008, pp64–95)

Northern Rock Plc

Northern Rock plc is owned and operated by Virgin Money, in the UK. This British bank was best known as the first bank in one hundred and fifty years to suffer a bank run. In the 2007 credit crunch, they had approached the bank of England for a loan to replace money market funding. It failed to find a buyer, and then it was forced to go public in 2008. Virgin Money bought it later in 2012 (Douglas, 1997).

The auditing practices could be equalled to economic elites who have brainwashed the politicians and policy makers. The company escaped retribution when it gave poor value for money when they engage in social misbehaviours. The banking crisis was caused by accounting firms enjoying state guaranteed market of company audits. In the UK, 2.5 million pounds existed in limited liability, and between 2002 and 2008, one hundred companies paid 2142 pounds in audit fees, and another $2159 pounds in consultancy services. They misadvised banks in forming special purpose vehicles, tax avoidance schemes, securitization, and restricting transactions, all factors that contributed directly to the crisis. They gave a clean bill of health with their own cooked accounts, even after whistle blowers noticed the risk profile of the bank, the auditors compromised their professional integrity and ethics, and as aid all was well. The auditors pulled a whole #23 million in consultancy fees and audits. The auditing experts cannot guarantee the survival of a bank, but they had a moral duty to compare audits to a health check, and are expected to work independently of the firms which they are auditing with reasonable care and skill (Bumiller, 2002).

Ellen &, Newman (1996) argue that Northern Rock was rescued from collapse by the UK taxpayers, as the auditors continued with their professional mal practices for huge amounts of consultancy and auditing fees. The auditors were easily manipulated by the management into allowing intoxicated assets to be reported as good and state profits which have not been realized. A whooping $5 trillion in assets and liabilities could not be traced from Northern Rock balance sheets. The missing gap is that none of these auditing companies have been investigated for their shortcomings in the banking crisis (Dye, Balachandran, &, Magee, 1989; Wyatt, 1997; United States General Accounting Office, 1996).

Professional firms such as KPMG, Deloitte & Touche, and price water house coopers raked in a global income of $95 billion, which ranks them as the 54th largest economy in the world. They also provide auditing services to all major banks; it is this huge income that they used to colonize politicians and regulators. They made cosy friends and interchanged auditing with consultancy. They wined and dined with politician from the labour party to enable them win huge consultancy contracts. KPMG admitted in 2005 of a criminal wrong doing for peddling tax evasion schemes of which they were fined $456 in the US. In 2009, their former partner was found with crimes of a conspiracy to defraud tax authorities, of which they pleaded guilty. These firms have secretive anti social auditing practices that span more fields than just tax evasion. Questions of integrity, effectiveness, and independence of these firms can be related to organisational culture where profits over rides virtues and ethics. There have been no major headlines breaking scandals exposed by these accounting firms that have made them bend rules as they wish for profits sake. There are also no auditing standards to ensure ethical and integrity issues are upheld about the public accountability of auditing companies (Piotroski, &,Srinivasan, 2008).

Regulators in the UK have been behaving like they don’t have the means to implement their purpose, and continue twiddling their thumbs. The same regulators have vested interest in the auditing firms, as they are the same personnel found in accounting firms. The auditing industry has subjected the distressed banks to treatment of toxic debts, off balance sheet accounting, dubious asset values, and questionable business models. Auditors have failed to return value for money in terms of the fees that they charge, they are supposed to advice their clients, the big fees that they receive from the corporate barons cannot make them independent.

Regulators should come out of the closet and take direct responsibility for auditing banks and financial institutions the regulators should use the auditors as their watchers, so that they do not hide under the cover of working with clients in confidentiality. These types of rogue auditors should not be consultant to the banking and financial institutions society. The auditors should be in a situation where they do owe duty of care to the regulators. The National Audit Office should take up the authority to ensure that all the auditors practicing are efficient, effective, and deliver a value for money to their clients. The House of Commons should also be able to inspect audit files by these accounting firms. This would provide a mitigating agent to cleaning up the auditing and accounting industry, to ensure that they do not engage in socially unattractive practices. Rather than involving themselves in corrupt activities that only servers the purpose of lining their pockets.

It is a great wonder that audit companies never raised any red flag when these corrupt and non transparent activities were taking place, whereas they should be the guardians of the shareholders in terms of openness and accountability. The current auditing systems is ridden with immense poverty of standard auditing require nets. Successive political leaders and opinion shapers should take the lead of discouraging this well oiled lobby of the technocrats, who fat their wallets with feather dusted audits that compromise integrity.

Conclusion

Auditing should be an independent verification of the accuracy of the financial accounts, to add value to separation of ownership and control, third party investment, generating government revenue, ensuring credit worthiness, ensure corporate social responsibility, and ensure effective stakeholder protection.

References

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Piotroski, J, &, Srinivasan, S ,(2008). Regulation and Bonding: The Sarbanes–Oxley Act and the Flow of International Listings.

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Koniak, S,George M, & Ross, Thomas (2010), “How Washington Abetted the Bank Job”, New York Times

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