Professional Accounting and Auditing

Question: Discuss about the Case Study for Professional Accounting and Auditing. Answer: 1: Case Study The professional accountants owe a duty toward the society also; therefore, it has to be made obligatory on their part to follow certain ethical guidelines and act in the best interest of the society (Giove, 2015). The accounting regulatory bodies of every country prescribe the ethical guidelines that are to be mandatorily followed by the professional accountants working in that country. In this regard, the international federation of accountants (IFAC) has prescribed the code of ethics for the professional accountants. The entire code of ethics prescribed by IFAC is divided into three part such as part-A, part-B, and part-C. The part-B of the code of ethics contains ethical guidelines for professional accountants in public practice (IFAC, 2006). The accountants are required to follow these guidelines while discharging their professional duties. In the current case study, Battersby and Associates Chartered Accountants firm has undertaken an auditing assignment of Medical Services Holdings Group (MSHG). Belinda, a partner of firm is carrying out the audit of Complete Cancer Care Limited, which is subsidiary company of Medical Services Holdings Group. During the audit, Belinda comes across that linear accelerators used in radiation therapy are not fit for the use in the medical treatment of the patients. Thus, Belinda wants to qualify the report by mentioning the fact about the critical condition of linear accelerators for use in radio therapy. However, the CEO of Complete Cancer Care Limited wants a clean report and for that the CEO is tempting the auditor. Now, the issue in this case is that whether the auditor should report all the facts or accept the CEOs temptations. The issue involved in the case is an ethical issue, which should be addressed carefully by referring to the professional code of ethics, auditing standards, and other ethical models such as the AAA model of American Accounting Association (Campbell, 2005). The primary guidelines of professional ethics require that the auditor should perform duties with integrity, objectivity, and professional competence and due care. The auditor should be fair, unbiased, and free of any conflict of interest, which might have impact on the reporting. The guidelines of the code of ethics require that a professional accountant should be aware of the circumstances that could adversely affect the opinion on the financial statements (IFAC, 2006). Circumstances that lead to conflict of interest may pose threat to the compliance with the fundamental principles such as integrity and objectivity. Further, apart from the ethical guidelines, the professional accountants are also required to consider the provisions of the auditing standards. The international auditing and assurance standards issued by the International Auditing and Assurance Standard Board contain provisions that guide the professional accountants in discharging their functions with professional due care (IFAC, 2016). The IAS 200 provides for overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing. As per this IAS, the auditor is required to report on the financial statements considering the findings of the work carried out. Further, the auditor should also take reasonable assurance that the financial statements are free from material misstatements (IAS 200, 2009). The AAA model of American Accounting Association assists the professionals in resolving the ethical issues by following seven steps in sequence. These steps help in cohesively analyzing the issue and reaching the solution in a structured manner (Work Ethics, 2016). In the present case, Belinda can resolve the issue by applying AAA model as under: Step 1: Facts of the case Belinda is auditing Complete Cancer Care Limited. While auditing the linear accelerators, it is found by the auditor that these are not fit for use in the medical treatment of the patients. Step 2: Ethical Issues The ethical issue arising in the audit assignment of Complete Cancer Care Limited is related to reporting that the linear accelerators are not fit for use (Work Ethics, 2016). Step 3: The Norms, Principles, and Values Concerning the Case The code of ethics guidelines and provisions of the standards on auditing applies to the current case. The norms of principles of the code of ethics require that the auditor discharges duties with proper care and due diligence (Work Ethics, 2016). Step 4: Alternative Course of Action Two options are available to Belinda; first is not to report about the condition of linear accelerators and second is to mention in the report that the linear accelerators are not fit for use. Step 5: Best Course of Action In order to comply with the ethical guidelines of the code of ethics and auditing standards, the best course of action for Belinda will be report appropriately about the critical condition of the linear accelerators (Work Ethics, 2016). Step 6: The Possible Outcome of Each Course of Action In case of the first option, Belinda will be breaching the guidelines of the professional code of ethics, which is punishable with rigorous fines, penalties, and prosecution. In case of the second option, the auditor will be complying with the ethical guidelines, thus, there is no danger of fines and prosecution. Step 7: Final Decision Based on the analysis of the possible outcomes of both the options, the second seems to be the best. Thus, Belinda should report the fact about the critical condition of the linear accelerators in the audit report (Work Ethics, 2016). Corporate Governance and Audit Risk Corporate governance has been emphasized in the corporate world in the recent decade due to observance of various unethical and illegitimate practices. The revelations of the corporate scandals have laid reforms in the regulatory regime across the globe (Monks Minow, 2008). The investor lost their faith in the organizations leading to serious damage to the entire capital market all over the world. Therefore, the corporations have now been obliged to comply with the corporate governance guidelines by incorporating the ethical practices. The term corporate governance is defined as the supervisory mechanism that helps to frame procedures and rules for directing and controlling the business activities. Thus, corporate governance has given a solid platform to the organizations to regain the trust of the investors and other stakeholders (Monks Minow, 2008). Further, the adoption of corporate governance practices has also contributed significantly in the area of auditing and assurance services by reducing the audit risk. The audit risk implies the risk that the auditor may give an inappropriate audit opinion on the financial statements of an entity (Daelen der Elst, 2010). This means that the auditor may give a clean report without being able to reveal certain facts due to involvement of the higher authorities of the company in the concealment of those facts. Further, the auditor may also give an inappropriate audit opinion by engaging in collusion with the higher authorities such as directors of the company. The corporate governance practices have reduced the circumstances of collusion of auditor with the directors or concealment of the facts by the directors deliberately by increasing the reporting responsibilities and adopting other means. The other means includes restructuring the formation of the board of directors of a company (Da elen der Elst, 2010). Current Australian Recommendations for the Inclusion of Independent Directors in a Board of Directors The formation of the board of directors has been modified by making is compulsory for the companies to have required number of independent directors on their board. The independent director in simple terms means a director who does not have any kind conflict of interest with the company (Department of Social Service, 2010). As per the guidelines of Australian Securities Exchange (ASX), a person is qualified to become an independent director of a company only if that person is free of any sort of relationship that might affect the independence in taking judgments and decisions. Further, the recent guidelines of ASX require that the board of a public company, registered in Australia, must comprise majority of the independent directors. Thus, at least 50% of the total strength of the board must be independent and free from any conflict of interest with the company (Australian Institute of Company Directors, 2014). Further, the Sarbanes Oxely Act 2002, which is accepted worldwide also provides for the independence of the board. The Act contains provisions requiring listed companies to appoint majority of the independent directors on the board (Pollmann, 2008). In addition to this, the recommendations of ASX in regard to independence of board cover that the chairman of the board should be an independent director. Further, it has been recommended that the person exercising the executing roles in the company should not be appointed as the chairman of the board so as to ensure transparency in the managing the business affairs. The companies have been recommended to have established a nomination and remuneration committee entrusted with the functions of appointment of the directors (ASX Corporate Governance Council, 2010). There should be a fair mechanism to assess the performance of the directors and the period of office should be determined based that assessment of the performance of an individual director. Need for Independent Directors As per the provisions of the Corporations Act 2001, a director owes a fiduciary duty towards the company. This means that the director needs to work in the best interest of the shareholders of the company setting aside their personal interest and concerns (Legal Service Commission, 2012). The Act requires that the director of a company discharges duties with due and proper diligence making decisions in good faith and rationale manner. For this purpose, it is essential that a director exercises his powers independently and in an unbiased manner. In this regard, it can be observed that the independence of the director is of paramount importance in exercising the powers judicially and fairly (Zhao, 2011). The need of independence in the board of directors emanate from the need of good corporate governance (Tricker Tricker, 2015). Thus, in order to ensure that the business affairs of the company are managed transparently, fairly, and in the best interest of the stake holders, it is needed to promulgate good corporate governance practices around the work environment. The independent directors play a vital role in fostering a climate of trust and accountability, which is a prerequisite for good corporate governance. The companies following good corporate governance have been observed to be flourishing and achieving the business goals (Tricker Tricker, 2015). Thus, the independence of the directors is also crucial for the achievement of the sustainable growth in the business and achieving the objectives and goals. The motive of inclusion of the independent directors in the board strength had a measure goal of eliminating the mismanagement and frauds (Deloitte, 2013). Looking at the reduction in the number of corporate scandals over time, it appears that this goal has been achieved. However, to manage the business affairs in an ethical manner and further reduce the possibilities of mismanagement and frauds, the need of independence of directors would always be there. Therefore, the companies are mandatorily required to maintain required level of independence in the management and conduct the affairs in transparent and ethical manner (Deloitte, 2013). Barriers to the Effectiveness of the Role of Independent Directors The biggest barrier to the effectiveness of the role of independent directors is the loop whole in the appointment process. The appointment of the independent directors is in the hands of the shareholders of the company, which may influence the effectiveness of the independent directors dispositions (Zhao, 2011). The controlled companies or small private companies in which the public is not substantially interested, the shareholders are involved in managing the affairs. The involvement of the shareholders in managing the business affairs has potential impact on the effectiveness of the role of independent director. This is due to the reasons that the shareholders, exercising their powers, may intervene in discharge of duties of the independent directors. Further, the independent directors also face challenges in regard to implementing the corporate governance in the company (Zhao, 2011). The adoption of good corporate governance practices may require substantial changes in the intern al structures and processes leading to dissatisfactions in the various interested groups in the company. References ASX Corporate Governance Council. (2010). Corporate Governance Principles and Recommendations with 2010 Amendments. Retrieved August 16, 2016, from https://www.asx.com.au/documents/asx-compliance/cg_principles_recommendations_with_2010_amendments.pdf Australian Institute of Company Directors. (2014). The importance of independence. Retrieved August 16, 2016, from https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2014-back-editions/march/feature-the-importance-of-independence Campbell, T. (2005). Ethics and auditing. ANU E Press. Daelen, M.V. der Elst, C.V. (2010). Risk management and corporate governance: interconnections in law, accounting and tax. Edward Elgar Publishing. Deloitte. (2013). Duties of Directors. Retrieved August 17, 2016, from https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/ZA_DutiesOfDirectors2013_16042014.pdf. Department of Social Service. (2010). Corporate Governance Handbook for Company Directors and Committee Members 2nd Edition. Retrieved August 16, 2016, from https://www.dss.gov.au/our-responsibilities/disability-and-carers/program-services/for-service-providers/disability-employment-assistance/corporate-governance-handbook-for-company-directors-and-committee-members-2nd-edition?HTML Giove, F.C. (2015). Auditing essentials. Research Education Assoc. IAS 200. 2009. Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing. Retrieved August 16, 2016, from https://www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf IFAC. (2006). Code of ethics for professional accountants. Retrieved August 16, 2016, from https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf. IFAC. 2016. About IFAC. Retrieved August 16, 2016, from https://www.iaasb.org/. Legal Service Commission. (2012). General Duties of Directors - Corporations Act 2001 (Ctth). Retrieved August 17, 2016, from https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php. Monks, R.A.G. Minow, N. (2008). Corporate governance. John Wiley Sons. Pollmann, A. (2008). The Impact of the US Sarbanes- Oxley Act of 2002 on Jurisdictions in Europe, Australia and New Zealand. Retrieved August 16, 2016, from https://docs.business.auckland.ac.nz/Doc/The-impact-of-the-US-Sarbanes-Oxley-Act-of-2002-on-jurisdictions-in-Europe-Australia-and-NZ.pdf Tricker, B. Tricker, R.I. (2015). Corporate governance: principles, policies, and practices. Oxford University Press. Work Ethics. (2016). Ethical Decision Making. Retrieved August 17, 2016, from https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p1/technical-articles/ethical-decision-making.html Zhao, Y. (2011). Corporate governance and directors' independence. Kluwer Law International.