After discussing briefly the primary role of a company auditor, consider why ethics is important to auditors. Evaluate how significant the contribution of auditors is to the effective corporate governance of large UK companies.

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  • 1.   1     Business  Environment   Individual  Essay  Topic:After discussing briefly the primary role of a company auditor,consider why ethics is important to auditors. Evaluate how significantthe contribution of auditors is to the effective corporate governance oflarge UK companies. Name:  Akta  Gupta   GDGWI  ID:  100100   Course:  BBA  Business  Studies   Module:  Business  Environment   Module  Code:  ACF100BE   Module  Leader:  Mr.  Kushal  Kataria   Cohort:  2010-­2013   Word  Count:  1351  Words     Word  count:    
  • 2. ACF100BE   2   GDGWI  ID  100100       "We  do  not  act  rightly  because  we  have  virtue  or  excellence,  but  we  rather   have  those  because  we  have  acted  rightly."     ~  Aristotle  384  B.C.  -­  322  B.C.  Every  individual  or  body  has  a  code  of  conduct  to  abide  by.  This  code  of  conduct  and  acceptable  behaviors  are  known  as  ethics.  The  American  Heritage  Dictionary  defines   ethics   as   “The   study   of   general   nature   of   morals   and   of   specific   moral  choices:   moral   philosophy:   and   the   rules   or   standards   governing   the   conduct   of  the   members   of   a   profession.”   These   ethics   not   only   are   to   be   abided   by  individuals,   but   also   by   organizations,   companies   and   people   who   deal   with   them.  This  is  known  as  Business  ethics.    Business  ethics  are  to  be  conducted  in  all  business  divisions  of  any  organization,  like   the   human   resource   department,   production   department,   technical  department  and  the  finance  department.  Of  the  various  departments,  the  finance  department   is   of   core   value   to   any   business   without   which   a   business   cannot  function  for  long.  Also,  any  errors  in  the  records  of  this  department  can  result  in  huge   penalties   to   the   business,   loss   to   shareholders,   reduction   in   market   share,  and  could  even  result  in  bankruptcy.  If  there  were  no  reliable  accounts,  then  the  shareholders   would   not   be   able   to   supervise   the   work   and   accounts   of   the  company  invested  in.    Thus,   to   prevent   such   cases,   a   company   appoints   an   external   official   that   is   an  authorized   body,   a   Certified   Public   Accountant   (CPA),   to   officially   check   the  financial   records   of   a   company,   ethically.   He   ensures   that   the   organization’s  financial   records   and   statements   represent   an   honest   and   accurate   position   of   the  company.  They  are  to  provide  reasonable  assurance  that  the  financial  statements  of   the   business   are   free   of   large   misstatements,   whether   errors   or   frauds.   This  assurance  is  however  not  guaranteed,  as  it  is  just  an  expert  opinion  and  at  times  may   be   incorrect.   Also,   the   auditor   could   provide   recommendations   to   the  company  about,  how  the  books  of  accounts  are  to  be  maintained,  so  that  it  would  prevent   any   loss   of   information   and   any   future   problems   to   the   company.   An  
  • 3. ACF100BE   3   GDGWI  ID  100100    important  task  to  be  performed  by  the  auditor  is  to  report  to  the  shareholders  of  the  company  of  any  matters  that  arise  during  the  audit.  Since  the  opinion  of  an  auditor  is  given  utmost  importance  at  the  times  of  issuing  annual   reports   and   at   taxation   for   any   company,   it   is   very   important   for   the  auditor   to   conduct   an   ethical   code.   Having   accounting   standards   and   an   ethical  code  to  follow  helps  auditors  act  more  professionally  and  give  a  more  dependent  opinion,  which  would  not  have  been  the  case  if  they  were  not  independent  in  their  task   and   would   be   influenced   by   the   external   environment.   Here,   the  independence   of   an   auditor   is   of   utmost   importance,   i.e.,   no   person,   situation   or  factor   should   influence   the   opinion   of   an   auditor   during   the   evaluation   of   the  accounts   as   this   would   result   in   a   wrong   opinion.   He,   under   any   situation   must  reveal  all  sides  of  the  accounts  and  must  not  misguide  the  investors.  Example:  A  CPA  must  not  represent  wrong  information  of  a  company,  only  because  his  son  is  the   senior   manager   in   the   same   company,   and   any   loss   to   the   company   would  result  in  his  son’s  loss.    The  auditors  are  highly  accountable  to  the  shareholders  because  the  shareholders  nominate  them  and  would  thus  want  to  see  a  transparent  and  clear  picture  of  the  company   .The   financial   reports   would   also   serve   an   important   need   for   internal  control  on  finance  and  growth.  In  the  short  run,  acting  unethically,  would  result  in  more   business,   more   non-­‐audit   services,   money,   gifts,   more   clients,   etc,   for   the  auditors   but   if   exposed   could   result   in   a   huge   failure,   more   than   expected.   This  was  the  case  with  Arthur  Anderson,  the  audit  firm  for  Enron.  It  helped  Enron  hide  its  losses  in  the  financial  reports  and  artificially  inflated  the  prices  of  its  shares  in  the   stock   market.   After   the   huge   financial   fraud   was   discovered,   Anderson   lost  most   of   its   clients;   also,   they   had   to   sell   most   of   its   business.   Enron   had   to   pay  huge  penalties  to  the  shareholders  who  lost  their  money  and  had  ultimately  filed  for  bankruptcy  in  December  2001.  Considering   the   high-­‐profile   business   scandals   in   the   world   of   today,   corporate  governance   has   received   high   attention.   In   2006,   Agarwal   stated   that   in   today’s  world,   an   auditor   forms   the   fulcrum   of   a   company   and   helps   in   implementing   and  monitoring   good   corporate   governance   practices   which   benefit   all   business  
  • 4. ACF100BE   4   GDGWI  ID  100100    stakeholders.   The   Australian   Stock   Exchange’s   Corporate   Governance   council  defines   corporate   governance   as   “…the   system   by   which   companies   are   directed  and  managed.  It  influences  how  the  objectives  of  the  company  are  set  and  achieved,  how   risk   is   monitored   and   assessed,   and   how   performance   is   optimized”  Hypothetically,   the   concept   of   corporate   governance   works   beneficially   for   all  stakeholders   of   a   business   as   the   business   works   on   ethical   grounds.   The   board   of  directors,  internal  auditors,  the  management  and  external  auditors  are  known  to  form  the  pillars  of  corporate  governance.  The   shareholders   and   the   stakeholders   of   any   company   would   primarily   be  interested   in   the   financial   position   of   the   company   invested   in   or   dealing   with.  There   is   a   level   of   trust,   which   is   to   be   built   between   the   company   and   its  stakeholders,   which   increases   corporate   governance   levels.   This   trust   is   built   by  giving  an  appropriate  picture  of  the  company’s  financial  resources,  i.e.,  having  high  levels   of   transparency,   which   would   not   mislead   them.   Thus,   an   auditor’s   role  towards   corporate   governance   is   to   monitor   and   help   in   building   a   relationship  between   the   management   and   its   stakeholders.   His   work   of   providing   a   financial  expert  opinion  with  high  levels  of  company  transparency  reduces  the  information  asymmetries   between   shareholders   and   management,   which   cannot   be   directly  controlled  by  either.  Toyota   Motor   Corporation,   a   Japanese   automobile   manufacturing   company   is  highly   considered   due   to   its   steady   increase   in   corporate   governance   over   the  years.  One  of  the   activities  by  Toyota  to  increase  its  corporate  governance  is,  four  of   its   seven   auditors   are   external.   This   ensures   shareholder   satisfaction   and   a  more   dependant   company   report,   which   would   result   in   better   relations   for   the  company   with   its   investors   and   dealers.   Various   other   companies   like   Sony  Corporation,  Toshiba  Corporation  and  Aeon  Corporations  strive  to  increase  their  corporate  governance  levels  by  instilling  high  degree  of  transparency  amongst  the  members  of  the  corporations.  Contrastingly,   there   are   many   companies   who   have   become   famous   due   to   the  auditing  frauds  that  took  place  in  their  organization.  A  famous  example  of  this  is  the   WorldCom   Telecommunications   accounting   fraud.   Unethical   auditing   by   the  
  • 5. ACF100BE   5   GDGWI  ID  100100    audit   firm   Arthur   Anderson   and   the   misinterpretation   of   the   financial   resources  resulting   in   an   overstatement   of   the   value   owned   by   the   company.   Company  resulted   in   having   only   figure   values   in   their   balance   sheets   but   no   money   in  reality.  This  resulted  in  an  acute  financial  crisis  for  the  company,  which  ultimately  resulted   in   bankruptcy.   The   lack   of   transparency,   accountability,   communication  between   the   management   and   shareholders,   i.e.,   an   overall   lack   of   corporate  governance   in   the   company   resulted   in   its   ultimate   failure.   Many   other   companies  had   similar   activities   like   the   Parmalat,   Waste   Management   Inc,   American  International  Group  (AIG),  etc.  After   the   major   accounting   and   financial   scandals   were   discovered,   mainly   the  Enron,  WorldCom  Telecommunications  and  Tyco  scandals,  the  Sarbanes-­‐Oxley  act  was   passed   by   the   federal   legislation   in   2002,   which   paid   further   stress   on   the  external   auditor   pillar   of   corporate   governance.   This   act   further   connected   the  audit   firm   to   the   corporate   governance   structure.   Also,   this   act   resulted   in   the  formation   of   a   board,   the   Public   Company   Accounting   Oversight   Board   (PCAOB)  who   would   monitor   the   activity   of   the   auditors,   due   to   which   the   reports   by   the  auditors   would   be   more   reliable.   This   increase   in   reliability   would   result   in   the  improvement  of  the  relations  between  the  management  and  stakeholders,  which  would   effectively   improve   the   corporate   governance   levels.   Also,   the   auditing  company   is   now   limited   to   provide   non-­‐audit   services   to   any   corporate   house   due  to   which   the   independency   of   the   auditor   increases.   Such   rules   and   regulation  would  help  the  complex  structure  of  today’s  business  world  act  more  ethically  and  work   for   the   progress   for   all   stakeholders,   mainly   shareholders,   which   would  directly   increase   the   levels   of   corporate   governance   and   in   the   long   run   provide  huge  profits  and  consumer  confidence.          
  • 6. ACF100BE   6   GDGWI  ID  100100     Bibliography  Agarwal,  S.,  2006.  Corporate  Governance  Through  Audit  Committees.  The  Chartered  Accountant,  55,  pp.  733-­‐742    Babineck,  M.,2006.  ‘Business’  is  relative.  [Online]  (Updated  16th  February  2006)  Available  at:  [Accessed  12th  December  2010]    Bizcivering,  2009.  10  Major  Accounting  Scandals.  [Online]  (Updated  12th  January  2009)                                                                                                                                                                                                                                                                      Available  at:­‐major-­‐accounting-­‐scandals/  [Accessed  11th  December  2010]  Blurtit,  2008.  What  is  The  Role  of  An  Auditor  [Online]                                                                                  Available  at:                                                                              [Accessed  10th  December  2010]  Carmichael,  S.  Hummels,  H.    Klooster,  A.T.  Luijk,  H.V.  How  Ethical  Auditing  can  help  Companies  Compete  more  effectively  at  an  International  Level.  [Online]                    Available  at:    [Accessed  11th  December  2010]  Codijia,  M.,  2010.  Code  of  Ethics  &  Auditing  Standards  [Online](Updated  10th  June  2010)                                                                                                                                                                                                                                                                  Available  at:­‐ethics-­‐auditing-­‐standards.html                                                                                                                                                                                                                                [Accessed  10th  December  2010]  Ferrell,  O.C.  Fraedrich,  J.  Ferrell,  L.,  2009.  Business  Ethics  Ethical  Decision  Making  and  Cases.  [E-­‐book]  USA:    Cengage  Learning.                                                          Available  at:                    [Accessed  10th  December  2010].  Financial  Reporting  Council,  2010.  The  UK  Corporate  Governance  Code.  [Online]  Available  at:                                                                                                                                          [Accessed  13th  December  2010]  Hiroyuki,  Y.,  2003.  Corporate  Governance  Japan.  [Online]                                                                    Available  at:  [Accessed  11th  December  2010]  
  • 7. ACF100BE   7   GDGWI  ID  100100    IBS  Center  for  Management  Research,  2002.  The  WorldCom  Accounting  Scandal.  [Online]                                                                                                                                                                                                                                                            Available  at:                                                                                                                                                                                                                [Accessed  12th  December  2010]  Investopedia  News  and  Articles.  Auditor  [Online]                                                                                                Available  at:                              [Accessed  10th  December  2010]  Karthik,  N.,  2010.    Accounting  Ethics.  [Online](Updated  8  October  2010)        Available  at:­‐ethics.html            [Accessed  10th  December  2010]  Lussier,R.N.  Achua,C.F.,  2010.  Leadership  Theory,  Application,  &Skill  Development  4th  Ed  [E-­‐book]  USA:  Cengage  Learning.                                                                                                                                      Available  at:­‐v5Yb1QXc_qe1kFKnr7co14g&hl=en&ei=AUMHTezKLI_MrQekq8GKDg&sa=X&oi=book_result&ct=result&resnum=5&ved=0CCMQ6AEwBA#v=onepage&q&f=true  [Accessed  11th  December  2010]  Lutzenberger,  T.  Role  of  an  External  Auditor  in  Corporate  Governance.  [Online]  (Updated  15th  April  2010)                                                                                                                                                                                        Available  at:­‐external-­‐auditor-­‐corporate-­‐governance.html                                                                                                                                                                                [Accessed  11th  December  2010]  Nicholson,  G.,  2008.  Corporate  Goevrnance-­  what  is  it?  [Online]  (Updated  24th  February  2008)                                                                                                                                                                                                                            Available  at:  [Accessed  13th  December  2010]    Puri,  R.  Trehan,  R.  Kakkar,  H.,  2010.  Corporate  Governance  Through  Audit  Committee:  A  Study  of  the  Indian  Corporate  Sector.  IUP  Journal  of  Corporate  Governance,  9(1/2),  pp.  47.  Rezaee,  Z.  ,2007.  Corporate  Governance  Post-­Sarbanes-­Oxley:  Regulations,  Requirements,  and  Integrated  Processes.  [E-­‐book]  New  Jersey:  John  Wiley  &  Sons.  Available  at:­‐Sarbanes-­‐Oxley:+Regulations,+Requirements,+and+Integrated+Processes&source=bl&ots=6XPouWq4qW&sig=se66TStP_EQeT5yRU6xIecvF_oc&hl=en&ei=VSoTTeC6LYfrrQf3zPyADA&sa=X&oi=book_result&ct=result&resnum=4&ved=0CCQQ6AEwAw#v=onepage&q&f=false  [Accessed  12th  December  2010]    
  • 8. ACF100BE   8   GDGWI  ID  100100    SearchFinancialSecurity.  Corporate  Governance  [Online](Updated  06  March  2009)                                                                        Available  at:,,sid185_gci1174602,00.html                                                                                                                                                                                                                                                                      [Accessed  11th  December  2010]  Toyota.  Corporate  Governance.  [Online]                                                                                                                                              Available  at:­‐                [Accessed  12th  December  2010]