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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.
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:
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
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
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
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.
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: http://blogs.chron.com/enrontrialwatch/archives/2006/02/business_is_rel.html [Accessed 12th December 2010] Bizcivering, 2009. 10 Major Accounting Scandals. [Online] (Updated 12th January 2009) Available at: http://bizcovering.com/history/10-‐major-‐accounting-‐scandals/ [Accessed 11th December 2010] Blurtit, 2008. What is The Role of An Auditor [Online] Available at: http://www.blurtit.com/q368480.html [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: http://actrav.itcilo.org/actravenglish/telearn/global/ilo/code/audit.htm [Accessed 11th December 2010] Codijia, M., 2010. Code of Ethics & Auditing Standards [Online](Updated 10th June 2010) Available at: http://www.ehow.com/about_6614456_code-‐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: http://books.google.co.in/books?id=GiQMr5w1N_kC&printsec=frontcover&dq=ethics+in+business&hl=en&ei=gs0ETZv2AoHirAeA7fmQDw&sa=X&oi=book_result&ct=result&resnum=9&ved=0CFUQ6AEwCA#v=onepage&q&f=true [Accessed 10th December 2010]. Financial Reporting Council, 2010. The UK Corporate Governance Code. [Online] Available at: http://www.frc.org.uk/documents/pagemanager/Corporate_Governance/UK%20Corp%20Gov%20Code%20June%202010.pdf [Accessed 13th December 2010] Hiroyuki, Y., 2003. Corporate Governance Japan. [Online] Available at: http://www.rieti.go.jp/cgj/en/columns/columns_009.htm [Accessed 11th December 2010]
ACF100BE 7 GDGWI ID 100100 IBS Center for Management Research, 2002. The WorldCom Accounting Scandal. [Online] Available at: http://www.icmrindia.org/casestudies/catalogue/Finance/The%20WorldCom%20Accounting%20Scandal.htm [Accessed 12th December 2010] Investopedia News and Articles. Auditor [Online] Available at: http://www.investopedia.com/terms/a/auditor.asp [Accessed 10th December 2010] Karthik, N., 2010. Accounting Ethics. [Online](Updated 8 October 2010) Available at: http://www.buzzle.com/articles/accounting-‐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: http://books.google.co.in/books?id=7ctnVNMtBQgC&pg=PA54&lpg=PA54&dq=unethical+auditors+affecting+businesses&source=bl&ots=tYupB3kwkp&sig=RD5-‐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: http://www.ehow.com/about_6302822_role-‐external-‐auditor-‐corporate-‐governance.html [Accessed 11th December 2010] Nicholson, G., 2008. Corporate Goevrnance- what is it? [Online] (Updated 24th February 2008) Available at: https://wiki.qut.edu.au/pages/viewpage.action?pageId=5248691 [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: http://books.google.co.in/books?id=Ri64D_PzyVEC&printsec=frontcover&dq=Corporate+Governance+Post-‐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]
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