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Influence of Ethics on Audit - Research Paper Example

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This research paper "Influence of Ethics on Audit" reviews a chain of relationships between the directors of a company, its shareholders, along with other stakeholders. Corporate ethics is involved with the approaches that supply investment to corporations in a bid to ensure an optimal return…
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Influence of Ethics on Audit
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?Influence of Ethics on Audit al Affiliation) Ethics con s a system by which organizations are controlled and directed. It is a chain of relationships between the directors of a company, its shareholders, along with other stakeholders. With reference to work conducted on corporate governance, t corporate ethics is involved with the approaches taken up by entities that supply investment to corporations in a bid to ensure they accrue an optimal return from investment (Shleifer and Vishny 2007). On a broader perspective, Gillan and Starks (2008) refer to corporate ethics as a system of rules, factors and laws affecting a company’s operations. Irrespective of the definition taken up, it is common for researchers to categorize corporate mechanisms into two groups; those that are internal to firms, and those that are external to firms. Ethics is charged with the responsibilities and duties of a firm’s board of directors in managing the firm in addition to the relationship they have with the firm’s shareholders as well as stakeholder groups (Duska, Duska & Ragatz 2011). Issues of corporate governance arise in a company with the presence of two conditions. First is in the event that there is a conflict of interest or an agency problem involving members of the company who might be the workers, consumers, or managers. The second condition is that the transaction costs are such that the problem dogging the agency cannot be ameliorated via contract. Another definition of corporate ethics is more comprehensive in that it argues ethics is involved with mechanisms through which a company’s stakeholders are able to exert control over corporate management and insiders in such a manner that their interests are protected (John and Senbet 2008). It is imperative to note that the term shareholders does not only refer to shareholders, but also debt holders in addition to non-financial stakeholders like suppliers, customers, employees, as well as other interested parties. A review of corporate ethics’ various definitions clearly highlights that they all allude to the presence of conflicts of interest between outsiders and insiders, hailing from the separation of control and ownership. The recent past has seen a growth in interest in corporate governance. Prevalent governance mechanisms have been questioned with intensified debates following business failures and financial scandals, and more recently, several accounting frauds of high visibility that have allegedly been perpetuated by managers (Gillan & Starks 2008). Underlying concepts of good corporate ethics Fairness Fairness refers to equitable treatment with the stakeholders in entirety. Equitable does not mean equal. It means treating each entity as much as they deserve; suppliers, customers, and stakeholders need to be categorized accordingly and afforded treatment on an equitable basis (Shleifer & Vishny 2007). Values and systems that underpin the organization need to be balanced by considering every individual with a legitimate interest in the organization and respecting their respective views and rights. Transparency/Openness Transparency alludes to the clear and open disclosure of pertinent information to shareholders as well as other stakeholders, and also entails not withholding information in the event that it may out rightly affect decisions. It means a default position with regard to the provision of information instead of concealing it, and open discussion on an issue of concern. Transparency includes all possible voluntary disclosures. Certain circumstances may however warrant the concealment of information and may be justified. They include confidential discussions about individuals, discussions regarding future strategy, and discussions that result in an agreed position that is consequently made public (Shleifer & Vishny 2007). Independence As a concept, independence is important to directors. Reports on corporate governance have increasingly stressed the pertinence of independent directors. They ought to be in a position to effectively monitor the company in liaison with external auditors who are equally independent, on behalf of shareholders. Directors’ lack of limits and links during their tenure should promote the curtailing of managerial capture-accepting the views of executive managers merely based on trust without questioning or analyzing them (Shleifer & Vishny 2007). Honesty/ Probity The code of good corporate governance defines probity in light of receipt of hospitality or gifts by trustees. Management need not accept hospitality or gifts that may have a likely influence on their decisions. This relates not only to being truthful, but also not being misleading to shareholders as well as other stakeholders by giving slanted presentations of information (John & Senbet 2008). Responsibility This refers to the acceptance of blame or credit by management for decisions on governance. The board of directors needs to act with responsibility towards and responsively to all the company’s stakeholders. A major point of contention however remains as to which stakeholders the directors should be responsible to, and the extent of their responsibility (John & Senbet 2008). Accountability Corporate accountability highlights whether a company and its directors are answerable as regards their actions’ consequences. The UK Cadbury report points out that making accountability feasible is the task of both of both parties. Directors ensure accountability through the quality of information they avail, while the accountability of shareholders is seen through their will to practice responsibility as owners (John & Senbet 2008). Reputation An organization’s reputation is protected for commercial reasons such as the frequent dependability of publicly traded shares on reputation, hence its place as an organization’s valuable asset (John & Senbet 2008). Judgment This means that the board makes decisions which enhance an organization’s prosperity. The board members must therefore acquire knowledge that is vast enough as regards the business and its environment so that they are able to afford meaningful direction to it. Judgment has implications on the manner in which company directors are recruited and consequently trained. Corporate governance therefore entails creating a balance between numerous competing entities and resource claims against one another (John & Senbet 2008) Integrity Integrity means conducting straightforward dealing. What is expected of financial reporting is that it needs to be honest and afford a balanced representation of a company’s state of affairs. Integrity reports are dependent on the integrity of the individuals charged with preparing them. Certain instances will lead accountants to face financial situations or use judgments not expressly covered by guidance or regulations, and integrity is highly crucial during these instances (Shleifer & Vishny 2007). Effect on Auditing Corporate governance may play a prime role in auditing and accounting dimensions since good corporate governance is tantamount to more audit independence. There is therefore a positive correlation between audit independence and corporate governance. Independent auditing stands as an essential feature of capital markets that are effective. In the developed world, the profession of auditing has long argued that the prime objective of independent audits is to give an expert opinion about how fair financial statements are. In the corporate sector, the audit of accounts by an independent auditor is mandatory by statute which functions to define his rights, duties and powers. It is important owing to the separation of management from ownership since the latter requires an entity that can keep professional vigil on the former and to whom both can trust for reliable accounts since the concise preparation of financial statements is the task of management (Myers 2005). The independent auditor dos not have much to suggest on the adequacy and form of financial statement, and has the responsibility of affording an out and out report on the incumbent situation. How reliable an audit report is, is dependent on the degree of trust its users repose. Auditor independence as espoused by corporate ethics has several important features. First, how reliable an independent auditor is based on the one hand on the auditor’s independence, and on the other hand the degree of his knowledge, competence and experience. Second, auditor independence is very important because his report is objective and subjective in nature. Third, independence is quite pragmatic since a wide spectrum of users has great interest in the auditor’s professional report, and failure to maintain the auditor’s independence will cause the expectations of users to be bellied (Myers 2005). The United States has a rules-based approach to ethical codes. Following high profile collapses of WorldCom and Enron in the US, the Sarbanes- Oxley Act (SOX) 2002 was passed by US congress. As opposed to the commonwealth countries and the UK, congress decided to make compliance bound by law, and not a rule of listing. Companies listed in the US are expected to comply concisely with SOX provisions. This has led to the rise of a compliance consultancy industry among management consultants and accountants, and SOX compliance can prove very expensive (Gillan and Starks 2008). The code of professional conduct of the American Institute of Certified Public Accountants is consistent of two sections; rules, and principles. The rules afford the framework that underpins the rules governing how members perform professional services. The council of the CPIA has the authority to out rightly designate bodies responsible for the promulgation of technical standards guided by the rules. As such, by laws necessitate strict adherence to those standards and rules. Specific ethical codes allied to the CPIA dictate the rules and principles to be followed in scope off the auditing domain (Shleifer &Vishny 2007). Section 53: Public Interest This ethical code stipulates that members are required to accept the obligation to carry out their functions in a manner that is bound to serve the interests of the public, demonstrate full commitment to professionalism, and concisely honor the interests of the public. A mark that distinguishes professionalism is accepting responsibility to the public. The public in the accounting profession constitutes governments, credit grantors, clients, the financial and business community, as well as other entities reliant on the integrity and objectivity of certified public accountants to uphold orderly function in commerce (Shleifer &Vishny 2007). When discharging responsibilities, auditors might encounter pressures from the above groups. They are expected to be guide by integrity in their action, under the precept that on fulfilling the responsibility they have to the public, the interests of employees and clients are bound to be served. This code influences auditing by ensuring the provision of quality service that is guided by professionalism allied to the code of professional conduct’s principles. Section 54: Integrity This code stipulates the need for maintenance and broadening of the public’s confidence. Integrity necessitates honesty of members, and candor constrained by the confidentiality of the client. Public trust and service should not be downplayed to personal advantage and gain. Integrity can function to accommodate honest difference in opinion and errors in audit. It however cannot accommodate the subordination and deceit of principle. The code of integrity requires that members observe principles of independence, objectivity, and due care (Shleifer &Vishny 2007). Section 55: Independence and Objectivity Members are expected to uphold objectivity and be devoid of conflicts of interest when discharging their professional responsibilities. Members in public practices need to be independent in appearance and fact when conducting audits in addition to other attestation services. This principle imposes the obligation to be intellectually honest, free from conflicts of interest and impartial. As such, members charged with audits act in a manner that is scrupulous and are candid when dealing with other members in public practice, in light of accepted principles (Shleifer &Vishny 2007). Section 56: Due Care Members need to uphold the technical and ethical standards of the profession, and strive to continually improve the quality of service and competence, as well as discharge professional responsibility to their very best. Due care is guided by excellence. It requires that members discharge their professional responsibilities with diligence and competence. This code obliges auditors to carry out professional services to the best of their ability considering the best interest of their clients, and still be consistent with the responsibility of the profession to the public. In all responsibilities and engagements, auditors are as such bound to attain a competence level that these principles require (Shleifer &Vishny 2007). Diligence obliges auditors to render prompt and careful service, be thorough, and uphold applicable ethical and technical standards. Owing to ‘due care’, auditors adequately supervise all personal activity for which they are responsible. Section 57: nature and scope of service Members in public practice are obliged the code of professional conduct’s principles in establishing the nature and scope of service they offer. Auditors therefore consider each principle to determine whether or not they should offer their services. If the nature or scope of the service is such that it may raise serious ethical concerns, they may opt for a non-audit. By so doing, financial fraud is consequently averted (Shleifer &Vishny 2007). Conclusion Ethic functions to underpin the code by which professionals in various disciplines offer their services. General ethical principles that guide professionals include honesty, independence, judgment, integrity, reputation and accountability. The accounting profession is guided by a set of ethical codes that guide the manner in which they offer their services. Four prime ethical codes guide these professionals in light of auditing and improve the overall quality of audits. They include; nature and scope of service, due care, public interest, integrity, and independence and objectivity. References Duska, R. F., Duska, B. S., & Ragatz, J. (2011). Accounting ethics (2nd ed.). Chichester, West Sussex: Wiley-Blackwell. Gillan, S. and Starks L.(2008) .A Survey of Shareholder Activism: Motivation and Empirical Evidence, Contemporary Finance Digest, Vol. 2, No. 3, pp. 10-34. John, K. and Senbet L. (2008). Corporate Governance and Board Effectiveness, Journal of Banking and Finance, Vol.22, pp. 371-403. Myers, P.J., (2005). Perceived Auditor Independence: The Neglected Views of Natural Shareholders, http://aux.Zicklin.branch.cuny.edu/critical/html2/8112myers.html Shleifer, A. and Vishny R (2007) .A Survey of Ethical Governance, Journal of Finance, 7(2). Read More
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