Ethical Standards in Auditing - Research Paper Example

Lecturer: ? Introduction Auditing is an impartial examination and assessment of an organization’s financial statements, which may be done internally by specialized staffs within the organization or by external auditors, who may be consulting firms or other competent individuals outside the organization. Auditors are expected to ensure that an organization’s financial exactitude and accountability are maintained. Firms apply expert auditing as a tool to strengthen their operations through offering authenticated information that is important in making informed business choices to ensure competitiveness and profitability. An auditor is a business professional with the responsibility to assess various features of an organization, individual actions or project implementation to ascertain that resources are used efficiently, which includes finances, labour, inputs and any other factor of production that may affect business efficiency as well as the authenticity of the financial accounts of the business. The auditor is expected to provide an audit report with recommendations concerning the amendment of inaccurate entries and situations that may negatively affect the organization. Auditors are expected to adhere to professional ethics and in a manner that promotes the organization’s well-being. This paper focuses on ethical standards in auditing and why those standards are important. It also highlights ethical auditing violations and how they can be avoided. Ethical Standards in Auditing McWilliams & Nahavandi (2006) highlight the code of ethics in auditing whereby ethical standards and expectations need to be adhered to with regards to the conduct of individuals and organizations in an audit process. Auditors need to be morally responsible for their actions in the process of auditing and need to understand their impact on the future of the organization. An audit report may lead to improvement of business competitiveness, but on the other hand it may also result in dire consequences such as termination of contracts, employment, fines and lawsuits. Professional ethics is therefore an important component in auditing. Public confidence is achieved through adherence to good code of ethics, which reflects effectiveness and efficiency. Ethical standards give an organization and the public the reassurance needed with regards to risk control and effectiveness (Beauchamp & Bowie, 2010). Auditors are expected to maintain integrity in their actions, which is an important indicator of trustworthiness and hence the reliability of their findings and final conclusion. According to McWilliams & Nahavandi (2006), auditors need to observe the values of independence, impartiality in their judgement, high moral standards with regards to professional demeanour as well as unconditional honesty in their activities. Conflict of interest is a vice that needs to be avoided in auditing since it may lead to biased results. Fear or favour may also influence the outcome of auditing since the auditor may avoid certain aspects that may help unveil important loopholes through which organizational efficiency is likely to be lost. Auditors need to exercise unmatched standards of even-handedness, honesty and ethical behaviour. They need to accomplish their work with uprightness, meticulousness and accountability while observing the law (Jamal, 2004). They are obligated to make disclosures stipulated by the law and in line with professional obligations. They should avoid situations that may unintentionally lead them to be party to any unlawful activity or get involved in actions that are disreputable to the auditing profession or to a business. Howieson (2003) notes that auditors need to demonstrate respect for the work of fellow auditors whether in the same or different organization and also recognize their distinct capabilities are areas of competency. Respect for other players in the audit profession promotes good work relations and possibility of future collaborations. Objectivity is the frame of mind that has respect to all reflections relevant to the prevailing task without influence of other activities. It is the independent of mind that is not prejudiced by the possibility of a professional opinion antagonizing parties with a different point of view (Carnegie & Napier, 2010). It is important for auditors to demonstrate significant professional objectivity in the process of data collection, assessment as well as interpreting information regarding the subject of examination. They need to conduct a sensible analysis of all the pertinent aspects without unjustifiable stimulus. Undue influence may not be noticed by the public but it might emerge in future, which may affect the auditor’s career as well as an organization’s credibility and hence competitive advantage. Objectivity can be accomplished through carrying out the audit in line with the instructions put forward in the audit procedures while at all times avoiding bias, alteration or negotiation with the parties being audited with the intention to influence the outcome of the audit. According to Hansen & Mowen (2009), some financial managers may try to engage the auditors in activities and bonds that may prejudice the evaluation process. Such attempts may be triggered by the desire by auditors to market their auditing services in the process of auditing thereby giving clients an opportunity to offer goodies to influence the outcome in their favour. Under such circumstances, it becomes difficult to disentangle the auditor from the organization, which leads to a flawed process. The auditors needs to safeguard their independence through avoidance of gifts and privileges from the client to ensure that they avoid opportunities for influence (Coulter & Vogel, 2004). It is important for an auditor to disclose any possible or apparent characteristic in the initial stages, such as existing relationship that may hinder the auditor from effective objectivity (Beauchamp & Bowie, 2010). The auditor may get in to embarrassing situations if it is discovered after completion of the process that he/she is in association with the client, whether business or private relationship. Consecutive audits for the same organization should be avoided to ensure an independent outcome. Political influence should be avoided through maintenance of neutrality in organizational politics (Coulter & Vogel, 2004). Confidentiality is also an important ethical standard that demonstrates an auditors’ respect for the organization or client. The information is provided for free and clients may withhold some crucial information if they realize that there is a possibility of unwarranted exposure to competitors (Howieson, 2003). Auditors need not expose information offered or acquired by chance unless they have the necessary authority or if they are legally bound to do so. Audit information should not be used for individual gain. Moreover, the anonymity of the interviewees in the audit process needs to be maintained. People may not be available for interviews in future if they realize that they will be exposed especially due to the fear of victimization in the work place for exposing incriminating information about their seniors (McWilliams & Nahavandi, 2006). Hansen & Mowen (2009) argued that confidentiality is the key to successful innovation and hence the need for organizations to maintain information security. However, professional obligation surpasses confidentiality in some situations such as fraud detection whereby there is an impending felony if it is not exposed. The auditor may be held to blame or be considered party to crime if he/she fails to prevent it from occurring despite having prior information. Without the necessary competency, there is no need for an individual to present him/herself as a qualified auditor. It is a crime similar to fraud and the incompetent auditor may lead to irreparable damage to an organization or its employees. Howieson (2003) noted that competency in auditing requires knowledge, abilities and practise that are necessary in the performance of auditing services. Auditing is a profession like many others that need good accounting skills and high level of understanding and accuracy. Sub-contracting of work is an important strategy in organizations to undertake large contracts with minimal resources. However, auditing needs to be undertaken by only those with the necessary skills and capacity to do it and therefore sub-contracting should be avoided (Jamal, 2004). Auditors also need to continuously engage in learning to enhance their skills increase the quality of work. Consistency and accuracy in assessment of data acquired through interviews, reviewing documents and observation is necessary. It is also important to endeavour to be comprehensive in the assessment and to avoid omissions, clearly disentangling facts from beliefs. Auditors need to support their findings with measurable data, while providing answers and explanations to post-audit questions from clients. It is important to make recommendations that help the client to understand what needs to be done after audit results are out (Carnegie & Napier, 2010). Ethical Auditing Violations Lack of objectivity is a major violation in auditing whereby auditors do not visualize things the way they see them but rather, they picture situations the way they would want them to be (Jamal, 2004). Overconfidence in auditing causes auditors to overlook some important aspects that are critical in the audit process. Sometimes they feel that even if they do not follow the procedures of auditing, their expertise guarantees excellent results. Hansen & Mowen (2009) argued that superiority bias has significant negative influence on objectivity in auditing. The misinterpreted perception of superiority is an intellectual bias whereby auditors may overestimate their competencies while underestimating their weaknesses. In some situations, people who are illusionary superior are tempted in to choices that are inferior to those of junior people whose abilities are regarded of as weak. It is therefore important that auditors approach the subject at hand with an open mind to ensure that all information is evaluated no matter how trivial it seems. Auditors wielding excessive power within the organization are usually recognized as very smart with regards to the organization’s objectives. Jamal (2004) argues that every so often power leads to wrong choices due to their strong conviction that they cannot make wrong decisions. Every person in an organization who in one way or another handles financial matters or influential office is cautious of auditors and hence the great power bestowed on them. Abuse of power among auditors is not unheard of since some unprincipled people may want to gain from the fear created among those being audited, with demands being made for a positive report to be made from the audit process regardless of the correctness of the data corrected (Carnegie & Napier, 2010). Undue pressure on the auditor may influence judgment, meaning he/she is likely to make a different decision if he was not under pressure. It is possible that auditors will make a decision subordinate to a higher person in the organization’s hierarchy especially in the case of internal auditing. This is because it is highly unusual that the auditor will be the highest person in the management. The auditor may be intimidated to influence the outcome of the audit. The threat may include denial of privileges previously enjoyed, demotion or non-payment of claims. However, it is unethical to give in to intimidation. He/she should find other means of ensuring objectivity or raise alarm than to remain silent and perform dishonestly because it amounts to participation in fraud (Howieson, 2003). Self-interest may also cause unethical practices in auditing, for example when an auditor or his/her relative is involved in the business. In such circumstances, various ethical requirements may be violated. It is highly unlikely that an auditor will give an adversarial report where he/she does not want to tarnish his/her name. Such a situation should be avoided at the slightest chance. However, high moral standing of an auditor is required to refuse such tasks since the client may also have high expectations for the auditor who is likely to give a positive report regardless of the facts (Hansen & Mowen, 2009). Self-review can also cause ethical violations in auditing whereby an auditor is expected to analyse his/her own performance. Naturally, people will not want to expose their weaknesses the way they would do for others. It may be necessary for the auditor to safeguard his/her reputation whether the previous audit was right or wrong. For example, it may be discrediting to an auditor to make a conclusion that a previous audit on a process which cost the organization a huge sum of money to acquire was unnecessary, when the same auditor authorized its acquisition after a careful evaluation of its importance (Beauchamp & Bowie, 2010). The auditor needs to be morally responsible to accomplish such a task or else, the most appropriate thing is to object to such an assignment. On the other hand, an auditor may be tempted to give false information in a situation where he/she participated in accounting for the monies for which accounting records are under audit. The expected independence may not be accomplished and there is a high possibility of bias (Vasarhelyi et al. 2010). Under such circumstances also, it is necessary for the particular auditor to give way to an independent person to do the work. Ethical violations may also occur out of ignorance whereby an auditor is not aware of what ethical principles he/she is expected to uphold. This in itself demonstrates incompetence regardless of the educational standing of the auditor. Professional ethics must be known to all practicing auditors for them to perform effectively. To avoid such circumstances, all people aspiring to be auditors need to understand the ethical principles of auditing as well as the expected code of conduct (Thomas, 2004). Conclusion Ethics in auditing is paramount to the success of business, since it provides an important basis for businesses to evaluate their effectiveness in the use of resources. Auditors need to be morally responsible for their actions. They need to demonstrate high level of fairness in their actions. Objectivity allows the auditor to avoid bias in his/her assessment. It is also necessary to maintain confidentiality with regards to the information acquired in the process of auditing. Auditors need to possess the necessary competences to accomplish their work effectively. They should clearly understand what is expected of them with regards to ethical standards. Auditors should not subcontract their work to avoid incompetence that may arise from third parties. Lack of objectivity is a significant ethical violation in auditing. Power wielding auditors may negatively influence the results due to the respect they command within the organization’s hierarchy. Undue pressure on the auditors may also influence the audit results as much as self-interest would do. An auditor of good moral standing should therefore allow other people to undertake the audit on his/her behalf. Self-review may also affect the objectivity of the auditor. Ignorance with regards to ethical principles of auditing may negatively influence the outcome of an audit process. References Beauchamp, T.L. & Bowie, N.E. (2010), Ethical Theory and Business, Seventh Edition, Pearson Education International Carnegie, G.D. & Napier, C.J. (2010), “Traditional accountants and business professionals: Portraying the accounting profession after Enron”, Accounting, Organizations and Society, Vol. 35(3), pp. 360-376 Coulter, J.M. & Vogel, T.J. (2004), “Assessing Financial Performance and Risks in the e?Commerce Industry”. Accounting, Organizations and Society, Vol. 19(4), pp. 60-76. Hansen, D.R. & Mowen, M.M. (2009), Cost Management: Accounting and Control: Accounting and Control, Cengage Learning Howieson, B. (2003), “Accounting practice in the new millennium: is accounting education ready to meet the challenge?” The British Accounting Review, Vol. 35(2), pp. 69-103 Jamal, K. (2004),”After Seven Decades of Regulation, Why is the Audit Profession in Such a Mess?” Business & Professional Ethics Journal, Vol. 23(2), pp. 65-92 McWilliams, V. & Nahavandi, A. (2006) “Using Live Cases to Teach Ethics”, Journal of Business Ethics, Vol. 67(4), pp. 421-433 Thomas, W.C. (2004), “An Inventory of Support Materials for Teaching Ethics in the Post?Enron Era”. Issues in Accounting Education, Vol. 19(1), pp. 27-52. Vasarhelyi,M.A., Teeter,R.A. & Krahel, J.P. (2010), “Audit Education and the Real Time Economy”. Issues in Accounting Education, 25(3), pp. 405-423 Read More