Auditors Effectiveness in a Government Organization - Research Paper Example

Auditors Effectives in a Government Organization of Executive Summary The present day government concern is rampant with corruption and misappropriation of funds. This raises serious questions about the integrity and ethical working of auditor who conduct government audit. The paper is aimed at finding out the possible causes behind such unethical and inappropriate government audit and also the problems that auditors face in such concerns. The research is done via a primary as well as secondary research to arrive at definitive findings and conclusions so as to suggest practical recommendations to address the issue. Contents Executive Summary 2 Contents 3 Introduction 4 Background of study/Literature Review 4 Research Question 6 Research Objective 6 Research Methodology 6 Research Findings 7 Conclusion 12 Recommendations 13 References 14 Appendix 15 Introduction The order of the day requires that there is persistent probity and accountability in all firms. Such drive of accountability comes from the quest of integrity from public sector management (Oshisami, 2004). Off late, the government sector is coming into increasing focus because of the rise in number of frauds and inappropriate use of public funds. Such irresponsible behavior on the part of the government has called increased attention to accountability and transparency on the part of auditors and accounting managers in these firms and those associated with such government firms (Banker, Chang & Cunningham, 2003). The paper is aimed at finding out the possible reasons behind ethical issues that auditor experience in government firms over auditing practices. The paper proceeds in two forms of data analysis to support and provide weight to the view. The primary data is collected by means of an interview of 30 auditors belonging to a private audit firm who do audits for government organization. The interviewees were quizzed over various aspects of ethical auditing problems in government firms. The secondary research over the topic was done by means of extensive research through journals, articles and books. The research moved on to identify problem areas in ethical auditing and tries to suggest recommendation for improvement over those. Background of study/Literature Review Auditing can be defined as a self-determining examination of books of accounts of an organization done by a designated person which gives a fair view of whether accounts maintained are true and reasonable and also whether they comply with regulatory requirements or not. Audit can be classified into three types of categories. 1. Financial statement audit: this examines financial statements and reasons over the true and fair representation of reports and its compliance with standards of reporting. 2. Operational audit: Here the auditor measures the performance of specific divisions or units of the organization and determines its effectives. 3. Compliance audit: decides over compliance of the organizational set up with certain specified rules, norms, regulations and standards by a regulating authority. In a recent report, it was found that one of the big four auditing firms, Ernst & Young had reported a flaw in about 48% of its audits revealed by the US government auditing regulators. Such inefficiencies included insufficient tests of their customer’s internal safeguards, failure of identification of revenue recognition methods and failure to identify contradiction in value of securities claimed by the company. Such issues raise question over the ethical practices followed by audit companies and auditors in the books and in the real life scenario’s (Mainoma, 2002). In another case, General electric paid about $23.9 million to KPMG for auditing and another $79.7 million for consulting service. In a similar scenario, J.P Morgan Chase paid $2.3 million as audit fees to Pricewaterhouse Coopers and an additional $84.2 million for management service. Such issues raise questions over the existence of independence of auditors (Ronen, 2002). Corruption in government companies remains to a major challenge in organizations and is deep rooted within their organizational system having diverse consequences of a country socio political and economic development. Each country’s accountability and probity is supported by it’s the Supreme Audit Institution (SAI) and its Auditor General. They are supposed to provide the base for good governance and sound practices in a public sector unit through unbiased judgment and assessment of assembly and usage of public resources. In their operations, these auditors face challenges that might hinder, weaken or completely confront their performance in discharging their roles as curtailers of corruption and mitigating independence of government executives and support. In an attempt to raise awareness and will among the public sector to improve their financial standards and organizational systems, the UAE SAI launched ‘Together to Protect Public Funds’ campaign and found that most companies in the country did not have any stated administrative and organizational requirements and it negatively impacted efficiency in public company operations. As stated by Gupta, 2005, auditing for local government firms is conducted to ensure that funds are in place for all kinds of authorized and planned expenditure. It is to be confirmed that such expenses are sanctioned by the government and incurred competently and properly to the desired activity and location. The audit function also has to identify that sums due to be received have been properly recovered and credited to respective accounts. Also, the employees, contractors and dealers get paid via their personal and official accounts. They also have to check that all stock and stores are priced at reasonable rates and quantity balances are checked and tallies with the books. Most importantly, the auditor needs to check if the value of amounts also tallies with the amount outstanding. The auditors lastly have to perform their basic audit function and check whether all financial statements are prepared in compliance with stipulated rules and regulations (Adeniji, 2004). Research Question The research question that the paper tries to address is that interference from administration in a government organization does not hamper or influence the reliability, fairness and truth of government firm accounts. Research Objective It has been discussed that the objective of the research is to identify the degree of effectiveness of auditors in a government organization setting. This research is aimed at examining the effectiveness of auditors in government organizations in the presence of bureaucracy and through primary and secondary research. Research Methodology The research uses a well structured questionnaire method to interview 30 auditors from a local independent audit firm find out the ethical issues they face while carrying out their work in government organizations. The responses of the questionnaire were ranked on attributes and responses were analysed using various graphs and tables. In the secondary data analysis, various journals, books and reports were studied to find out the general trend and information pertaining to issues faced by auditors while working with government concerns. Such information is then combined with the results of primary research to arrive at decisive conclusions that cause problems in auditing for government companies. Research Findings The study found that auditing of government organizations was efficient and effective when reporting was done without the interference of administrative and political influences on the financial working of the concern in the presence of well qualified staff. Such trend is more visible in corporate. Thus, the research recommends transparency, objectivity and integrity to be implemented by government officials and auditors. This also calls for significant restructuring of anti corruption societies, hike in remuneration of auditors and fringe benefit enhancements that shall stimulate enhanced performance (Chung & Kallapur, 2003). From the responses obtained from 30 auditors from a private audit firm which conducted audits in both corporate and government organizations, interviewed to comment of the auditing problems they faced in government organizations, the following results were derived. Figure 1: Reasons behind unavailability of Financial Information The respondents from audit firm were quizzed over what they thought was the reason behind unavailability of financial records in government firms. About 46% of respondents felt that lack of educated employees within the higher hunches of the organization were the primary cause behind unavailability of correct financial information. The second favourite reason among the respondents was improper maintenance of financial records. About 40% of the people felt that the lack of proper record keeping was the main driver of bad financial reporting followed at government firms. It was believed that absence of ethics in reporting made it vulnerable to political influences. Financial reports were designed to serve the needs of the influential people of the organization and financial information was altered by them. Staffs were not skilled enough to check the misappropriation of financial records (Alexander & Britton, 2000). Figure 2: Reasons behind Improper Financial Information When questioned over their opinion about the reasons behind inappropriate financial record keeping with government firms, the responses revealed that about 37% of the auditors felt that there was a lack of educated and qualified staff at the managerial level that could perform the financial record maintenance activity with efficiency. They reported that most of the staff who prepared these financial reports were under qualified and hence influenced greatly by political leaders and administrative staff who altered these reports as per their wishes. Also, about 33% of the respondents attribute political influences from outside as well as the administrative staff as being the primary cause of financial reporting flaws in government organizations. They believed that such records did not meet the regulatory norms or accounting standards and disclosure requirements and were greatly designed to serve the purposes of political influences.] Figure 3: Reasons behind Problems in Ethical Auditing The lack of support in government firm auditing was a common response from all respondents that were quizzed. The questionnaire tried to establish what were the primary problems and issues that auditors faced while auditing such companies. It was felt that support for provision of correct financial information was not available because a lot of political influence from various sources hampered financial records and consequently record keeping. About 43% of the responses revealed that ethics in audit practices was challenged largely by political influences. Right compliances and correct reporting could not take shape because it did not confirm to the needs of administration and political groups who were instrumental to the functioning of the government concern. About 37% respondents felt that support from the administration as also lacking when it came to undertaking ethical auditing. Correct information was kept hidden and reasons for loopholes in financial reporting went unaddressed or misinformed (Awe, 2008). Figure 4: Factors that Can Improve Financial Reporting On being questioned over what could possibly increase the efficiency of financial reporting in government companies which in turn would support ethical auditing, 33% of the respondents believed that presence of educated people at higher levels of the organization could alone address a large portion of the issue. These people believed that financial managers were incompetent and this is the prime reason why financial reporting was not done properly. More qualified people in finance department would follow all regulatory compliances and ensure better representation of financial statements. Another segment of responses obtained believed that lower salaries of government employees made them resort to cheat on financial reports and triggered corruption in organizations. Higher government salaries combined would in turn reduce politics and undesirable administrative influence on organizational functioning and financial reporting thus ensure better financial management. All this put in together would then contribute towards better and ethical audits. Figure 5: Factors that Can Improve Auditor Efficiency To provide strength to auditors, the questionnaire also asked respondents about what could help their firm in supporting ethical auditing in government concerns. Majority of the interviewees believed that they needed better training in ethical practices and compliances that would assist them in performing ethical audits. Along with this, an equal number of respondent felt that there was a need to include more of qualified and experienced auditors in the team that went to conduct audits in government organizations. This would ensure proper experience and guidance in handling matters of ethics while auditing (Campbell & Hougton, 2005). It was also felt necessary that adequate support in taking stands and making strong decision was required. Such support was solicited from higher officials of the audit committee and regulators. From the secondary research, it was observed that auditors find their independence curbed as soon as they conduct audits for government agencies. It is reported that audit for such companies is either a matter between higher officials in the audit company and the managers of the government company or, auditors are handicapped in terms of financial information available to them in these companies which restricts their ability to assess financial results more effectively. This calls for a need of better guidance with audit teams and a regulatory framework that shall effectively make required information available to auditors. Another finding was that auditor often found them at a loss when it came to managing issues of political influence and administrative inefficiency at government companies. They did not know how to handle such situations. Adherence to the wishes of the company then seemed to be the only way out. This highlights the need for extensive training and education of auditors on the practical aspects of auditing. Conclusion The study explores auditing effectiveness in government owned enterprises. The motivation behind this study is grounded over the fact that government enterprises perform poorly when it comes to financial reporting and management of public funds. This arises primarily on account of misappropriation of available funds and unsound auditing practices. It was also observed that due to auditors failed to get any support in ethical auditing practices because of lack of educated staff in the organization who held the key positions. Also corruption in the system and political influence were key drivers of problems in ethical auditing. The results also reflected that lower level officials do not interfere much in the auditing process. It was observed that administrative staff and lack of officials at the higher level retarded that practice of ethical auditing at higher levels. Therefore the research concludes that ethical auditing of government owned enterprises is essential for effective reporting but requires no interference of administrative staff and political influences in financial activities of the concern. Another thing essential for development of sound auditing practices is the presence of qualified staff at higher levels that can ensure better financial management of the firms and thus facilitate audit processes (Jenfa, 2000). Recommendations In order to increase effectiveness of financial reporting and compliances in government organizations, it is recommended that the anti corruption agencies are established to check practices at these companies and bring unethical practices out in public. Secondly, it is suggested that audit companies increase the remuneration and fringe benefits for auditors who conduct audits with government companies such that they are motivated to report correct and eliminate possibilities of falsifying audit reports and produce misleading audit results. Thirdly, audit firms should increase the number of qualified and experienced staff in audit teams that conduct audits and report for government concerns. This would ensure better management of unethical forces and false financial reports. Fourthly, regulators of audits and financial reporting should promote correct financial representation as a tool for better public image and higher profitability owing to greater consumer confidence and shareholder support. This should ideally motivate best practices in financial reporting (Wyatt, 2004). Lastly, false report by audit firms should be heavily penalized for both the company under consideration and the audit firm conducting audits for the concern. This would call for a need to establish a regulatory agency that monitors audit reports. References Adeniji, A. A. (2004). Auditing and Investigation. Lagos: Value Analysis Consult Publishers. Alexander, D. & Britton, A. (2000). Financial Reporting. London: Thomson Learning. Awe, O. I. (2008). The Theory and Practice of Auditing. Lagos: Gilgal Publications. Banker, R. D., Chang, H. & Cunningham, R. (2003). The public accounting industry production function. Journal of Accounting and Economics, 35(2), 255-81. Campbell, T. & Hougton, K. (2005). Ethics and Auditing. [pdf] The Australian National University. Retrieved from http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=5&cad=rja&ved=0CFAQFjAE&url=http%3A%2F%2Fwww.oapen.org%2Fdownload%3Ftype%3Ddocument%26docid%3D459097&ei=LI7LUsPoHIPX0QWDv4C4Dw&usg=AFQjCNEHF_QrldjfUaKs90LJuXXb9ejAOQ&sig2=kQS8DzaqbYx-pTWWq7Bqdg&bvm=bv.58187178,d.Yms Chung, H. & Kallapur, S. (2003). Client importance, nonaudit services, and abnormal accruals. The Accounting Review, 78(4), 931-55. Gupta, K. (2005). Contemporary Auditing. New Delhi: McGraw-Hill Co. Jenfa, B. I. (2000). Elements of Professionalism and Practice of Accountancy. Jos: Ehindero Nig Ltd. Mainoma, M. A. (2002). An assessment of the quality of financial reporting. Journal of Business Administration, 2(1), 116-126. Oshisami, K. (2004). Government Accounting and Financial Control. Ibadan: Spectrum Books Ltd. Ronen, J. (2002). Post-Enron reform: Financial statement insurance, and GAAP revisited. Stanford Journal of Law, Business and Finance, 8(1), 39-68. Wyatt, A. R. (2004). Accounting Professionalism – They Just Don’t Get It! Accounting Horizons, 18(1), 45-53. Appendix Questionnaire 30 people were interviewed and their responses were recorded in the following questionnaire 1. What were the reasons behind unavailability of financial information with government firms? Lack of Educated Staff 14 Improper record keeping 12 Political Influence 2 Unethical administration 2 2. What was observed as the primary reason for improper financial records? Lack of Educated Staff 11 Improper record keeping 1 Political Influence 10 Unethical administration 8 3. What were the problems faced in ethical auditing in government firms? Lack of Educated Staff at higher levels 3 Interference of Lower level staff 3 Political Influence 13 Unethical administration 11 4. What do you think could help improve in financial reporting with government firms? More educated people at higher levels 10 Reduced political and administrative influence 8 Higher salaries for government employees 9 Additional Regulatory compliances 3 5. What do you think needs to be done at auditors end to manage auditing at government firms more efficiently? Training on ethics and best practices 12 Support from higher levels for practicing ethical auditing 4 Inclusion of more experienced staff in audit of government agencies 12 Higher authority in auditing practice 2 Read More