Auditing Practices, Professionalism, Ethics, And Standards - Essay Example

Auditing Practices, Professionalism, Ethics and Standards Insert (s) Auditing Practices, Professionalism, Ethics and Standards Introduction The contemporary auditing model used in many market societies has made auditors to be dependent upon their directors and companies rather than an independent body for their remunerations and profits. This practice has significantly increased the risk of auditors being subservient to their directors and to some extent even bending rules to accommodate the demands of their companies or directors (Sikka, 2008, p.268). Although some experts have argued that auditing firms may still be able to legitimize their status by appealing to and incorporating professionalism in their practice, this is often difficult as they are often motivated to increase their profits and market niches just like other capitalist enterprises. In addition, according to Dunn (2006, p.102), the auditing model that is currently in practice in many regions is further complicated by the fact that auditors are generally permitted to sell their consultancy services to companies and other audit clients. This has particularly increased the dependency of auditors on fees paid by companies thereby further impairing the perceived and actual independence of auditors. Based on these limitations, there has been an increasing need to enhance the professional ethics of auditors especially by ensuring their independence and freedom from any form of client control. This paper critically discusses the contemporary auditing practice and its flaws with particular focus to the professional ethics regarding auditor independence and a critique of the relevant standards or sections of Corporations Act related to independence in auditing practice. Professional Ethics regarding Auditor Independence Auditor independence refers to the internal auditor’s independence and freedom from freedom from any form of control by parties that may have financial interests in the business under auditing (Baker, 2005, p.13). The independence of auditors particularly demands a considerable level of professional integrity, ethics and objective approach to the entire auditing process without any external influence. According to many experts, auditor independence may also be used in reference to the external auditors’ exclusion from parties that may have fiscal interests in the businesses being audited. Generally, achieving independence is critically essential for the auditors to be able to effectively retain their objectivity and service reliability. According to Sikka (2008, p.271), the current auditing practice of making auditors depend on their directors for their fees, remunerations and profits has been widely blamed for the rising cases of corruptions, manipulations and integrity issues among auditors. Although it has been argued that auditors still redeem their status by appealing to and incorporating professionalism in their practice, this is not always possible as auditors just like other capitalist enterprises are often driven by personal interests particularly the need to increase their profits and market niches. The contemporary Australian Audit ethical standards particularly require an integrity and objective approach to the audit process (Australia, 2011 p. 123). The corporate acts provisions for external audit standards in the security exchange act of 1934 and in the Sarbanes Oxley act of 2002. In these acts, both the independence of internal auditor and external auditors are clearly stated. These provisions ethical there is adequate risk management, external and internal controls and the poor governance. However, although these standards have sought to enhance the independence of the auditors, a number of regulatory gaps still exist and many auditing firms have frequently violate rules regarding auditor independence to engage in unethical practices by entering into business relationships with their clients and the companies in which they are undertaking auditing (Hastings and Janofsky, 2009, p.27). As a result, there is an urgent need to improve the standards and introduce new rules that will ensure compliance with the ethical and professional requirements of auditing practice. The transparency of auditing firms and their eligibility has sometimes been questioned due to their dependence on their directors and companies for their remunerations and profits as opposed to depending on an independent body. Auditing standards have therefore been set by different countries in trying to regulate and build trust in auditors practice. Several acts of the law have also been formed in governing auditing as a practice. Corporate collapses has been responsible for the spotlight of professional auditing. Professional skepticism is an ethical behaviour that is useful to auditors. Being skeptic does not mean that a fraudulent behaviour is always present but it also makes it a possibility. Error and fraud are treated as outcomes but not as being sought as the objective of the audit. This critical analysis is important in coming up with a credible result (Love and Lawson, 2009, p.44). The culpability and involvement of auditors and accountants in various unethical or unprofessional practices as well as conflicts of interests in their practice have long been documented in Australia as well as in other various parts of the world (Sikka, 2009, p.45). For example, a number of audit firms and companies such as Lever Brothers Plc, Cadbury Nigeria among others have been recently plagued with numerous ethical problems and scandals sometimes leading to the eventual collapse of the business. A study by Holm and Zaman (2012, p.55) confirmed the presence of lack of trust in the professionalism of auditors, transparency of the process and commercialization of the firms. The research emphasizes on the need to improve on the quality of audit services. The problem has been compounded by the fact that the auditing model that is currently in practice in many free market countries allow auditors and accountants to sell their consultancy services to companies and other audit clients thereby further increasing their dependency on parties who may have an interest in what is being audited. According to many researchers, the backbone of audits is the financial statement. Accounting is a major part of auditioning and auditors are sometimes referred to as accountants. However, auditors are expected to tell the truth, be fair, objective and exercise expertise in their work (Watts and Zimmerman, 2003, p.620). These ethics are important in building trust around auditions. The importance of the output of auditors is the diversity of use of the result. The report of a single audit is useful to customers, investors, capital markets among other stakeholders. Issues majorly addressed which are also sensitive are the liabilities, assets, revenues, costs, profits and losses. Lack of expertise by auditors has led to the collapse and fraud facilitation by corporate (Sikka, 2009, p.870). In addition, integrity is an important value in auditing. When integrity is being questioned in an audit, the outcome will be questioned as well. Integrity as a virtue can be confirmed through evaluations and background checks. Integrity is best exercised when limited transactions are carried out. Many transactions have been found to be related with fraudulent auditors. It is an indication of wanting to hide a few transactions (Power, 2013, p.384). Auditing is the evaluation of financial and responsibilities of the personnel responsible to prevent corruption. Investors and the public i.e. the stakeholders, will benefit from the process by the outcome of accountability of the people in high positions. Auditing of firms has become a necessity for the success of any company (Holm and Zaman, 2012, p.51). Audit Standards and Sections of the Corporations Act The current Australian auditing standards have established the requirements and the responsibilities of the auditors to professionally undertake financial audits based on the stipulated ethical standards. Generally, the Auditing standards of Australian Quality control have been revised several times. The standards to be discussed here are those amended in 2013. The quality control of auditing standards are majorly for the regulation of any firm that carries out audits, firms that review the financial reports and for firms which provide other related financial information or related assurance services. In Australia, the standards are read together with the preamble ASA 1001 of the standards (ASQC, 2013). These quality control policies are supposed to conform to international standards. In many cases the practicality of the above statement rarely holds water. For example, one of the international standards requires that a firm should provide evidence of their conformation with standards yearly. This compliance is stated to be in line with independence, procedure and policies, ethical and legal requirement by all firm personnel (ASQC, 2013). The reality and practicability of the act is not feasible for most firms especially due to financial constrains. Auditing has been found to be an expensive and taxing affair to most firms. On the other hand, the act was set out in trying to put a road map against fraudulent and corrupt behaviours among firms. It brings into account the credibility in the management and responsibility among the personnel of a firm. Vause (2009, p.14) suggests that the corporations should act on the other hand is clear in the format of an audit report. Interpretation and meaning of each part from the title to final conclusion is well laid out. The corporations act in my opinion is clearer and more guiding to financial auditors and related audits. Finally, the Securities and Exchange Commission provisionally adopted and revised rule 2-01 qualifications of accountants. These provisions ensured the assertion of auditor independence requirements which were to be in line with the security exchange acts of 1934 section 10A-audit requirements and Sarbanes Oxley act of 2002-title II-auditor independence (Kranacher et al, 2011 p. 111). In auditing as a field of profession, without strict ethical practices and interdependence the abuse of this profession is prone to be rampant. It is therefore cordially in order for the individual auditors to stick and comply with the accounting commission’s strict ethical rules. This will restrict the violation of accounting professionalism ethical standards.  Nature and Development of Audit Expectations Gap Audit expectation gap refers to the difference in the expectation of the user of the financial outcome of the statements and the expectations of the independent accountant. The history of the development of the expectation gap dates back to 1974 when it was first defined was defined by a philosopher called Liggo. The definition of expectation gap however, has been changed to suit specific researchers with little change in the meaning. In the research to determine the nature of expectation gap, it was found that the perception of the financial user and the auditor are completely different (Woh and Koh, 1998, p.148). One of the factors which have led to the difference in perception is the ability of the user to expect too much from the auditor than their own ability. The auditor always expects the auditor to be responsible in detecting fraud and illegal acts and making this known to them. The auditor also believes that any irregularities are in most cases caused by the user who is always aware of their behavior (Cousins, 2008, p.114). Currently, there is a lot of concern in relation to the beliefs held by auditors and the public differently as per the sole auditors’ duties and responsibilities as well as the messages conveyed to the general public by the audit reports. In the recent years various some well-established and spectacularly publicized corporate have collapsed. Subsequent implications of these corporate are collapse in regard to ethical audit malpractices have heightened to greater audit expectation gaps (Kranacher et al., 2011, p. 134). Accordingly, in comparison to the olden days, the audit expectation gaps held a huge moral responsibilities and consideration in comparisons to the current corporate world. However, despite the challenges that have faced the auditing profession it has remained successful in most cases. The success has been dependent on response to the challenges the profession has faced (Love & Lawson, 2009, p.43). Finally, in reduction of the expectation gap much is being done and observed in the audit sector. Activities such as extended audit report, education of the public and audit firms on expectation gap and the provision of an audit methodology which is structure (Woh and Koh, 1998, p.152). Conclusion In conclusion, the dependency of auditors on fees paid by companies in market societies has negatively impacted on their independence. This has significantly increased the risk of auditors being subservient to their directors and to some extent even bending rules to accommodate the demands of their companies or directors. However, the legitimacy of the profession and auditing practice can effectively be regained by improving the regulations of auditing professional ethics and ensuring their independence from client control through proper auditor independence standards. References ACSL 2011. Australian corporations & securities legislation 2011. North Ryde, N.S.W., CCH Australia. Auditing Standards Quality Control (ASQC 1). 2013. Auditing and Assurance standards board.Available at www.auasb.gov.au Baker, R., 2005. The Varying Concept of Auditor Independence: Shifting with the Prevailing Environment. The CPA Journal 2(1):pp.1-14. Cousins, J. 2008. 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