External Regulation of Auditors - Essay Example

External Regulation of Auditors External Regulation of Auditors Introduction Members of the European Union have made an agreement to introduce more stringent rules and external regulative frameworks to govern the audit market (Sidel, 2011). This is intended to increase competitiveness in the audit market and strengthen the independence of auditors. Auditing constitutes an independent examination and evaluation of the entity’s financial statements to establish whether the financial statements reflect the true and fair value of the status affairs as at a particular date (Huault & Richard, 2012). Periodic auditing ensures accuracy and financial responsibility in organizations. Accounting standards and regulations require auditors to give an audit opinion in order to provide a reasonable assurance that the financial statements present a true and fair value in accordance with the financial accounting frameworks. An independence auditor examines the financial records and business transactions of a company that the auditor is not affiliated with. The objective of hiring and ensuring audit independence is to avoid conflicts of interest and ensure the integrity of the auditing process. Regulation of Auditors The Statutory Audit Directive (2006/43/EC) sets out the requirements for statutory and regulation policies (Catty, 2012). The Companies Act of 2006 has transposed this into the United Kingdom Law to ensure proper regulation of the auditing function. The Companies Act 2006 gives powers to Recognized Supervisory Bodies (RSBs) to register and supervise auditors. The system of RBSs involves registering, monitoring, investigating and discipline auditors. The Financial Reporting Council (FRC) is vested with the statutory powers that the government delegates it to do recognition, supervision and de-recognition of RSBs (Goeke & Antonucci, 2011). The FRC controls auditors indirectly by conducting regular inspection visits to the RBSs in order to investigate the performance of their responsibilities. The Audit Quality Review (AQR) team of the financial Reporting Council monitors the audits of all listed and other major public corporations. The Financial Reporting Council operates an independent disciplinary scheme for accountants, accountancy, and accountants in the United Kingdom. The Accountancy Scheme does not dependent on any professional bodies. The Financial Reporting Council handles cases of potential misconduct that have the potential for raising critical issues affecting the interest of the public in the United Kingdom. One of the responsibilities of the Conduct Committee is to operate independent disciplinary schemes for investigation of cases affecting the UK public interest, ensuring operational effectiveness of the schemes and their supporting regulations, and making regular publicity for the disciplinary activities ad achievements of the FRC (Financial Reporting Council, 2003). Publicity is meant to further the control the auditors’ independence. The immediate role of audit independence is to serve the audit, and the objective of the audit is to improve the reliability of information that users depend on for investment and credit decisions. Audit independence tries to make the audit more effective by providing assurance that the auditor will maintain objectivity in planning and executing the audit function. Evaluating audit independence requires clear understanding of whether it should be based on a prudent concept, the judgment of the regulators, or the opinion of investors (Financial Reporting Council, 2006). There should also be a clear understanding of whether the objective of audit independence is served by applying regulatory prohibitions to other parties to the business that do not have the potential to influence the business. The audit function works by deterrence, verification, and detection of errors and frauds. When the management is aware that auditors are coming, they avoid distorting financial statements since they are aware of the auditors’ vigilance in detecting any mistake in the financial statements. Auditors’ Training The law requires auditors to acquire the relevant skills and knowledge in the field of auditing. Audit work should be delegated to people who are equipped with appropriate experience acquired through training (Schmitt, 2012). Adequate training provides a reasonable assurance that the auditing function will be performed with due care. Training papers used for orienting audit staff contain audit programs and specimen schedules. The papers provide audit assistants with reference materials when conducting audits. Academic qualification dictates the functioning of the audit function. The auditing staff is assigned responsibilities that match with their capabilities. When controls over programs change, appropriate testing should be done to make sure that the modified system is reliable. Change agents emphasize the necessity of user training to equip users with relevant skills and expertise on proper use of auditing systems (Schmitt, 2012). When professionals have the required skills and knowledge, they are presumed to be equipped with proper tools of the job for better performance. Auditing Professionalism Accepting appointments as company auditors requires auditors to evaluate themselves to ensure that they are professionally, legally, and ethically qualified to work for the client (Adelopo, 2012). Failure to adhere to the professional standards exposes the auditor to legal liabilities. For example, if investors incur losses because of using the auditor’s reports to make investment decisions, the auditor will be forced by law to use their own resources to make good the losses suffered by the investor. Professional misconduct exposes auditors to risks such as losing the accounting practice credentials. Auditors, therefore, fear the consequences of professional misconduct and concentrate on doing their work within the frameworks of accounting standards. This alone acts as a machinery to deter auditors from professional misconduct and does not require extra regulatory frameworks to guide them. The auditor is guilty of professional misconduct if they submit, in their name or in the name of the auditing firm, a report of an examination of the financial statements and examination of such statements have not been made by them (Rossouw, 2007). Auditors may be corrupted to falsely ratify the accounting statements and auditing report that they had not prepared. This type of statements may be concealing the company’s errors and frauds. When auditors ratify the false reports, they remain liable for any loss arising from applying the statements to make investment decisions (CPA Australia, 2012). The huge fines they expect to settle make them vigilant and maintain highest standards during auditing. Failure to adhere to professional, ethical, and accounting standards exposes auditors to professional misconduct. Auditors are also liable to negligence under civil and criminal liabilities, liability to the client company under contract law, and liability to third parties under the law of torts. Professional ethics is one of the critical elements of auditors’ professionalism. Auditors are exposed to strict professional ethics during pre-service and in-service training. A professional auditor should act in a manner consistent with the desirable reputation of the occupation and refrain from all conducts that may expose auditing to profession discredit. Fundamental principles of professional ethics include integrity, professional independence, confidentiality, and technical competence (Ferguson Publishing, 2009). These principles compel auditors to perform to their best level even in the absence of external regulation. However, it becomes questionable if the auditor can really observe these principles all the time. Human nature are characterized by disobedience and inconsistency. Supporters of external regulation argue for the necessity of controlling auditors’ behavior and following up observance of ethics; they, thus ignore the role of professional ethics in managing auditors’ conduct. Auditor Remuneration Receiving remuneration is one of the rights of auditors. The auditor should be paid audit fees when due and be reimbursed audit expenses incurred in connection with the audit (Rossouw, 2007). The auditor should prove that they spend the expenses solely for meeting the costs of a particular audit exercise. The letter of engagement illustrates the basis on which audit fees are computed and bases of all other billing arrangements. Auditing professionals constitute a group of the highest paid professionals. With the amount of money they are paid, auditors do not have reasons for engaging in malpractices to gain extra money. The challenge with remuneration as a way of preventing auditors from engaging in financial malpractices because human beings are greedy in nature; the more they get, the more they need (Adelopo, 2012). The need for money is also a human want, that is, it is insatiable. Regardless of this, proper remuneration can deter auditors from engaging in corrupt activities even when there is no external regulation. Conclusion The auditing function is characterized by strict control from external regulation. External reregulation concentrates on protecting investors and lenders from malpractices of auditors. When regulators want to institute an audit independence rule, they need to do a thorough evaluation of all the reasonably significant, foreseeable, and potential effects of the rule; they should not concentrate only on the auditor’s objectivity. Auditors are well-equipped with knowledge and skills through training that enable them to perform their functions effectively. Auditing professionalism exposes auditors to ethics and consequences of professionalism misconduct. These serve as warning for auditors since they could face heavy penalties for misleading people. Competitive remuneration package provides auditors with adequate finances for satisfying their needs so that they cannot engage in corrupt activities. The services of external regulators cannot be completely eliminated, but auditors should be allowed to work without excessive interference from external regulation. Training, professionalism, and competitive compensation packages enable the auditors to appreciate their work and do it with due care. References Adelopo, I. 2012. Auditor Independence: Auditing, Corporate Governance and Market Confidence. Farnham: Ashgate Pub. Catty, J. P. 2012. The professionals guide to fair value: The future of financial reporting. Hoboken, N.J: John Wiley & Sons. CPA Australia. 2012. Auditing, assurance and ethics handbook 2012. Frenchs Forest, N. S. W: Pearson Australia. Ferguson Publishing. 2009. Professional ethics and etiquette. New York: Ferguson. Financial Reporting Council. 2003. The combined code on corporate governance, July 2003. London: Financial Reporting Council. Goeke, R. J., & Antonucci, Y. L. 2011. Antecedents to Job Success in Business Process Management: A Comparison of Two Models. Information Resources Management Journal (irmj), 24(1), 46-65. Huault, I., & Richard, C. 2012. Finance: The discreet regulator : how financial activities shape and transform the world. New York: Palgrave Macmillan. Rossouw, D. 2007. Ethics for accountants and auditors. Cape Town: Oxford University Press. Schmitt, D. B. 2012. Advances in accounting behavioral research: Vol. 15. Bingley, U.K: Emerald. Sidsel, G. 2011. “Developing a framework for examining business-driven sustainability initiatives with relevance to wine tourism clusters,” International Journal of Wine Business Research, 23(1), 62-82. Stuart, I. 2012. Auditing and assurance services: An applied approach. New York, NY: McGraw-Hill. Read More