The Role of Auditors along with Board of Directors in Preparing Financial Statements - Essay Example

A Critical Assessment of the Role of Accounting Table of Contents Table of Contents 2 Introduction 3 Accounting and Financial ments 4 Appointment and Role of Board of Directors 5 Role of Auditors and Audit Quality 6 Government Intervention and Regulatory Bodies 8 Conclusions 10 References 12 Introduction Accounting is commonly referred as a procedure of measuring, recognising along with communicating about the financial stance of the company to the public, its stakeholders and decision makers. It is essential that the financial information communicated to its users are reliable and transparent as these information are further used for making effective decisions and assisting investors to secure their interests from the company. In the present business scenario, accounting reports play a significant role for decision-makers about the financial performances along with future growth prospects of business organisations. Contextually, financial information is required to be revealed in fair value, so that the users are able to depict the information with better accuracy and appropriateness. The financial information is also required to be accessible and comprehendible by its different users. The financial statements are the prime source of economic information about business organisations (Stolowy and Lebas, 2006). The growing importance of financial information has developed due to increased incidents of financial scandals in numerous business organisations that include Enron and WorldCom among others. In this regard, different accounting policies along with standards have been implemented by business organisations with the aim of ensuring that financial statements are prepared as well as communicated in an ethical manner. Contextually, auditors and boards of directors are required to ascertain that financial information is measured accurately (Carnegie and Napier, 2009). In this context, the essay emphasizes the role of auditors along with board of directors in preparing financial statements, so that fraudulent practices can be discouraged and chances for the same can be mitigated to the highest possible extent if not completely. Additionally, the essay also discusses the actions that are undertaken by regulatory bodies and the UK government in response to scandals. Accounting and Financial Statements Financial accounting is used with the objective of ensuring that financial information are recognised and measured in a systematic manner. It also aids in providing adequate information in relation to business performances ascertaining the accurate financial position of the business organisations. Additionally, financial information conveyed through accounting is intended to provide updated information about assets along with liabilities held by the company that further obliges its future business market positioning. In this regard, the accuracy of financial information will be important for business decision-makers, creditors, investors, employees and the government (Elliott and Elliot, 2011). Accounting information also provides important information relating to business transactions. Additionally, it plays a significant role for auditing operations as the auditors use the information to ensure that financial resemblance are adhered and other financial reports are prepared in accordance with accounting standards and applicable principles (Elliott and Elliot, 2011). Thus, financial statements are important sources of financial information depicted in a timely manner. The statements are used immensely with the assistance of which, investors along with other stakeholders can identify plans as well as the potentials of the business performances based on updated and scrutinised information (Palepu and Healy, 2007). Appointment and Role of Board of Directors The Board of Directors (BODs) play an important role in ascertaining that operations of business organisations are performed in accordance with organisational objectives. The BODs are also entitled with the responsibility of seeking that the needs as well as requirements of the shareholders are accomplished successfully. Additionally, the board members are also entrusted with the tasks of ascertaining that business operations are conducted in accordance with business principles along with business ethics related specifications. The directors are also required to ascertain that financial reports are prepared based on the specified accounting standards. The shareholders of business organisations are thus held accountable for selecting board members. The shareholders are also provided with the power of dismissing directors through majority vote (Charles Russell LLC., 2012; Anderson, Mansi and Reeb, 2003). Likewise, the BODs are held responsible for determining the business values, goals along with objectives of an organisation. Additionally, the directors are accountable for ascertaining that the financial information are properly measured and accounted in the financial statements and reports. In this context, the BODs are required to ensure that financial information is recorded on the basis of the Companies Act 2006. Subsequently, the board members should seek that the accounting records are maintained according to the specified accounting principles and standards. The directors should ensure that financial statements depict appropriate information in relation to business transactions as well as financial position. The financial statements comprise all the financial entries relating to receipts along with payments. The assets as well as liabilities of an organisation are also presented in the financial reports. Moreover, adequate details including sales, purchase and inventories. The BODs’ role is also significant when ensuring that financial statements prepared in accordance with the Act are able to mitigate accounting scandals (Charles Russell LLC., 2012). Role of Auditors and Audit Quality Auditors are entrusted with the responsibility of auditing financial statements. Auditing is a procedure of ensuring that financial transactions or records depict correct as well as true value. Moreover, it is utilised to ascertain the reliability of financial statements that are drawn with the assistance of accounting records. It is mainly concerned with analysing financial records of business organisations with the motive of determining the trustworthiness of those records. In this regard, the auditors are responsible for seeking that financial statements or reports depict true along with fair information about the performance of an organisation. The auditors are also liable for examining the financial information presented in the company reports. Additionally, the auditors are entitled to scrutinise the accounting records, take accounting controls along with measuring transparency in the accounting systems that are used for assessing, identifying and preparing financial statements. Subsequently, the auditors are responsible to determine the strengths as well as weaknesses of the financial statements, which may assist the management of business organisations in enhancing their accounting operations. They also provide important statistical information about accounting policies and standards in relation to the effectiveness as well as clarity of the financial information delivered (Dart, 2011). In order to preserve adequate transparency that the auditors are offered with adequate independency in their operations, which implies the omission of bias influences caused by the client organisation’s decision-makers including directors. The principle of auditors’ independence plays an effective role towards assuring that financial statements are prepared with better credibility and fairness. Auditing operations are conducted with immense importance in present scenario following the severe consequences faced by different business organisations in the recent phenomenon, such as those including Enron, Tyco along with WorldCom for accounting scandals. In this regard, the regulatory bodies of different countries have formulated effective accounting and auditing policies with the intention of ensuring that financial statements are prepared in accordance with certain specific standards or policies and so that true along with fair financial information are presented through financial statements. With this intention, the government of the US has developed the Sarbanes-Oxley Act during the year 2002 with the aim of ascertaining that auditing operations are conducted in a systematic manner with complete auditors’ independence. The auditors conducting their operations in compliance with the Act are able to mitigate the problem of accounting scandals substantially. Similarly, Auditing Practice Board (APB) of the UK has developed specific Ethical Standards for Auditors during the year 2004 with the intention of improving audit practices. The developed policies ensure that the auditors conduct auditing inspection on a regular basis and have enhanced auditors’ independence to a certain extent. Subsequently, the auditors performing auditing operations ascertain that information presented in the financial statements are based on relevant accounting policies and standards to minimise the chances of accounting misrepresentations and fraudulent practises (Dart, 2011). Government Intervention and Regulatory Bodies The government and the regulatory bodies of the UK have formulated as well as implemented different accounting policies and standards after witnessing accounting scandals in big corporate sectors including Enron and WorldCom among others. Subsequently, the accounting policies are developed as well as reformed with the intention of ensuring that financial statements depict accurate along with reliable information (Dart, 2011). For instance, the Companies Act 2006 was enacted during the year 2006 in the UK with the aim of reforming the regulations policies and based on which, operations of business organisations are conducted in an effective manner. The Act ensures that administration of business organisations, including executive and non-executive directors, are able to execute better control in business operations. The regulations formulated further ensure that accounting and other statutory information are communicated in electronic forms, so that stakeholders and governments are able to conceive accurate information at their conveniences. In this regard, the reliability of the financial statements and annual reports are required to be documented in electronic form at the Companies House. The Act entrusts responsibilities to the directors to seek that business operations are conducted in adherence with desired regulations and organisational objectives (Davies, 2007). Accordingly, the Financial Reporting Council (FRC) has developed accounting standards, referred as Financial Reporting Standards (FRS) on the basis of which financial information should be reported. These standards can be further segregated into three categories, which include ‘Application of Financial Reporting Requirements’, ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and ‘Reduced Disclosure Framework’. The FRS is formulated in accordance with ‘International Accounting Standards Board’ (IASB) and ‘International Financial Reporting Standards’ (IFRS). The FRS regulations, applied in the UK are further used during the preparation of financial statements with the aim of ensuring that the statements and reports reveal true along with fair value about financial position and business transactions. Additionally, the accounting standards enable financial information users to be provided with adequate understandable quality, apart from ensuring that the financial information presented in the statements is in consistency with accounting standards that are applicable on an international basis. FRS also assists business organisations in possessing requirements in accordance with which, financial reports are to be prepared. In this context, the financial statements prepared in accordance with FRS can ensure that the economic information is reliable, complete, relevant and comparable. Respectively, compliance of the standards is aimed to ensure that financial statements and reports are prepared accurately, minimising the probable chances of accounting scandals. The implementation of these accounting policies along with standards may also increase complexities for directors and auditors to scrutinise the financial information appropriately due to the occurrences of numerous accounting standards (FRC, 2013). Besides the Companies Act 2006 and the FRS, the International Standard on Auditing (ISA) also provides guidance postulating standards in accordance with which, the auditors are required to scrutinise financial information. The auditors examining financial information on the basis of ‘true and fair frameworks’ and ‘compliance frameworks’, so that financial statements provide true along with fair financial information. True and fair framework ensures that financial information presented in the company reports are accurate as well as reliable. Similarly, compliance frameworks ensure financial information presented in the financial reports are in compliance with the regulatory accounting standards. In this context, the auditors, involved in examining the financial statements appropriately, shall be able to provide important information about the reports in written form. In this regard, the auditors may ensure that the financial statements are presented in accordance with the relevant framework of financial reporting. Additionally, the auditors, with the assistance of ISA, can ensure that the financial information revealed in the financial statements is reliable, relevant along with understandable. In this respect, the auditors examining the financial reports ascertain that accurate as well as values are depicted. Consequently, the auditors, examining the financial statements with the assistance of ISA, shall able to mitigate the occurrence of accounting scandals significantly (FRC, 2013). Conclusions In the present business scenario, accounting plays a significant role in ensuring that the financial statements provide accurate and true information. Accounting is a technique of identifying, measuring along with communicating financial information of business organisations to users including stakeholders and government among others. Additionally, after the incidents of accounting scandals in business organisations that include Enron and WorldCom among others, the government and the regulatory bodies formulated and reformed accounting policies and standards in order to mitigate fraudulence and accounting misrepresentation. Arguably, the introduction of new and reformed accounting standards has provided adequate responsibility to BODs and auditors to ensure that financial statements are prepared according to desired accounting policies. In this respect, the BODs and the auditors play an effective role in determining that financial information reveals true as well as accurate values. Moreover, preparations and examinations of financial statements, in accordance with relevant company accounting policies along with regulatory standards, can help in minimising the occurrences of financial scandals and financial statements misrepresentations to a noteworthy extent. References Anderson, R. C., Mansi, S. A. and Reeb, D. M. (2003). Board Characteristics, Accounting Report Integrity, and the Cost of Debt. SSRN: 1-40. Carnegie, G. D. and Napier, C. J. (2009). Traditional accountants and business professionals: Portraying the accounting profession after Enron. Working Paper Series: 1-30. Charles Russell LLC. (2012). Directors’ Responsibilities. File: 1-16. Dart, E. (2011). UK investors’ perceptions of auditor independence. The British Accounting Review, 43(3): 173-185. Dart, J. (2011). A guide to directors’ responsibilities under the Companies Act 2006. Business Law: 1-131. Elliott, B. and Elliot, J. (2011). Financial Accounting and Reporting. United Kingdom: Pearson Education Limited. FRC. (2013). The Financial Reporting Standard applicable in the UK and Republic of Ireland. Publications: 3-314. FRC. (2013). International Standard on Auditing (UK and Ireland) 700. Audit and assurance: 1-26. Palepu, K. and Healy, P. (2007). Business Analysis and Valuation: Using Financial Statements. Canada: Cengage Learning. Stolowy, H. and Lebas, M. (2006). Financial Accounting and Reporting: A Global Perspective. Canada: Cengage Learning EMEA. Read More