Failure to Exercise Due Professional Care and the Appropriate Level of Professional Skepticism - Essay Example

Failure to Exercise due Professional Care and the Appropriate Level of Professional Skepticism Introduction The recent failure of auditing firms has been drawn a greater attention for the organizations to ensure adequate quality and compliance with the auditing functions. In relation to the recent observation, there is a number of renowned auditing firms that had been witnessed to collapse due to their ineffective practice of professional skepticism in the auditing processes. The failure of professional care and appropriate skepticism associated with the auditing practices has further been observed to create major financial risk not only for the industry in which the company operates but its impact has resulted to have significant effect on the overall economy (Plumlee et al., 2012). The failure of Enron in the 2001 is one of the major examples of lack of professional skepticism due to the company’s fraud in accounting along with mismatch representation of the audit reports. In this regard, the practice of a well-built professional mechanism and adequate professional skepticism has been considered as a set of key exercises for the modern auditing and financial institutions to avert various possible threats (Hansen, 2011). The report intends to critically justify the major roles and importance of professionalism characteristics along with an effective practice of skepticism in terms of eliminating fraud and irresponsible auditing practices of the firms. In order to achieve the aforesaid objective, the research report would critically explore major failure of the auditing and financial institutions due to their ineffective practice of professional skepticism. The paper also justifies why the failure of professional care and professional skepticism leads to emerge a growing risk for the modern financial and auditing firms. 2. Critical Assessment of the Problem The accounting and auditing process of the practitioners are highly correlated with the global financial status. According to the modern financial status of the various countries, it can be observed that the organizations seek to associate quality based auditing and assurance report of their financial records. In the present day context, the auditing profession are highly inclined towards responding to the changes in the auditing environment particularly due to the emerging criticism witnessed by many renowned auditing firms (The Association of Chartered Certified Accountants, 2011). In this regard, organizations are frequently observed to involve in number of fraudulent acts pertaining to the financial reporting due to the lack of auditors to demonstrate adequate professional skepticism. Failure of exercising professional skepticism can be considered as one of the key concerning issues for the auditing firms in the present business environment. The issue has been considered to lead a significant problem for the firms to maintain strong set of auditing policies. The failure of exercising professional skepticism can be defined as a major set of fraudulent practices that are often observed to impose a number of risks and challenges to the firms to remain sustainable. With regard to the recent collapse of different auditing firms, it has been widely witnessed that the failure of professionalism and skepticism generally involves few major characteristic that have major impact on the auditing functions performed by the firms in financial reporting (Plumlee et al., 2012). 2.1 Importance of the Professional Skepticism for the Auditor In relation to the concept of professional standards, the term professional skepticism generally defines a nature of ‘question mind, which seeks to critically assess the audit evidences. During the process of making professional judgment, the auditors of a firm can direct professional skepticism towards both auditing evidences and decision making processes of the firm. With regard to the Statement on Auditing Standards (SASs), the professional skepticism of the auditors provides significant emphasis towards increasing quality and reliability of the reporting practices. In this regards, SAS 57 and 67 greatly emphasizes that the integration of an appropriate skepticism by auditors can enable them to be considered as a valid evidence regarding the overall auditing practices of the firm and thus can reduce the inconsistency of financial reporting (Grenier, 2010). With reference to the various auditing standards, the practice of an appropriate professional skepticism has been emphasized in order to increase efficiency and reliability of the financial information of the firms. It reflects an exceptional characteristics or traits of the auditors to formulate and clearly assess different financial information of the firm that ensure transparent, accurate and reliable communication of the financial reporting to the stakeholders of the firms. The accountability of the auditors in this context can be referred as a key factor of professional skepticism that enables the auditing firms to promote fair practice of the financial information. The factor of professional skepticism tends to build a strong guidelines in accordance with the accounting standards and ensures to protect auditing functions from different types of fraudulent or misrepresentation of financial records (Carpenter et al., 2002). The adequate compliance with appropriate professional skepticism of the auditors enable the firms to build a strong sustainability. In this context, it is worth mentioning that the complying an appropriate professional skepticism improves firms performance to meet the desired expectation of the stakeholders and ensure to deliver valuable financial information more accurately. The accountability of the auditors also protects the interests of the investors and keep them to remain as the key groups of stakeholders of the firms. Moreover, it also enables the auditors to critically justify each financial elements and ensures to report each financial elements to the both internal and external groups of stakeholders. Besides, transparency can also be considered as a strong characteristics in the professional skepticism of the auditors. The nature of transparency regarding the choice of auditing method and different practices associated with different reporting activities can also be reckoned as few of the major aspects of professional skepticism. In this regard, the nature of maintaining adequate transparency of the auditing practices increases the level of skepticism of the auditors and ensure to protect firms from numbers of potential threats or market uncertainties. In this regard, it can be stated that professional skepticism is one of the key attributes of a firm to increase its strong and sustainable position (Carpenter et al., 2002). 3. Evaluating the Implication of the Issues with Real World Examples According to the auditing standard guidelines, the standardized layout of audit report reflects a set of financial statements that includes laws, various financial principles along with compliance of fraud detection and illegal activities within the financial portfolio. The basic standards of an audit report significantly possess the activities which should be practiced by the auditors at the end of each financial statement. The auditor needs to prepare the report based on appropriate methods that would further enable investors as well as other interested parties with ease of understanding. The contents of the financial report should be free from ambiguity or vagueness, however it should include relevant financial evidences and also be supported with specified objectives and constructive information (Jickling, 2002). Nonetheless, it can also be observed that the organizations also skip over various interpretive guideline of ASB in their auditing process which often lead towards poor representation of the financial information. In this regard, an adequate characteristics of professional skepticism ensures to protect both the stakeholders from any possible uncertainties arising from fraudulent practices executed with the firms. The typical failure of Enron Corporation (Enron) in the year 2001 can be considered as one of the major examples of the failure of professional skepticism that led the company to face radical breakdown. The collapse of Enron is often stated as one of the major breakdowns in the present unconventional global economy, exhibiting the significance of corporate governance efficiency (Jickling, 2002). The failure of Enron apparently indicated towards the influence caused by illegitimate practices of company’s decision makers and auditors that led the company to face major financial breakdown. The accounting scandal and various types of fraudulent auditing practices of the board of directors had been observed to contribute Enron to face a major bankruptcy (Flint, n.d.). In the similar context, the audit failure of WorldCom is also a real world examples which had also face major bankruptcy due to the inadequate practice of professional skepticism in its auditing functions (Committee on Governmental Affairs United States Senate, 2002). The concept of corporate governance in the auditing functions has always been recognized as one of the major and most essential practices of the auditors to redefine their level of professional skepticism. Contextually, theorists have often suggested that effectively performing business operations and achieving the desired business objectives can happen in a much convenient manner with the aid of effective corporate governance. An effective framework of the organizational corporate governance principally denotes the ethical appropriateness of practices performed by the organization that in turn assists in ensuring adequate transparency, loyalty along with integrity throughout its operations, securing the well-being of the company stakeholders (Solomon, 2011). 4. Possible Solution to the Issue With regard to the overall discussion of the issue, it has been significantly observed that professional skepticism tends to increase the reliability and accountability to strengthen the firms’ long-term sustainability. The real-world experience in the global auditing and accounting practices have been widely judged to be the consequences of professional skepticism failure revealed by many auditors in the past. In order to deal with the challenges driven by the failure professional skepticism, there can be identified numbers of strategies that can enable the modern firms to avert major implication of the issue. Few of the key strategies have been briefly describes in the following section. 4.1 Ensuring Adequate Compliance with the Auditing Codes The failure of professional skepticism is one of the key leading factors to have major impact not only on the firm’s financial position, it has also been observed to weaken the sustainability of the firms. In order to deal with the negative consequences of the issue, the adequate compliance with auditing codes and standards can be considered as a key factor for the auditors to maintain their level of professional skepticism. In order to comply with the codes, the auditors should focus on practicing globally accepted standards and policies that can ensure the auditors to maintain adequate accountability, transparency and reliability while reporting financial performance of the firms (Strine, 2011). 4.2 Corporate Governance Corporate governance is also identified to instrumental in monitoring and evaluating the performance of the auditors that ultimately contributes towards promoting professional skepticism. It provides the structure on the basis of which performance of a business organization can be optimized (Shil, 2008). In relation to the problems associated with the failure of professional skepticism, the rules, systems, relationship as well as processes on the basis of which operations are executed in corporations can significantly improve the level of professional skepticism of the auditors. A well-built framework of corporate governance also incorporates strong guiding principles relating to the critical examination of financial data with adequate evidence that ensure to protect reliability and accountability of the financial information. Moreover, an effective governance framework can also be ascertained promote fairness and accountability of the different auditing practices that can also strengthen the professional skepticism of the auditors (Shil, 2008). 4.3 Fairness and Accountability The implementation of fairness and accountability in the decision making process leads to considerable improvements in the auditing practices of the firms. The adequate fairness and accountability in financial reporting enable auditors to demonstrate their level of skepticism and further help to reduce various types of potential issues to be faced by the firms. Additionally, adequate fairness and accountability of the auditors towards the board and shareholder groups also ensure building competitive position of the firms and preserve long-term sustainability in the present global economy. Therefore, nature of maintaining fairness and accountability can be considered as a set of key practices for the auditors to minimize the risk arising from the failure of professional skepticism (Benston & Hartgraves, 2002). 4.4 Improving Internal Strategic Measures The continuous improvement of the internal strategic and operational functions can further enable firms to reduce the risks associated with the failure of professional skepticism. In this regard, the board of directors and other executive members must need to critically monitor each accounting function and equity methods used by the auditors which enable them to prevent severe risks of bankruptcy. In addition, the organizational system and structure of the board of directors and senior executive members have also been identified as few of the key strategic measures that contribute to improving professional skepticism of the auditors while practicing accounting activities (Benston & Hartgraves, 2002). In addition to the concern issue regarding the failure of professional skepticism, the continuous practice of maintaining an effective culture between the board of directors and executive and non-executive members can also increase the fair and transparent financial reporting. The adherence of a strong corporate or organizational culture would also enable the auditors to mitigate various risks that can be driven by the failure of professional skepticism. 5. Conclusion Over the past few decades, the notion of professional skepticism has been identified to play a crucial role for the firms to improve the quality of their reporting functions. It generally provides adequate support on minimizing various types of auditing issues and build strong shield towards the protection of the firms from potential threats associated with financial fraud and malpractice. In relation to the observation of the issue, the failure of maintaining professional care and appropriate level of professional skepticism had been recognized as a key concerning areas for the firms that has contributed towards may financial challenges. In order to mitigate the risks that are generally derived from the problem, the adequate compliance with auditing standards and policies can significantly enable the firms to improve their level of skepticism. Moreover, the strengthening corporate governance framework and ensuring continuous improvement of fairness and accountability relating to the auditing practices can also help firms to avoid the failure of professional skepticism. In addition, to the risk mitigation measures, the concept of improving internal strategic and operational measures can also enable firms to evade the risk of failure in professional skepticism of the auditors. References Benston, G. J. & Hartgraves, A. L., 2002. Enron: What happened and what we can learn from it. Journal of Accounting and Public Policy 21, 105-127. Carpenter, T., Durtschi, C. & Gaynor, L. M. (2002). The role of experience in professional skepticism, knowledge acquisition, and fraud detection. Retrieved from http://aaahq.org/audit/midyear/03midyear/papers/MidYear%20Paper%20(No%20Appendix).pdf Committee on Governmental Affairs United States Senate. (2002). The role of the board of directors in Enron’s collapse. 107th Congress 2d Session, 1-57. Flint, A. J. (n.d.). Solutions to corruption in the auditing profession. Retrieved from http://www.cbfa.org/Flint.pdf Grenier, J. H. (2010). Encouraging professional skepticism in the industry specialization era: A dual-process model and an experimental test. Retrieved from https://www.ideals.illinois.edu/bitstream/handle/2142/16041/1_Grenier_Jonathan.pdf?sequence=3 Hansen, B. R., 2011. Effective Corporate Governance? Corporate Governance in the United States, 1-33. Jickling, M. (2002). The Enron collapse: An overview of financial issues. CRS Report for Congress, CRS1-CRS5. Plumlee, D., Rixom, B. A. & Rosman, A. J. (2012). Training auditors to think sceptically. Retrieved from http://web.ku.edu/~audsymp/myssi/_pdf/Plumlee%20et%20al.%202012%20Training%20Auditors%20to%20Think%20Skeptically%20-%20April%202012%20KU%20Symposium.pdf Solomon, J., 2011. Corporate governance and accountability. The United States of America: John Wiley & Sons. Shil, N. C., 2008. Accounting for good corporate governance. JOAAG 3(1), 22-31. Strine, Jr. L. E., 2011. One fundamental corporate governance question we face: Can corporations be managed for the long term unless their powerful electorates also act and think long term? The Business Lawyer l(66), 1-26. The Association of Chartered Certified Accountants. (2011). Audit under fire: a review of the post-financial crisis inquiries. Retrieved from http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-af-auf.pdf Read More