The Future of External Audit - Coursework Example

Name of student Professor’s name Course name 13th December 2013 The future of external audit Auditing is a process that has attained much ground and much fame among many organizations in the world today. Whereas to most organization, particularly public organizations require that auditing be carried out as one of the statutory values, other companies just prefer to conduct auditing activities to win investor confidence. An investor needs to have some confidence in a certain organization before he or she can decide to lay down resources to buy stocks of this company (Chea 13). How does auditing assist in the accomplishment of this purpose? Technically, auditing promotes transparency in various organizations. This research paper shows how the process of auditing influences how companies are perceived by other people out here including external investors. As stated in the introductory part of this paper, it is important to evoke the confidence of the potential investor in a certain company. The functions and the auditing are usually most eminent when it comes to the end of a certain fiscal year and companies have to post their earnings and revenues. Most organizations have designed and came up with departments that are meant to handle audit issues. Other organizations prefer to have their auditing taken care of by external bodies. There are various reasons which make these organizations prefer to have their auditing handled by people from outside their ranks. Having external auditors conduct the audit process creates an avenue of transparency in the organization. Recommendations on how external auditing as a process could be made better has been offered in this paper. The paper will also examine the trend in financial reporting and examine the future of external audit. A conclusive section that ties the discussion offered in this paper will be given at the end. External auditor definition Before this paper engages into a discussion of the roles and effects of the external auditors, it is important to give a definition of the external auditor in this portion. Haron defines eternal auditors as people or organizations which examine the various financial records as well as transactions that a business engages itself in over a particular fiscal year or period. The external auditors do not have any affiliation whatsoever to the company or organization for which they are conducting the auditing (Power 199). This gives them autonomy and the chance to be able to offer unbiased reviews of the company that they have been mandated to review. External auditors may work as single individuals or business firms which have specialized in the offering of auditing services. External auditors roles There are various roles that are associated with external auditors. Some of these roles have been highlighted in the following paragraphs. One of the roles of external auditors is the capacity of the auditors to be able to offer a comprehensive and analytical examination of the financial records of a certain company or business entity (Agboola et al 94). More often than not, external auditors are individuals who have attained high levels of academic excellence and who use their qualifications to enable them offer analysis of various companies. Other external auditors have vast years of experience as auditors and financial analysts of various companies. External auditors take an analytical approach to the books of account of various companies and try to establish various facets such as avenues where revenues could be lost through massive and unwarranted expenses, cost cutting activities among other issues. Technically, when a company hires external auditors, it normally wants these auditors to put the financial position of the company in check. This is done through establishing various avenues where the company could be losing money and proposing various ways to reverse the same. An external auditor is also tasked with the role of making reports pertaining to how a particular company is governed (Ghoshal 78). For instance, after they conduct their analysis, the audit officers then present the findings to the party that had employed them to conduct this analysis. Normally, auditors have a very keen eye for errors and it is their responsibility to ensure that the company does not lose money through unwarranted costs and expenses. Auditors have a role of maintaining confidence the work. This is easily achieved through the aspect that by being external parties and entities to the organization, they do not lean on any side. The analysis that they conduct is taken to be unbiased and a true reflection of the position of the company at a particular period of time. Auditors are also tasked with the role of making recommendations onto how a certain company could work optimally ensuring that there are no leakages associated with increased costs and expenses. These recommendations and their application are normally very valued by the concerned parties. These external auditors give a plan on how the same is to be applied and the implication of the application of the plans set out by them. In some cases, the external auditors are hired to pioneer the application of changes that they come up with in their recommendations. At this point, the management of the organization works closely to the external auditors to ensure that they succeed in this endeavor. Technically, external auditors provide a platform for change and better management skills to the company in which they have been hired to audit. Therefore, external auditors can be summarized as being advisers, financial wizards as well as managers in a certain setup. Users of audit information There are several target users of the audit information that is provided by these external auditors. Some of these target users have been described in the following paragraphs. One of the major users of audit information is the government. The government needs to know in all sincerity how much a particular company makes in form of revenues in a certain fiscal year. This information is then utilized by the concerned government agency to determine how much that a specific company should pay in form of taxes (James et al 160). Companies may also order an independent audit of its operations to determine whether it is moving forward in its accomplishment of the goals and objectives it has set out for itself on the onset. Sometimes, companies may find themselves sidelined by various factors and this makes it hard for them to fulfill their goals and objectives. To assist them get back onto this track, they hire the services of the external auditor. Potential investors who are interested in a particular company also find the information provided by various external auditors extremely useful. This is because normally, the information given by these auditors gives a true reflection of the company’s financial position. This influences to a very large extent the decision that these investors make on whether to invest in the company or not. The information given by various external auditors prevents the potential investors from taking uncalculated risks and avoid unnecessary loss of resources. The employees and management of the organization also need the services of the external auditor to determine how well they are fairing so that they can determine other factors such as bonuses and payment increases to workers. They need to know whether a proposed bonus would be justified or whether a certain proposed project would be afforded from the financial position of the company. It shows which areas are weaker in the company as well as the strong areas. Managers may then be in a position to fix these areas that are considered weak points to enable the company achieved its goals and objectives of profit maximization. Auditors go through the financial accounts and transactions of a certain company with a lot of precision. This enables them to be able to pinpoint avenues where there are cash outflows from the company that cannot be warranted. These unwarranted cash flows are reviewed and if possible, brought to an end. Basically, external auditors serve to increase efficiency in a certain organization through reducing avenues where cash outflow could occur without proper justification for the same (Rajendran 366). Other users of information provided through the audit process could be courts of law. Sometimes, fraudulent activities may occur or a company may be suspected of engaging itself in fraudulent activities. The court of law is charged with the mandate of deciding whether these accusations hold ground or not. To be able to offer a comprehensive assessment of such a situation and be able to understand the financial transactions that a company has been engaged in, they employ the services of an external auditor. This external auditor will ensure that these companies do not get the chance to cook their books of accounts or change any records in their favor. The court evaluates the financial transactions that a certain company has been engaged in for a certain period of time to determine whether a fraudulent transaction was conducted. If the court utilized the services of an internal auditor, it would give them the chance to cook the data and the financial information would not be a true reflection of the actions of that specific company. The financial crisis of 2007 and lessons learnt from it The financial crises occurred between the years 2007 and 2009. This was a crisis that brought the financial and economic concepts of major countries across the world to its knees. Insurmountable amounts of money were lost. People lost their jobs and economies were on the blink of collapse. The financial crisis was a precipitation of various factors in the world. Companies borrowed and leveraged heavily. Money was given out to people without a proper background check and without ascertaining their capacity to pay back the amount of money lent to them. This resulted into a widespread crash and financial crises when it was established that people could actually not be able to pay back the loans given to them by the various banks across the world. Many banks had overstretched their borrowing capacities with the central bank and with their reserves depleted, they were not in a position to survive the crises. In a bid to try and sway off this crises, many of these banks and financial institutions struggled to raise additional funds from the public so that they could stay afloat. Many of these companies engaged in ‘book cooking’ so that they could present their situation as being good while this was not the true essence. Many of the investors who were duped into investing with them lost a great deal of money. The investor confidence hit an all-time low. The financial reports that most companies presented were not convincing to these investors who did not perceive them as true reflections of the companies’ financial situations. When the management of major companies realized that many investors were skeptical about the financial information that they received, they decided to start hiring the services of external auditors, these auditors were considered better and more truthful than the internal auditors because they did not have the disadvantages that were associated with the internal auditors. Whereas it was possible to influence how the internal auditors operated, it was harder to influence how the external auditors operated. The information and reports that were relayed by the external auditors was taken to be wholly substantial and as the truth. Investors made their decisions based on this information. From then, it became the norm of many companies to engage the services of external auditors every time they needed quantifiable and factual financial information pertaining to a certain company. it should be noted here however that the process of auditing is an old age process. The usage of external auditors has taken much root of late especially after the financial crisis of the 2007 to 2009. There were various lessons learnt from these crises. These are better form of communication had to be formulate between the various parties involved, and more reporting was needed, on an occasional basis. Before then, many companies rarely audited their books of accounts. After the crisis, it became almost as an unspoken rule that company had to offer an audit of its financial records at least once every year. This was done mostly at the end of every fiscal year of these companies. External auditors’ independence As mentioned earlier in a previous section of this paper, the sovereignty, autonomy and independence of the external auditors is what has led to their massive influence and acceptance in the corporate society today. To be able to provide financial advice and financial information to various parties and organizations without fear or bias, these external auditors need to maintain their distance from the company in which they are conducting the audit process. Typically, the implication in this case is that external auditors should have absolutely no affiliation to the company in which they are conducting their auditing activities. Lack of affiliation offers them the freedom to be able to conduct their affairs without the fear of being biased. They offer services without leaning on any side. These external auditors deliver facts and they analyze the position of the company from the financial data that is availed to them in contrast to using information relayed to them through the word of mouth. The external auditors are appointees of the board of directors of the company in which they have conducted their audit process. The internal auditors are employed by the company and as such they report directly to the supervising body or management body that gave them the employment opportunity. This constrains their independence factor. External auditors have their independence protected by the fact that they do not have their employment mandates taken through the organization. In other words, they do not have to operate within the boundaries of the organizations’ objectives and goals. This makes them have a lot of power and autonomy over other auditors out there. The external auditors do not have the responsibility of reporting their findings to the shareholders of the organization. Their roles end with the extent of reporting to the people who hired them, that is, the board of governors. From there, the board of governors takes over the mandate to issue instructions and make policies to the other stakeholders of the company. Challenges faced by the external auditors Like all other professions, the external auditors are also faced with a myriad of challenges. These challenges are highlighted in the following paragraphs. One of the notable challenges that external auditors are faced with is lack of cooperation from various workers in the companies that the auditing process is being conducted. Many workers view the existence of external auditors as a threat. The fact that most external auditors have it in their roles to ensure that they find gaps and avenues of cost minimization in a certain company is considered a threat in itself. One of the roles of the external auditors is to determine how various employees work and assess whether they are fulfilling their mandate by hitting their targets. The employees who have not hit the targets set out by the company feel threatened by the presence of these auditors. They perceive them as being there to get rid of their jobs. This often creates a lot of distaste directed towards these external auditors. This distaste leads to lack of cooperation from these workers. Lack of cooperation occurs on many different platforms. For instance, employees of a particular company may decide to refuse to answer various questions that these auditors ask from them. These workers feel that through answering these questions, they would be exposing themselves to the threat of losing their jobs. They may also hide or destroy important files which could be used by the external auditors to make informed decisions in the company. They take advantage of the fact that they know the internal operations better than the external auditors and so this makes it easy for them to hide some information from the external auditors. This information could prove to be very important in a way if the auditors could retrieve the same. Another challenge that is faced by these auditors is the act of condescending and intimidation from the superior officers in the various organizations they work in. Sometimes, these external auditors may find themselves in a situation whereby the superior officers in the organization that has mandated them to conduct the audit become overbearing to an extent that it affects the delivery of their work. These officers may interfere with how these auditors conduct their work, making them deliver unbiased work. Corruption is also another very huge challenge that external auditors have to fight every time (James et al 159). Through corruption measures, companies have been able to post information that is not fundamentally truthful because of coercion or corruption. Since corruption is a crime, the governments across the world have set up very strict measures and fines to curb the same. False information presented to investors through corrupt external auditors could lead to a lot of loss. To prevent this, it is important to ensure that measures have been put in place. Some managers do not feel comfortable at all handing over sensitive financial information to other people. This may lead to some of the managers censoring some information and this does not bring out the true picture of the company. Many managers do not feel very comfortable giving out sensitive financial information to third parties from scrutiny. They feel exposed. To be able to win the confidence and the trust of these managers is usually a very daunting task for the external auditors. Benefit versus cost of external auditing External auditing is normally an expensive and very extensive affair. Companies have to bring in new people from out there and introduce them to the company. They give them the financial details of the company and await their analysis. The costs of this process are high. However, the benefits of external auditing offset these costs. For instance, external auditing increases the potential investor’s confidence in investing in a certain company. This confidence makes them be able to invest in this company because they see that the company is transparent about its operations. Auditing process makes it easy to discover fraudulent activities that employees may have engaged in and assists the management to act accordingly to be able to catch the suspect before more losses are made. Through the process of auditing, companies are able to run more efficiently and avoid wastage of resources. External auditors offer advice on areas that they think that the company may be losing resources (Richard et al 37). Sometimes they even go to an extent of offering advice on the types and forms of employees that work in the company. In acute cases, the organization may hire the external auditors to be able to manage the company for them so that they can set it onto the path of redemption and efficiency. The costs involved in this case include the cost of hiring the services of the external auditors. Most times these auditors work in teams and based on their qualifications, they can be very expensive to hire. The benefit-cost analysis in this case shows that it would be better off to have the services of the external auditors because the advantages of the same outweigh the disadvantages. The costs might seem much in the short-run but in the long-run this would prove to be very economical to the organization involved. Recommendations Various recommendations pertaining to the process of external auditing and how the process can be made better have been offered here as the following paragraphs highlight. a) One of the recommendations offered here is that organizations should consider incorporating the use of technology in their auditing activities. With the rapid advancement in technology, many operations of many countries in the world have come to rely heavily on technology. Organizations should find a way to use softwares that are easy to use and interactive. They can then use these softwares to conduct external audit of their companies and operations. Usage of technology will not only reduce the time taken to conduct the audit, but will also save on time and costs involved. Technology will reduce the number of people involved in this process. b) It is important for managers and the auditors to act on a mutual feeling of trust and confidentiality. The management of the company should trust the external auditor to treat the information they receive confidentially. The external auditors on the other hand should be able to trust the management with the availing of all the relevant materials pertaining to financial information of the company without restraining anything. c) Companies should ensure that they either try to maintain a department within themselves that will be tasked with the capacity to conduct audit or ensure that they have a personnel who has the capacity to conduct impromptu audit activities in the company or when the demand arises. This is to make sure that the operations of the company are always in check and in line with the policies and procedures of the organization. d) Another recommendation to be made here is that when companies need to engage themselves in audit activities, they should do so at impulse. This random check will not give the employees the chance to clean up their files for presentation to the auditors and this gives a true reflection of their company’s position at that particular moment. This keeps the employees at their toes at any given moment. e) The management of the company should be able to ensure that they have routine checks to make sure that the employees are always in line with the policies and procedures that the company has set up for them. Trends in audit In the past, as noted here, audit was primarily carried out in such a way that it took care of financial aspect of the company. Potential investors were basically interested only in the financial situation of the various companies that they wished to invest in. They believed that the financial position gave a true reflection of the company’s performance and through this, they would be able to ascertain how the company would behave in the future. However, today, the competitive nature of the business world has led to various dynamics in the process of auditing. The role of auditing have diversified and grown larger and bigger each day. Today, the process of auditing incorporates management advisory amidst other very important factors (Ian 122). Companies have come to rely largely on the power of various auditors and audit services to be able to assess their strength at any given point. When a company needs to gain additional cash from the public through floating of more stocks in the market, it is a common norm of engaging the services of external auditors to ensure that they understand their true standing and are able to determine how much they should float to the market at that moment. Auditing has been used by shareholders to a very large extent today to find loopholes in management. The various stakeholders of a company need to know where weak areas are present in the company so that reversal measures can be instituted. The future of audit looks set. With the current competitive nature that many industries are engaged in, it has become particularly important for many to incorporate the services that external auditors bring to the company. The common factor in this case is the adoption of technology in the companies that engage in auditing activities. Companies which offer these services have grown huge owing to the fact that there is abundance of clientele in this business. More and more businesses are finding the services of external auditors invaluable. There is a lot of engagement today from external auditors in various fields of business. Even the government engages the services of external auditors to audit various ministries and departments to be able to ascertain without any doubt and biasness what happened in case of any misappropriation of funds. The external auditors have autonomy from the organizations in which they conduct their audit process. This is what makes them retain their strength and their viability even in the future. The future for the external auditing processes is still bright. Today, most of these external auditors have taken it upon themselves to incorporate into themselves various courses that are aligned with the auditing courses and structure. Some of the basic courses that these auditors have engaged in include accounting, finance, management as well as actuary among others. These courses have a positive bearing on the auditing process and course because they give these auditors the capacity to be able to conduct their duties in an interpolated manner. Many major companies have come up and brought together a pool of auditors whose main job is to assist many companies come out of a rut. They work closely with these companies to help them come out of the problems facing them and at the same time ensure that they achieve their goals and objectives. Conclusion The above discussion has offered a huge insight into the future of audit and the various roles that are associated with the audit process. The importance of external auditors has been emphasized in this paper. There are various roles that have been identified here that are accrued to the external auditors. One of those roles is the capacity of the auditors to provide confidence in the financial standing of a company through a provision of unbiased analysis of the company’s books of account. The importance of the roles that these auditors play in evaluation of a company ‘s strategies. It has been shown here that external auditors point out the weaknesses that a certain company has and provide solutions for the reversal of the same. There are various recommendations that have been made in this paper pertaining to the topic of discussion. Some of them include the adoption and use of technology in the process of auditing. With the technological advancement that the world has experienced in the last decade, it has become important for external auditors to adopt the use of technology as a way of ensuring that they maintain their relevance today. The role of external auditors during the financial crises that occurred in the world in the year 2007 and 2009 has also been looked into in this paper. Various users of auditing information have been identified in this case and the way they use this information highlighted too. The trend and the future of external auditing has been observed as having the practice being on the rise because many investors today are more informed and they require substantiated evidence to be able to make informed decision on where to invest. In conclusion, it can be stated that the future of external auditing is solid. 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