Auditing and Ethical Practice - Run Corp Ltd and One Tel Investment Ltd in Australia Stock Exchange - Example

Name of the student: Course Tittle: Name of the professor: Date Table of Contents Table of Contents 2 1.0 Introduction 2 2.0 Reasons for Collapse 3 3.0 The Corporate Act 2001 and code of ethics 4 4.1 Failure by management 6 4.2 Function and role of auditors in the collapse 7 5.0 The Corporate Act 2001 and the Sarbanes Oxley 12 Reference 13 1.0 Introduction This paper discusses two companies that have been deregistered in Australia Stock Exchange for the period 2011-2014 due to various factors. The companies under this analysis include Run Corp Limited and the One Tel Investment limited in the Australia Stock Exchange following compulsory acquisition by Wealth Mining Pty Ltd under its takeover following compulsory acquisition while One Tel collapsed and closed its operation as it was delisted from the stock trading. Corp Limited main activity is retail activity in real estate industry while One Tel was operating in communication industry (An RUN , 2013) In section 225 of the Australian Security and Investment Commission 2001, the financial reporting commission is vested with the responsibility for monitoring the effectiveness of the independence of auditor requirements for the public listed companies. The financial reporting commission is also given responsibility of monitoring the overall company’s compliance with the IFRS and another audit related disclosure requirements in which they give accounting, profession body reports and come up with methods of improving their assurance programs. One Tel is also one of the giant telecommunication company established in Australia. The Company enjoyed success since its inception and wanted to enter into the world market, but this dream was short leave (An RUN , 2013) In order to improve the auditor’s independence and functions, there are several rules and arrangements, which the FRC has put down, they include: i. Responsible for establishing the independence of audit Committee and how they are being monitored its activities associated work programs with the performance of the functions and ii. Exchange information program and regular meetings with selected organizations and audit firms 2.0 Reasons for Collapse The collapse of the two companies Corp Limited and the One Tel can be associated with many reasons including mismanagement of the resource, poor cash flow management, poor liquidity, lack of auditor independence and poor ethical standards by the auditors and management. Poor credit, liquidity management and low utilization of the shareholder's equity that has led to the collapse of the firms. 3.0 The Corporate Act 2001 and code of ethics Australia Federal government has set comprehensive legislative and professional requirements concerning the auditor’s independence. Some of the cardinal requirements include: i. Audit Standard ASA 220 dealing with the quality control for audits of the historical financial information that was given by assurance and Audit Standard Board in April 2006 ii. Part 290 of the code of Ethics for professional Accountants (APES 110) given by Australian Standard Board (APESB) in June 2006; and iii. APES 320 Quality control for firms that was issued by the APESB in May 2006 Under the Companies Act, all disclosing entities, public and other listed companies, which are registered, are required by law to prepare end year financial reports and have them audited. Authorized auditors that are registered by the ASIC and auditors must audit the reports. Audit and assurance is their main reasons and aim of (APES 110), one of the distinguished the profession as the most special as it takes its own responsibility and act in a way the will always maintain public confidence and interest. Moreover, the responsibility of the members is not to satisfy the need of individual client but public in general The three major component of the code include: i. Responsibility by the auditor to identify threats to compliance with fundamental principles; ii. Auditors’ to evaluate the significance of the threats identified during audit activity and lastly iv. To apply safeguards, where and when necessary in order to eliminate the threats and reduce them to an acceptable level. The fundamental principle of the code states that members shall comply with the following fundamental principles at any given time: i. Integrity – Auditors must be straightforward and honest in all professional and other related business relationships during and after their functions. ii. Objectivity – Auditors not at any given time should allow bias, conflict of interest or any undue influence other to override professional duty or business judgments iii. Due care and professional competence – auditors are expected to maintain professional knowledge and skills at the required level to ensure that their clients receive competent professional services that are purely based on current development and practices, techniques and legislation and should act diligently, and in accordance with the applicable technical and professional standards. iv. Confidentiality – the auditors should respect the confidentiality of information acquired because of professional and business relationship. Therefore, auditors’ should not disclose any such information to third party without specific and proper authority, unless there is a legal right and duty to disclose such information, nor use such information for the personal advantage of the members or for the third party. v. Professional behavior- the auditors are required to comply with the relevant laws and regulations and avoid any action that may discredits the profession. Following the audit report and the responsibilities bestowed upon auditors, there was contravention of the code of ethics by the auditors of the two companies following their collapse and deregistration from the Australia Stock exchange. The negligence was also present in the part of the management as they were not able to advise the shareholders accordingly concerning the actual activities of the company. 4.1 Failure by management The failure and deregistration of RUN and One Tel. can be attributed to the negligence by the management to give proper approach to the mistakes and risks as they were coming. From the cash flow statement of the two companies, they indicate that the companies were generating enough cash flow from the operating activities and these were able to meet their daily operation activities. However, the statements were overstated according to audit board as the companies were posting huge profits that were not real. The directors of the two companies had failed to act in line with shareholders interest. They decided to pursue their personal interest regarding to the management of the company hence contravening the agency relationship. Both firms in their ambitious expansion plans in which they approved without prior considering their consequences and failed to put proper control systems in place for the company. The directors contravene section 180 to 183 of the Corporate Act 2001, hence they should be held personally liable. The chief finance officers also contributed to the collapse of the two companies. As qualified accountants, the finance officers ought to take responsibility and ensure that the reporting are done in accordance with the laid down rules and in case of any discrepancies, the finance officers could have act in a swift manner and take corrective actions in regard to the discrepancies. The failure of finance department includes poor debtors aging and cash balances couple with poor cash flow statements. For One Tel Company for example, the directors approved bonuses payment though the company reported a loss of about to $ 291 million. This was against the code of ethics of the company and expected behavior of directors. 4.2 Function and role of auditors in the collapse The auditors had also failed their duty to protect the company from closing down. From the liquidity risk analysis it is apparent that failure of the companies were on the way coming. Current ratio The current ratio is used to measure a company’s ability to meet its short-term financial commitments, without threatening its financial stability. The ratio relies on the company’s current assets and current liabilities, since it is believed that a company should use its short-term assets to meet short-term liabilities. Current ratio = Current assets Current liabilities Run Corp Ltd = 3,749 / 9,954 = 0.40 One Tel = 28,280/ 55,620 = 0.508 If the current ratio is less than one then it is a bad sign for the company’s survival, since it indicates that the company may not be able to meet its current liabilities. From the analysis, the current ratio of Run Corp Ltd is 0.40 indicating poor performance by the company and this might be one of the reasons for collapse of the company (One.Tel auditor, 2012). In any way, this is not in accordance with audit code of conduct or ethics therefore the auditors performed their duty in accordance with the Corporate Act 2001 and Code of Ethics for professional Accountants (APES 110). For One Tel Ltd the current ratio is 0.508, which is less than one mark, it shows that the company is not performing quite well in terms of liability management and they are able to complete their short-term obligation when the need arises. This could be one of the major reasons for the company collapse so the auditors right to state that the company financial statements are in compliance of IFRS and undue influence was not present when auditors were performing their duties. Acid test Ration The acid test ratio takes only those current assets that are readily convertible to cash i.e. it exclude inventory (Carey and 2001). The Quick (or Acid Test) Ratio is a more effective indicator of liquidity as it only takes into account the most liquid assets (cash and net accounts receivables in this case) and does not take into consideration current assets that are considered as less liquid including inventory and office supplies Acid test = Current assets minus stocks Current liabilities Run Corp Ltd = (3,749 -123) / 9,954 = 0.36 One Tel = (28,280 -2342)/ 5,5620 = 0.466 The Run Corp Ltd ratio is 0.36 indicating that the company is not liquid enough to meet it short-term obligation. This is a clear indication of poor performance in part of the company and their liquidity objectives are not met. For One Tel the ratio is 0.466 indicating that the company is liquid and able to meet its short term obligated compared. It is a good indication of good performance and the company is doing well. Run Corp Ltd has an objective of maintaining sufficient cash on hand and un-drawn bank facilities to meet ongoing capital requirements by the company. The excess of the company current liability over current asset reflects the poor performance of the company. Current liabilities also include the $4 million deposit received from Rental Management Australia that will be converted into equity The maturity analysis of the financial assets and liabilities based on the management expectation are as follows Year ended June 2013 6 months 6-12 month 1-2 year 2 and above Cash & cash equivalents 3,074 - - Trade & other receivables 650 - - Trade & other payables 4170 570 247 - Interest bearing borrowings 7519 1103 2140 13037 Bank guarantees 281 - - - - Net maturity -7,642 -1673 -2,387 -13,037 For One Tel, the main objective of the group’s financial risk management approach seeks to minimize potential adverse effects due to the unpredictability of financial markets. The company is not performing well in terms of their liquidity and this shows that the company is not living to achieve its objectives. Return on Shareholders’ Funds (ROSF) Return on Shareholders’ Funds can be fined as ratio of profit after tax and company equity. It is used to measure the company ability to reinvest resources for income generation. The ratio is calculated by dividing net income by total equity, enabling investors to know the efficiency with which company assets are being used to generate revenue. Return on Shareholders’ Funds (ROSF) = Profit after Tax Total Equity Run Corp Ltd = 1,518 /18,718 = 8.11% One Tel = $ (7,212) /56,595 = -12.74% The higher the ROSF the better a company is at utilizing resources for revenue generation, hence the more profitable the company is likely to become. With ROSF 8.11%, Run Corp Ltd Company is doing well in utilizing the shareholders equity since they have reported high return on shareholders fund and this could not be the possible reason for closing up. With ROSF -12.74% One Tel is performing poorly in terms of return on shareowners fund hence the company is not good in investing and this might support the takeover hence they are delisted from the stock exchange (Carson, 2005). Two different companies and the current one is Ernst & Young had audited One Tel and is the same audit firm auditing RUN limited. The audit firm has failed to respect the responsibility concerning advising the two companies which have collapsed. The evidence is overwhelming from the liquidity risk analysis of the company and the cash flow statement, though the auditors goes ahead and admits that the accounts and financial statements are in accordance with the IFRS and the financial officers overstated the profit. The auditor’s board found that there are several items that did not meet the reporting standard as per the Australia accounting standards. The audit board also found that the audited reports were in breach of the corporation Act and did not meet ethical standards required by (APES 110). Currently there is no case against the audit company and the company is one of the respected audit firms globally. The auditors’ board is still in the process of evaluating the extent of damage that might have been caused to the RUN ltd by the audit since its case is recent and the work of auditing and analyzing its past records is on. Ethically, the audit firm did not leave to the professional expectation as spelled in APES 110, the directors can be assumed to have misled the auditors. The auditor’s independence was compromised in the process of carrying out their duties. Earnest and Young was the same auditors to the majority shareholders of the One Tel company and at the same time accepting to audit the One Tel. the familiarity independency was compromised. Following APES section 290 part 13, states that if a firm is considered as a network firm, the firm should be very much independent from the audit clients of other networks. This was contrary to One Tel and Earnest and Young, therefore there was in independence during the audit and lack of professionalism. The five fundamentals of ethical activities during audit as explained by APES 110 section 5 was lacking. They include: Integrity- Eanrst and Young were not straightforward in offering their services to the two firms since they lack ethical integrity as they contravene section 290 of APES. Professional behavior- as the APES 110 section 150 states that all professional bodies are bound to with the laws and regulation guiding the profession. The auditors contrived this act hence lack the professional behavior as expected. Objectivity- to the total and overall services provided by the auditors to the two companies, they were very many and lacked objectivity. 5.0 The Corporate Act 2001 and the Sarbanes Oxley According to the Australian Corporate Act 2001, auditors have the responsibility and duty to conduct an audit in accordance with Australian Auditing Standard to provide reasonable assurance whether the financial statements are free of material misstatement following the set audit procedures and framework laid down by the audit committee. While in Sarbanes the auditors has no responsibility of the collapse of the firm (Carson, 2005). According to Australian Corporate Act 2001, auditors are being held personally responsible for negligence and the collapse of the company while in Sarbanes Oxley this is not present. In actual sense, the Corporate Act 2001 is more in line with the IFRS and GAAP more than the Sarbanes Oxley (Carson, 2005). Reference An RUN (2013)Annnual Report RUN ltd for the year ending 2013: http://www. Corp limited. Aust.com business weakly Carson, V. 2005. "One.Tel auditor denies conflict". The Australian (Canberra, A.C.T.) (1038-8761), p. 22. http://0-global.factiva.com.library.ecu.edu.au/ha/default.aspx One.Tel auditor was linked to Packer. Retrieved 10 April 2014 from http://www.smh.com.au/news/business/onetel-auditor-was-linked-to-packer/2005/10/25/1130239522655.html Read More