Auditor's Liability in China - Assignment Example

Australian Catholic University AUDITING AND ASSURANCE SERVICES INDIVIDUAL ASSIGNMENT STUDENT NAME: ADM. NO: COURSE CODE: ACCT. 300 LECTURER 9/27/2012 ESSAY ACCT 300 Auditing and Assurance Services Section A Question 1 All Australian universities have their expected Graduate Attributes (GA). ACU expects that, on successful completion of the units, students will have developed their ability to, among other attributes: Three reasons in point form why you should fail the student; 1. Greediness: Majority of institutions will commit their effort in the pursuit of truth and academic freedom, thus building up its students’ fraternity. First things first, ethical perception is paramount in student development, but the student advocacy for greed intervention by concentration on maximising of profit at all costs is wrong. He/she will be going against societal norms or concerns of ethical perspective. The main aim of ethical perspective for graduates is to mould them to future managers who will be in position to enhance ethical ideas with the customers. This tend to get their customers actively involved in the procedures and events to the extent potential and suitable as well as showing respect for the autonomy of their clients implies not making a decision for clients, nor fostering dependent attitudes and behaviours. 2. Irresponsible: The student’s carelessness on common good of environment and society will also force him/her to be failed. It is expected that students should recognise their responsibility to the common good of the environment and society by showing their contributions to achieve great things. An intervention that is demonstrated through their leadership skills, community engagement and academic achievements. 3. Disrespect to human dignity and diversity: Graduate are expected to help attend to all that is of concern to human beings, thus bringing a distinguishing ethical perspective to the universal tasks of higher education. As such endeavours form a strong concern for justice and equity to the entire fraternity of mankind. This development is accomplished through openly teaching and assessing the graduate’s attributes within each course. But the students show that they does not respect for the dignity of each individual and for human diversity will force a tutor or lecturer to fail them in the course and appeal to them to demonstrate some concern to human beings. Three reasons why you should pass students Knowledge: Graduates have an in-depth knowledge in their chosen field of study and the ability to apply that knowledge in practice. Maximisation of profit is the key aim of any businessman or woman is to maximise profit at all costs. Thus, for students advocating for greed is good is fair and many people have utilised it to make utmost profit in business. Communication skills: The class is of open-minded people who respect their words and defend their actions. They share their views openly and know what they yearn for in life. Decision makers: The class is full of decision makers, people who value key decisions in business, “maximising profit”. They are not up to following other people beliefs in books like graduate attributes that were views of individuals. Question 2: cultivating the culture among employees of the institution such that they would respect The dignity of each individual in the society and human diversity is very paramount in work stations. In accounting firms, the values are fundamental in day-to-day work of an accountant. Indeed accountants and auditors add value to the financial reporting process through provision of an unbiased, objective opinion on the assertions made by management. Besides giving opinions on management affirmations concerning financial performance, they also offer an opinion on management affirmations in relation to the reliability of systems of internal control (Carr & Clarke, 2010, p.333). Such information is of great importance to the daily progress of a business or a company, thus embracing the dignity of each individual in the society. In consideration to human diversity, a C.E.O should nurture the talent of each employee to make sure what is best in him or her and encouraging consultative plans. The promotion of consultative arrangements in the workplace by communicating, influencing and consulting is part of a systematic approach to managing human diversity. It entails both the informal and formal processes of ensuring people in the organisation are informed about what is expected of them and have opportunities to effectively contribute in the decision making procedures. In regards to Carr and Clarke (2010), all teams be it management or subordinates are made up of individuals who possess their own beliefs, attitudes and expectations. These aspects are likely to affect their admiration for authority, their discernments of self-worth as well as significance within organisation. For this reason, these will affect their ability or desire to embrace change. As a C.E.O, one should respect the wishful beliefs and attitudes of each staff and by so doing nurturing the dignity of each individual in the society. Section B Question 1: The behavioural biases that could influence auditors’ judgment and opinion Real decision-making situations are characterised by complexity. They are influenced by many interdependent factors with inherent uncertainty. There is a continuous flow of information. Furthermore, decision problems are often not stable over time. To combat this complexity, financial decision makers (auditors) observe essentials, and try to reduce the dimensionality of the problem. Barberis and Thaler (2003) behavioural finance literature with focus on the aggregate market level, on the cross-section of average returns, on individual investor behaviour, and on corporate finance. Individual perspective is an application of psychology to financial markets. Barberis and Thaler (2003) list the most common biases that arise when people form certain beliefs and preferences. They comprise of overconfidence, optimism and wishful thoughts, representativeness, conservatism, anchoring and availability bias. Standard economists, however, may argue that individual biases are not that important, as individuals differ, so their biases should cancel out in the equilibrium. However, it is well-known that some biases can be systematic and persistent. Repeated patterns can even be used as a basis for prediction of behaviour of others, which is very important in the context of financial markets. In regards to Simunic,D.A. & Wu, X. (2009). Auditors’ judgment and consequent opinion add value to the financial reporting process through provision of an unbiased and objective opinions, however could sometimes be biased by personal aspects such as over-confidence; heuristics of representatives; framing, regret avoidance; and so on. Biases can arise both in the process of forming beliefs and preferences. In the more general sense, a bias can be defined as a departure from normative, optimal, or rational behaviour. Heuristics are rules of thumbs, procedures utilised in the processing of information and reasoning, often based on trial and error. They are importance as they make cognitively complicated assignments much easier, though, they could lead to methodical biases. When a biased behaviour becomes methodical and robust, it presents a base for forecast of behaviour. It is predominantly significant for financial markets where biased behaviour can manipulate asset prices, and for that reason influencing of more rational market participants too (Simunic, D.A. & Wu, X. 2009) The three specific heuristics that most auditors’ are susceptible and biased to comprise of availability, anchoring and representativeness. The behavioural biases could therefore influence the auditors’ judgment and opinion in decision making. Availability bias refers to the tendency to form judgements based on sources that are readily available, but to underweight data that may not be readily available. For instance, a person may underestimate the danger of using normal roads and overestimate the danger of driving on a highway because the media tends to report most accidents on highways but not on normal roads. The heuristics and biases allied with availability reveal the significance of salience and attention. Most people refers to availability bias as a judgemental heuristics in which a frequency or probability of a class or event is assessed on how easy it is to recall its instances (retrievability), how easy it is to mentally construct its instances (imaginability), or how easy it is to associate two instances (illusionary correlation) (Kim L. Anderson2011). This bias is said to use the strength of association between instances to assess their probabilities. For illustration case, a study was conducted where people were asked to compare the frequencies of words starting with letter “r”, and words that have letter “r” in the third position. Even though the latter are more frequent, the participants opted for the first case, because it is much easier to mentally construct words by using their first letter. Similar results can be obtained when testing different mental operations. For retrievability in auditing, the frequency of instances which are more easily brought to mind (retrieved) looms larger. Also, it assesses the frequency of co-occurrences by the ease of making association between objects. Anchoring on the other side is the tendency to create an estimate by use of a process that starts with an initial number (the anchor) and thereafter make changes qualified to the anchor According to (Kim L. Anderson2011). Anchoring bias begins with an initial value given by the problem formulation, or by some partial computation and then changes it towards the final value. The complexity of this bias is that the changes is often insufficient, which means that the final value will heavily depend on the initial value The consequence of this heuristic is that individuals tend to overestimate conjunction of events with high personal probabilities, and underestimate a disjunction of events with low personal probabilities. Anchoring effect is also present in the evaluation of subjective probability distributions, resulting in overly narrow confidence intervals. Over strong anchoring because of status quo often leads in underestimation of the probability of extreme movements. Setting confidence intervals overly narrow means that people get surprised more frequently than what they expects. Even data and predictions that are initially presumed end up to be unrealistic and still have an anchoring effect. Representativeness entails the tendency to rely on stereotypes in making judgement. For example, a person who depends on representativeness may be in particular bold in forecasting that the future return of a certain stock will be very favourable because its past long-term performance has been very favourable. Thus, forming a judgement on basis that favourable past performance is representative is good stocks (Kim L. Anderson2011). Even though, representativeness leads such forecasts to be overly bold, because of unsatisfactory awareness to factors that stimulate regression to the mean. Representativeness bias occurs when it is required to assess the probability of an object a belonging or originating from a class or process B. The heuristic rule says that if object A is highly representative or highly similar to a stereotypical object of class B, the probability of A originating from B is judged as high and vice versa. The predicament with this bias is that it persists even when facts, which should affect the judgement of probabilities, are introduced. For instance, when uninformative description is provided, the representativeness is insensitive to the prior probability base rate frequency of outcomes. Section C Question 1: Evolution of Auditors’ liability to third parties to Germany, Japan and People’s Republic of China The independent audits of financial statements, comprising the economic incentives and relations adjoining audit contracts and audit processes, are relatively new in People’s Republic of China, whereas for Japan and Germany it’s a bit old. Prior to the mid 1970s, auditing was perceived as a purely practical activity in China, which was manned by technical strategies broadly set by the professional body itself. Additionally, neither the quality of an audit nor the auditor’s work effort entailing complex judgements regarding the nature, extent and timing of evidence to be collected are directly observable, even to the company’s management. Lastly, auditors are subject to a considerable amount of professional and government regulation, and these regulations may vary from one country to another. Despite such intricacies, auditing is a thriving business world-wide and high quality audits are widely recognised to be critically vital to the proper functioning of capital markets. The emergency of auditors’ liability trend and accounting profession in China began in the mid-to-late 1980s. For Germany, auditing started in early 19th century and developed with the emergency of industrial development, while in Japan it was practiced after the world war 11.Both of the statutes are available for clients and third parties. Similar to the global growth of auditing research, an auditor’s liability which is an increasing body on China-related auditing issues has been published in recent years in international accounting journals. Hao (1999) describes the changes in the organisation and regulation of auditing practitioners within China in the 20th and tend to argues that the professionalization procedures and measures of the public accounting and auditing profession in China is totally different in comparison to the West, with the one of Chinese government maintains a dominating influence over the Chinese accounting profession. During auditing process, an auditor is in a contractual relationship with a client, thus may be sued for breach of contract, which may be in terms of general monetary damages for losses incurred because of breach. Comparable to other Western countries like Germany whose auditing practices have public finance and business dominance, Japan has private business dominance. According to Tang, Chow and Lau (1999) Chinese audits provide a concentration development of the State-owned enterprise (SOE) and expound on the challenges facing of such audits. For Japan, in 1949 the development of auditing and accounting stooped and changed into a new direction because of reconstruction that was being undertaken during that period. Chinese case was dominant in 1960s when Chinese Communist Party was ruling, which had been adopted from Japan and some from Soviet Union, for example, the Soviet’s accounting principles helped the People’s Republic to draw its auditing regulations for different sectors of the economy. During 1992, reform replaced the existing fund balance statement that was being practiced by state-owned enterprises to balance sheet in financial reporting system which also incorporated ration analysis. Illustration of Auditors’ liability to third parties case in Germany In the case of Bloβe Auskunftvertrag in 1988, the ruling of Bundesgerichtshof recognized a statement, like an advice that was presented on different incidents as implied on agreement to third parties. The Bundesgerichtshof resolved that an Abschluβprüfer assented tacitly to the third party to adopt particular decision. The question on whether both parties wanted to contract was irrelevant during the court proceedings. Although special inquiry was needed to find out the concerns that were met by Abschluβprüfer in his reporting and whether it was of significance to the third party in decision making. It was acknowledged that the presenter (Abschluβprüfer) of audit information was supposed to observe certain level of expertise for last condition report. Illustration of Auditors’ liability to third parties case in Republic of China The case of Jiang vs. PT Hong Guang and Chen Du Su Du CPA The case of Jiang vs. PT Hong Guang and Chen Du Su Du CPA Firm in 1998 was a good illustration of auditor’s liability to third party. The investors had sued companies and their auditors for wrong presentation of audit reports. This information presented was misleading and this resulted into loss of millions of RMB. The payout by CPA firms the case and paid the lawsuits which amounted to millions of RMB. The corporate fraud and accusation of auditor negligence grew at alarming rate but was later cut short with stiff lawsuits that were established to govern audit reports. Illustration of Auditors’ liability to third parties case in Japan Hanrei Jiho and Tokyo Cases of auditors’ liability to third parties have not been rampant in Japan, because of strict measures governing the audit firms. Example of dispute that arose in 27 July 1973 involved Hanrei Jiho and Tokyo motors regarding shareholders portions at the market. The case ordered for provisional disposition in terms of temporary restraining order that was issued on grounds that company had attempted to present favourable issues through auditors without the consent of shareholders. Tokyo district court resolved that this was a serious breach of contract and shareholders were supposed to be sought in any decision making. Overview of Auditors’ liability to third parties case in three countries Although, a new generation of accounting and auditing restructuring has instigated considerable changes in the Germany and Japan, for China it has been gradual in conforming to global auditing standards. For example, Chinese independent auditing standards (CIAS) were promulgated in 1995, to govern the auditing and legal liability process in the People’s Republic of China. According to Lin and Chan (2000), the Chinese standards closely resemble international standards and guidelines in several vital dimensions, even though with slight differences. However, current efforts have been made to update the CIAS to be radically convergent with- International Standards on Auditing (ISAs). Although, auditor’s liability is a crucial issue in the emerging Chinese markets, little documentation has been made about it. But, Chinese audit regulators tend to believe auditors have the accountability to detect and report frauds that are egregious in nature, transaction-based and associated to accounting earnings. Chinese facilitators and regulators have emerged to the independent director structure and audit committees (ACs) to listed businesses since the year of 2002 in order to control auditor’s liability and improve corporate governance. Chambers (2005) compares the practice, rules and enforcement of auditor’s liability between Germany and China. He finds that the responsibilities of encompassed in auditor’s liability are broadly similar, though Germany guidance offers a greater role with respect to risk management and operational control. As to the fulfilment of commercial auditor’s liability governance guidance, the Germany system is more market driven, whereas China is characterised by regulatory enforcement, similar to Japan. The current auditor’s liability environment in China reflects factors that are both unique among the three countries and common to international practice. Conclusion Presently, under Chinese law, the auditing standards specifically contemplate that audit engagement correspondence should cover the issue of liability arising in the event of breach as stipulated in CIAS. However, the principles the counties contract law impose certain restrictions, the most important of which are: any exemption or limitation clause must comply with the principles of good faith and fairness; a standard clause will be invalid if it exempts the party which provided it from liability (Graeme & Parker, 2007, p.37). With all these regulations in place, auditors are expected to seek limit liability to a particular reasonable sum rather than excluding it altogether in their correspondence. The scope of auditors to be held liable to people other than their clients is very limited in People’s Republic of China as compared to Germany and Japan. In short, such liability is restricted to cases where auditor has assumed responsibility to the particular third party. Chinese arbitration of liability is assessed based on the documentary evidence, with witness evidence counting for little in itself. It’s however; open to auditors and their clients to agree to resolve their disputes by binding arbitration instead of litigation. Bibliography Australian Council for Educational Research (2001) Graduate Skills Assessment: Summary Report GSA Entry ACER 2001 Viewed 14 January 2003 http://www.acer.edu.au/index.html Barberis, N. C. & Thaler, R. H. (2003). A survey of behavioral finance. In G. M. Constantinides,M. 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China-Related Research in Auditing: A Review and Directions for Future. China Journal of Accounting Research, Vol. 2, No. 2, pp.3-17 Tang, Qingliang, Chee W. Chow, and Amy Lau. 1999. Auditing of state-owned enterprises in China: historic development, current practice and emerging issues. The International Journal of Accounting 34 (2): 173-187. Kim L. Anderson 2011 The Clute Institute; The Effects Of Hindsight Bias On Auditors’ Confidence In Going-Concern Judgments And On The Audit Opinion Decision , Indiana University of Pennsylvania, USA Journal of Business & Economics Research – September 2011 Volume 9, Number 9 Read More