A Shift in the Audit Fees of the Big Four and Non-Big Four Auditing Firms over the Last 10 Years - Essay Example

Auditing Name Institution Date QUESTION 1 Has there been a shift in the audit fees of the big four and non-big four auditing firms over the last 10 years? Introduction Audit firms are known to offer the following services to both public and private entities and they include; auditing of financial statements, tax, consultation, assurance, advisory, corporate finance, actuarial and legal services among others. The four largest audit firms in the world also commonly referred to as the big four are the following; Deloitte Touche Tohmatsu Limited commonly known as Deloitte, Price water house Coopers (PwC), Ernst & Young (E&Y) and also Klynveld Peat Marwick Goerdeler (KPMG). There are local audit firms that are found in Australia which have not yet made it to the big four standards but are also good at prvidinfg auditing services among others and these include; Morgan Stanley Australia, Grant Thornton Australia, Pitcher Partners and also Crowe Horwath among others (Accountingverse, 2014). Shifts in audit fee patterns over the years Looking at the focus of the question we will discuss how audit fee patterns have shifted over the last ten years for both big four and non-big four audit firms, because the has definitely been a shift that has been noted in the pricing patterns. There has been an increase in the number of audit firms entering the market with firms opting for smaller audit firms because they offer more personalized audit services than the big four but another reason for the shift is the pricing differences and the discounts being offered in the audit firms. This has brought concern for the big four audit firms because the increase in players in the audit market threatens to make the vulnerable to fail and the smaller audit firms are putting themselves in a position that will allow them to compete and even take over their position in the big four category if they fail (Chaney, Jeter and Shivakumar, 2004). In a monopoly market structure, the monopoly firm or firms in this case tend to set the prices for the products in the market but that is not the case for the big four because they do not determine the prices of services offered by other audit firms. The entrance of mid tire audit firms in the audit market has led to various shifts in the pricing policies in the audit market with many observations being made. Some claim the mid tier audit firms have resorted to charge high audit fees to acquire high returns and also make them equally competitive as the big four. Not all new market entrants are charging high audit fees there are new entrants who are low-balling that is charging low audit fees at start up to ensure that they maintain normal profits forcing the big four to lower their audit fees thus lowering their profitability and to some extent the quality of their work because of the low fees (Cassell, Giroux, Myers and Omer, L). Some big four audit firms have also opted to prey on mid tier audit firms by offering much lower prices than the maximum fees the mid tier audit firms would offer. Therefore competition has been a major reason for shifts in pricing in audit firms in the last ten years. Another reason that has led to the shift in prices is the choices and preferences of the customers or clients. Companies have been seen changing their audit partners frequently forcing the audit firms both big four audit firms and the mid tier audit firms to go back and make changes to their initial agreements or contracts so as to keep their customers satisfied and also prevent them from moving to other audit firms (Butterworth and Houghton, 1995). Conclusion There are a number of reasons that lead to changes in audit fee patterns and they may be similar or differ between the big four audit firms and the mid tier audit firms. These changes in audit fees have also resulted in changes of the quality of audit services and also the competitive environment in the audit market. References Chaney, P., D. Jeter and L. Shivakumar (2004), Self-Selection of Auditors and Audit Pricing in Private Firms, The Accounting Review, Vol. 79, No. 1, pp. 51–72. Chan, D. (1999), Low-balling and Efficiency in a Two-Period Specialization Model of Auditing Competition, Contemporary Accounting Research, Vol. 16, No. 4, pp. 609–642. Cassell, C., Giroux, G, Myers, L and Omer, L. The Emergence of Second-Tier Auditors: Evidence from Investor Perceptions of Financial Reporting Credibility. Butterworth S. and K. Houghton (1995), Auditor Switching: the Pricing of Audit Services, Journal of Business Finance & Accounting, Vol. 22, No. 3, pp. 323–344. Accountingverse, (2014). Big 4 Accounting Firms. Retrieved on 19th September, 2014 from < http://www.accountingverse.com/articles/big-4-accounting-firms.html> Asia Pacific, (2012). Top Companies to Work for as an Auditor in 2012 in Australia. Retrieved on 19th September, 2014 from http://www.careersinaudit.com.au/article/top-companies- to-work-for-as-an-auditor-in-2012-in-australasia/ Ferguson, C, Pinnuck, M and Skinner, J, D. (2013). The Evolution of Audit Market Structure and the Emergence of the Big 4: Evidence from Australia, pp. 1-76. QUESTION 2 The audit report has transitioned over the years from a unique narrative to a more standardized template. Discuss Introduction Auditing involves the verification of financial statements and documents that belong to any legal entity whether it’s a private or a public entity with the intention of providing a professional opinion about the entity. The audits are supposed to ensure that legal entities are complying with the rules and regulations provided by the relevant regulating bodies and thereafter make reports about them. The auditor’s opinions are expressed in the auditor’s report which could either be that the financial statements have been presented fairly or the financial statements have been provided in compliance with the guidelines or the Generally Accepted Accounting Principles (GAAP) and also noting any challenges without providing opinions or the auditor could state how (nature and size of the deviations) the financial statements have strayed from the guidelines provided and also make a statement that the financial statements provided are not in compliance with the GAAP that is the generally accepted accounting principles. The reports are not the same they vary with the level of the auditors’ expertise (Audit Quality Forum, 2006). Changes in the quality of audit reports The quality of audit reports has changed significantly over the years because of the existence of regulatory bodies that govern how financial reports should be prepared and presented who did not exist before. The Financial Reporting Standards ensure that reports are easy to read and they make full disclosures so as to allow better informed economic decisions for the users of the reports (Audit Inspection Unit, 2007/8). Initially audit reports just gave an overview of the entities assets, liabilities and their operations but audit reports that are prepared according to the Financial Reporting Standards ensure that auditors and the clients are held responsible for their duties by attaching evidence in the reports in the cases of misstatements and materiality and also ensure that the audit reports offer or provide expert advice on how to deal with financial misstatements and their materiality on the company or legal entity. The Financial Reporting Standards also ensure that the reports prepared by auditors don’t just give their opinions but ensure that the financial statements are free of misstatements that are material or that could significant effects on the entities general objectives and perception. The financial statements help the auditors get the appropriate advice for them to draw and make their conclusion about the business entity in accordance with the financial reporting framework that has been provided. The financial reporting standard also determines which entities the auditors should conduct audits and which they should avoid by looking at the limitations set by the entities on their financial statements. It also makes provisions of what should be included in the audit reports and what should not (IFRS, 2007). Conclusion The standards that are being used by auditors now to make their reports were not available before thus making audit reports then to look like unique narratives of the legal entity they have conducted an audit on. Therefore one can conclude that audit reports now take the form of standardized templates because of the guidelines provided by the financial reporting framework or standards. References Audit Inspection Unit, (2007/8). Audit Quality Inspections: An Overview, London: Financial Reporting Council. Financial Reporting Review Panel, (2008). Review Findings and Recommendations 2008, London: Financial Reporting Council. Audit Quality Forum, (2006). Principles-based auditing standards, London: ICAEW. The Institute of Chartered Accountants of India. (2011). Auditing and Assurance, Vol.1. pp. 3-4. International Standard on Auditing 545 (2004), Auditing Fair Value Measurements and Disclosures, New York: IAASB. Deloitte. (2010). Swimming in Words: Surveying Narrative Reporting in Annual Reports. London: Deloitte. Institute of Chartered Accountants in England and Wales, (2007). Technical Release FSF 03/07: Interim. IFRS, (2007). Guidance: Guidance for Auditing Financial Statement Disclosures made under IFRS 7 (FRS 29) Financial Instruments: Disclosures. London: ICAEW. QUESTION 3 Since the demise of Arthur Andersen and the passage of the Sarbanes- Oxley Act of 2002 there has been ongoing debate as to mandatory audit firm rotation and partner signing. Discuss the reasons for and against Introduction Arthur Andersen LLP was one of the big five accounting firms before it voluntarily surrendered its practicing licenses because of the Enron scandal in 2002. Arthur Andersen LLP was unable to detect that one of its clients, Enron had made revenue of more than a hundred billion dollars from fraudulent activities making all its practices fall under heavy scrutiny. Investors in the company (Enron) suffered huge losses after the scandal because the prices of the shares fell drastically. The public alleged that the company was an accomplice of the firm thus causing the firm to surrender its license to the Certified Public Accountants offices in the United States of America. This scandal brought about the enactment and also implementation of the Sarbanes- Oxley Act of 2002 which was established to protect investors from corporations that may be engaging in fraudulent activities. The Sarbanes- Oxley Act of 2002 also commonly referred to as the SOX developed very strict policies in financial disclosures that will prevent accounting frauds in entities (Moore and Crampton, 2000). The Sarbanes- Oxley Act of 2002 is comprised of eleven elements that cover issues such as a Public Company Accounting Oversight Board (PCAOB), independence of auditors, corporate responsibility, enhanced financial disclosures, analysis of conflicts of interest, commission resources and authority, studies and reports, corporate and criminal fraud accountability, white collar crime enhancement, corporate tax returns and finally corporate fraud accountability (Piotroski and Srinivasan, 2008). Benefits and Challenges of audit firm rotation and partner signing Benefits Audit firm rotation will allow other audit firms to go through your financial statements and pick out the mistakes that other audit firms were not able to detect. It therefore will give confidence to the clients among other parties that the entity is following the guidelines provided by the Financial Reporting Framework. The rotation of audit firms and signing of partners will ensure that corporations are held accountable for their deeds. Because of fear of detection of mistakes the quality of audit works will be improved significantly (Kuschnik, 2008). Challenges The rotation of audit firms and partner signing will come at an extra cost for the client because the different audit firms used will have to be paid for their services. Intense competition among audit firms may bring rise to malicious practices such as creating mistakes where they did not exist so as to drive the competitors out of the industry. Conclusion If firms are not keen while doing their duties, they might sign up clients that will drive them financial troubles and even closure such as Enron did to Arthur Andersen LLP. Therefore, firms should follow the guidelines provided and make the necessary reports to avoid such cases in the future. The proposition to rotate and sign in different audit partners at different times could help the firm or entity avoid many risks that may have escaped other auditors and therefore help the firm but it has its own challenges that have been highlighted and some of them include high costs and malice from audit competitors among others. References Kimmel, PhD, CPA, Paul D.; Weygandt, PhD, CPA, Jerry J.; Kieso, PhD, CPA, and Donald E. (2011). Financial Accounting, 6th Edition. New Jersey: Wiley. Shakespeare, Catharine (2008). Sarbanes–Oxley Act of 2002 Five Years On: What Have We Learned? Journal of Business & Technology Law: vol. 333. Kuschnik, B. (2008). The Sarbanes Oxley Act: "Big Brother is watching" you or Adequate Measures of Corporate Governance Regulation? Rutgers Business Law Journal, vol. 5, no.1,pp. 64–95. Cornford, A. (2004). Internationally Agreed Principles For Corporate Governance And The Enron Case, United Nations Conference on Trade and Development, G-24 Discussion Paper. Series no. 30, pp.30, Moore, V, M and Crampton, J. (2000). Arthur Andersen: Challenging the Status Quo. The Journal of Business Leadership, vol. 11, no. 3, pp. 71–89. Kohn, S, M, Kohn, M, D and Colapinto D, K. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. Praeger Publishers. Piotroski, J, D. and Srinivasan, S, (2008). Regulation and Bonding: The Sarbanes–Oxley Act and the Flow of International Listings. Retrieved on 19th September, 2014 from Question 4 What is 2+2? Engineer- “It lies between 3.98 and 4.02.” Mathematician- “in two hours I can demonstrate it equals 4 with the following proof.” Physicist- “it’s in the magnitude of 1-10!” Social worker- “I don’t know the answer, but am glad we discussed this important question.” Attorney- “in the case of smith vs. state, 2+2 was declared to be 4.” Trader- “are you buying or selling.” Accountant- “what would you like it to be?” Discuss accounting and auditing in terms of the seven perspectives. Introduction The accounting process involves the acts of measuring; processing as well as the communication of financial information to its respective users to allow them to make informed economic decisions. These users may include; investors, creditors, the government, suppliers and financial institutions among others whereas auditing is the process of systematically and independently examining data, statements, operations, performances and activities of entities of either financial or non-financial nature. The audit process can take place after the accountants have completed measuring, processing and announcing their results to the public, they come in to verify that the data the accountants have provided is accurate and has followed due guidelines provided by the financial reporting framework (Needles and Powers, 2013).. As mentioned there are various users of accounting information and these may include engineers, teachers, mathematicians, social workers, attorneys and traders among others. They require the financial information provided to make better economic decisions with regards to their investments. If the information is not prepared properly following the relevant reporting guidelines, the users will not be in a position to make the right interpretation of the information. Although the information may be simple to the eyes, its interpretation may change the meaning of the statements and therefore auditors must ensure that the information provided is accurate with no material misstatements to allow the different types of users to understand the same information properly with little to no difficulties (Lung, 2009). Accurately prepared financial information or statements will have little to no deviations when used by readers. Just as 2+2 may a simple arithmetic to others the results will be interpreted differently by different readers and some may not comprehend it at all, it is therefore the responsibility of accountants and auditors to ensure that accounting information is accessible, easy to understand and interpret to the members of the public. This is because they will use this information to make serious financial decisions that will affect them for the rest of their live and could have great impacts on other people such as their dependants. Conclusion Financial information is very vital to many members of the public because they use it to make important financial choices and therefore the information provided should not give conflicting opinions to the users instead it should be simple enough to avoid such complications. Different people because of their professional backgrounds may interpret the same information differently and therefore it becomes the responsibility of accountants and auditors to ensure that the financial information will be easy to understand and interpret as well. People should not assume that because they can understand some information it does not mean others will understand it as they do, accountants and auditors are therefore charged with the responsibility of ensuring that financial information is interpreted the same way by different users. References Needles, B, E. and Powers, M. (2013). Principles of Financial Accounting. Financial Accounting Series (12 ed.). Cengage Learning. Weber, R, P., and Stevenson, W. C. (1981). Evaluations of Accounting Journal and Department Quality. The Accounting Review, vol. 56, no. 3, pp. 596–612. Lung, Henry (2009). Fundamentals of Financial Accounting. Elsevier. Labardin, P, and Nikitin. M. (2009). Accounting and the Words to Tell It: An Historical Perspective. Accounting, Business & Financial History, vol. 19, no. 2, pp. 149–166. The Institute of Chartered Accountants of India. (2011). Auditing and Assurance, Vol.1. pp. 3-4. Gilbert W. J, and Engle, T, J. (2005). The Use of Control Self-Assessment by Independent Auditors. The CPA Journal. Nelson, J. (2014). What is an Accountant and how is it different than an Auditor? Retrieved on 19th September, 2014 from http://www.hepcamp.org/what-is-an-accountant-different- auditor/ Read More