Executive Summary

Australia has seen multiple frauds since the year 2000. It has put all the bodies in the question which
are involved in the accounting and management of an organization. Auditing has faced intense
action against them as they are the ones responsible for verifying the accounts and stating the
fairness in the operations of the entity. Multiple issues have been turned up which stated the
irregularities in the auditing and accounting profession relating to internal control, ethical
requirements, legal liabilities and so forth. The case of the collapse of Harris Scarfe with an
outstanding debt of $650 million has been a classic case of how the management along with
auditors has failed in their duties. This report discusses the case of Harris Scarfe and the role of
auditors in the downfall of a mighty company. It also discusses the changes that taken place to
restrict these practices in the future.

Table of Contents

Contents
Executive Summary ................................................................................................................................ 1
Table of Contents ................................................................................................................................... 1
Introduction to the Case of HARRIS SCARFE ......................................................................................... 2
The backdrop of the Company............................................................................................................ 2
Auditors of the Harris Scarfe.................................................................................................................. 2
Audit Procedures That Led to the Collapse of Entity ............................................................................ 2
Auditor’s Independence, Professional and Ethical Behavior ................................................................ 3
Amendments have taken after the Collapse of Harris Scarfe............................................................... 3
Recommendations for the Improvements in the Auditing Profession ................................................ 3
Conclusion .............................................................................................................................................. 4
References .............................................................................................................................................. 4
 Introduction to the Case of HARRIS SCARFE

The name of the Harris Scarfe reverberates as one of the biggest scandals in Australia after it
couldn’t pay off the dues of $265 million and collapse. It has sent a warning signal about the
professions of Accounting, Auditing, Management, and Board itself (Omer Kavrar, 2017). After the
irregularity has been unveiled, it was deduced that there was a material irregularity in the financials
and manipulated to raise more borrowings from banks and trade creditors. The Chief Financial
Officer of the company has been jailed as he created a false picture to obtain more loans when the
company’s solvency was in question.

The backdrop of the Company

Harris Scarfe was founded in the year 1850 in Adelaide South Australia in the business of hardware
and iron. Over time, It has become an important trader in various items ranging from industrial to
agricultural items. In the year 2001, differences were traced in the inventory of the company and it
remained disputed until the next six years. The board and auditors did not raise questions or
concerned over the same over this period. Board has remained unaware of the irregularity and acted
innocence by saying that they blindly believed in the reports sent by the senior management. (Omer
Kavrar, 2017).

Auditors of the Harris Scarfe

Ernst & Young, and PricewaterhouseCoopers, one of the few most prominent names were appointed
as the auditors of the Harris Scarfe. The auditors of the Harris Scarfe have also faced the ire of loan
agencies and creditors. ANZ Bank has filed a suit for $70 million and questioned the auditor's
professional behavior as they have not reported the mismanagement in inventories and irregularity
or window dressing of books of accounts.

Audit Procedures That Led to the Collapse of Entity

A few attributes of the good auditor is a deep knowledge, experience, a questioning attitude, fact-
finding and maintaining the independence, and honest in its work. Hodgson, an employee of the
company has testified that the company has faced cashflow issues and could have faced liquidation.
But, with inflation of the stock, the company kept floating over the next 5 years and the amount
kept increasing year on year.

Following are some issues noticed behind the fall of Harris Scarfe:

 As per section 296(1) of Corporations Act 2001, the management has a fiduciary duty to
oversee that accounts of the company are prepared according to the accounting standards
 and that demanded a true and fair view of the company. On the other hand, Auditors were
responsible for providing an assurance on the accounts presented to them.
 The independent director on the board of Harris Scarfe has been reduced to a negligible
number in the time of the fraud where the board required to keep at least one-half of the
directors as an independent. (pg-58) (Gay, n.d.). Auditor has to keep a check on whether the
company is following all the duties prescribed by the law.
 Independence of Auditor was also in question as it decreases with the familiarity, and
connection with the management or board.

Auditor’s Independence, Professional and Ethical Behavior

It is very reasonable to assume that the personal conflicts were involved in the case as auditor
independence was at stake. The over-reliance on the accounts issued by the organization would
create suspicion in the minds of the stakeholder. After doing a thorough checking, it was evident
that multiple big audit firms were drawing earning more than the audit fees but from other non-
auditing services provided. (ASIC, n.d.)

Amendments have taken after the Collapse of Harris Scarfe

After the downfall of Harris Scarfe, multiple changes were proposed, few of the important ones are
mentioned below:

 A series of changes have been taken place such as new ethical rules by the International
Federation of Accountants, along with series of changes in the SEC rules for amending the
various issues in the independence of the auditor. (Gay, n.d.), pg-55.
 In the case of independence, few principles have been led out as those that conflicting
issues, an audit of firms of similar names, management functions and other measures have
been taken place to improve the auditing procedures.
 The audit committee has been the most important issue in the governance and in line with
that auditors were instructed to take strict and stringent action against the audit committee.
Following Ramsay Report (2001) stakeholders of the company should take care of the
corporate governance issues. (Gay, n.d.) pg-59.
 It was also noticed that the independence of the auditor could be hampered because of
providing other services to the client. So, the ASIC has surveyed 100 biggest companies for
the evidence of other services provided by the auditors. (Gay, n.d.), pg-60.

Recommendations for the Improvements in the Auditing Profession

Due to the multiple downfalls in the year ending 2001 in Australia, It was evident that there are
severe issues in the management. There are various areas in which recommendations are required.
(ASIC, n.d.) Few recommendations to professional skepticism should be implied such as having a
questioning mind, stringent checking in the audit evidence, and proper judgments are also required.
Improving audit quality would also require to be enhanced.

Conclusion

The court found out that mismanagement of the company is the sole responsibility of management
and a prominent issue of corporate governance. The only charge that has been put on the auditor
was on the negligence of duty in assessing the true picture. It was evident that the auditors or the
management must have known the internal management of the accounting but it has not taken up.
In the wake of multiple such frauds happened in this arena, strict actions have been imposed.

References

ASIC, n.d. Improving and maintaining audit quality, s.l.: Australian Securities & Investments
Commission.

Gay, G., n.d. RECENT DEVELOPMENTS IN AUDITOR INDEPENDENCE, s.l.: Monash University,
Department of Accounting and Finance.

Omer Kavrar, B. Y., 2017. Corporate Collapses in Australia: Case of Harris Scarfe. Journal of
Economics, Business, and Management, 5(January), pp. 12-17.