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EXECUTIVE SUMMARY

The purpose of the current study is to provide the functions of audits in accounting,
highlighting the recent accounting scandals that happen in the region in the past
18months, “conflicts that compromised objectivity”, what should be done to salvage the
reputation of audit firms that are under scrutiny and end with recommendation and
conclusion.

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INTRODUCTION

In today's world, most of the activities undertaken are largely conducted through
finances. It has been discovered that ever since the individuals and institutions start to
record every activity that happens, they have felt the need to employ auditors to monitor
and oversee the finances. The auditors must make sure that the finances are used
appropriately. An audit is the inspection and verification of a company’s financial
statements and record [ CITATION Mir19 \l 1033 ]. David Regan explains audit as a
process of assessing the value in which the auditor act as an intermediary between
two or more parties [ CITATION Dav03 \l 1033 ]. [CITATION ASS19 \l 1033 ]describes the audit
as an independent inspection of financial information of any business whether profit-
oriented or not and regardless of its size or legal firm. Although they explained an
audit in different ways, they do not mention the physcal chcking of inventory to make
sure that all departments are following document system of recording transaction
[ CITATION Col19 \l 1033 ] . An audit has two branches external and internal audit. Internal
audit is an independent, assurance and consulting activity to add value and improve
the operations of the business [ CITATION Dav03 \l 1033 ] more so external audits focus
on the assessment of financial statements [CITATION Dav03 \l 1033 ]. This literature will
review audit functions in accounting firms, scandals that have happened in the past
18 months in the region, conflict that compromise objectivity, ways to recover the
reputation of the audit firms that are under scrutiny in the literature review,
recommendations and lastly conclusion chapter.

1.0 LITERATURE REVIEW

1.1 FUNCTIONS OF AUDIT IN ACCOUNTING

Internal auditing helps big four accounting firms to manage risk and improve the
function of the business. For example, a recent newspaper article from southern Africa
states that due to auditors there were able to identify risks and problems incurred by the
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big four firms. Auditors work can increase public trust by providing analysis and
recommendations related to the effectiveness of supremacy, assessment of risk and
warnings (Oregon Secretary of State, 2018). However, Marinus said ‘'instead of
assuming the risk management on the agenda for a team meeting, internal audit
emphasizes that each of the items is effectively dealing with opportunities and strength.
He goes on to say instead of assuming that, future is makeable and perfectible through
risk and control testis, audits acknowledge that the world is unstable (De Pooters,
2019).

More so, audits help the firms in decision making. It helps the firms to make strategic
decisions, by spotlight areas that could prove problems for the firms (Coetzee and
Lubbe, 2013). They explain that audits help the firms to be aware of certain areas that
might cause harm to the firm and analyze the principles of going concern. (IIARF, 2013)
goes on to say firms will be able to accomplish its objectives by bringing a systematic
approach to evaluate the effectiveness of the control process, hence promote going
concern method. These authors are concerned about the ongoing of big firms to prevent
the shutting down of firms.

Furthermore, auditors determine the accuracy of financial statements prepared by the

company and examine company resources to determine how effectual and professional
they are utilized. (Fadzly and Ahmad, 2004) explain that auditors determine the
accuracy by calculating the accounting books, assessing whether the entity is well
managed. (Ege, 2015; Prawitt et al., 2012) says that they determine the accuracy by
prevention of management misconduct. This helps the firms to review compliance with
its legal obligations and checking the responsible behavior by the firms in environmental
and social aspects.

Lastly, the audit detects fraud in the big four firms. An auditor conducting auditing
accordance with effectiveness criteria is responsible for obtaining reasonable assurance
that the financial statements, as a whole, is a free material misstatement, whether due
to error or fraud (Pulley, 2016). However, auditors are not responsible for detecting all
fraud that is incurred in the firms, though auditors detect fraud there are some of the
fraud that an auditor cannot detect.

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1.2 THE RECENT CORPORATE ACCOUNTING SCANDALS

All corporate financial scandals begin with a falsified statement. (Study Moose, 2016)
explained that scandals are shown to occur because of the unethical behaviors of
leaders. He explained that being unethical is one of the most artifacts that cause
accounting scandals. However, Ken Frost said some artifacts cause accounting
scandals that are greed and poor accounting control (Frost, 2016). (CAQ, 2010) states
that everyone tends to commit fraud. These authors are explaining that accounting
scandals are there because of being dishonest or poor management.

One of the recent accounting scandals that happened in the region has occurred at the
Hwange Zimbabwe mining company. This was caused by unethical movements made
by management that is corruption. It was said that for the past few years serious
corruption was made (Makwanye,2018). After the internal audit has completed their job
it was discovered that there was serious corruption that was made. They recommended
a forensic audit and they suspended every management body that was connected to
corruption. An external forensic audit has uncovered massive corruption, tax evasion
and corporate, in which the government agency lost millions of dollars through wanton
financial waste and substantiated payments to the auditors and to repair the loss that
was made (Kunambura, 2018).

One of the scandals that were brought to light by media was of Steinhoff company when
its share price drastically fell in December 2017.it was reported by Cameron, (2018) that
after the initial bombshell the company's share fell by 85% and by 11 May 2018 it was
R1.60.PWCs investigation found that the accounting fraud was up to $7.4billion
accounting fraud at Steinhoff (Motsoeneng, 2019). According to Cameron, (2018), the
fall of the company was caused by accounting irregularities about off-balance sheet
items and possible misrepresentation of earnings. They found fictitious transactions
recorded, this fraud involves a small group of executives and outsiders. This scandal, of
course, brought down Steinhoff, but the company faced legal actions by JSE, Financial
Service Board (FSB) and other institutions. The company also faced two different class
action lawsuits in German and Netherlands (Cameron, 2018). External implications of

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this fraud caused a 200 billion knocked off the JSE, negatively impacting South Africa's
economy and knocked off the pension funds of ordinary South Africans (Rose, 2014).
These scandals also wiped all shareholders' capital and led to several resignations.
They decide to pursue claims against those responsible for the unlawful conduct
outlined (Motsoeng,2019). Fraud is one of the things that causes firms to shut down.

Least but not last, the South Africa Reserve Bank put small mutual under curatorship in
March last year 2018 against a scenery in the background of a serious liquidity crisis.
This was because mutual banks experienced increasing liquidity challenges over the
past months.it was reported that these problems emanated from a failure of directors
and executive management to manage the banks' rapid growth and its funding and
liquidity position (Kganyago, 2018). Kganyago, (2018) continue reporting that
challenges emanated also from the maturity of a large concentration of deposit from
municipalities, and was exacerbated by the termination of other sizeable deposits. This
was the serious scandal that has happened in the region, the process of finding curator
revealed significant financial losses, this led to a decision to hire forensic investment
(Rossouw, 2019). Millions looted, Dozens benefited illegally (corruption watch, 2018)
Although the SA reserve bank can still appoint a curator when a bank experience
solvency problem, the chance of recoveries is slim (Rossouw, 2019).

1.3 CONFLICTS THAT COMPROMISED OBJECTIVITY

The objectivity principle is about the professional service in the field of professional
accounting that members should maintain integrity, be free of conflicts of interest and
shall not knowingly misrepresent fact or subordinate his or her judgment to others
(Booker & Booker, 2016). Although this principle of objectivity still stands in accounting
there has been an erosion of service to the public as accountants, because personal
and business relationships with client and client management continue to cause
conflicts of interest (Booker & Booker, 2016).

According to Mintz (2018), most of these relationships have been barriers to objective
and impartial decision making which is a threat to the independence of the audit

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function. Such relationships, for example, are between managers and auditors, whereby
conflicts arise when managers try to influence auditors into an omitting or changing
conclusion that they perceiving as damaging operations (Giles, 2015). This is why the
AICPA code of professional conduct was recodifies in 2014 in an attempt to deal with
such conflicts of interest when attesting service through threats and safeguard operation
(Mintz, 2018). However, this approach does not guaranty the absence of conflicts such
that they are permissible as long, as they can sufficiently be mitigated by safeguard
approach (Mintz, 2018).

1.4 WAYS TO SALVAGE THE REPUTATION OF THE AUDIT FIRMS THAT ARE
UNDER SCRUTINY

To salvage the reputation of the audit firms that are under scrutiny, there must be a
lower conflict of interest and regulations that govern audit firms.

Conflicts of interest are a situation whereby someone cannot make fair decisions
because of the fear of tomorrow's effects. However, it may also arise when someone's
best interest is not your best interest. This means that to helps audit firms under scrutiny
they must listen carefully to others' views and respect each other's emotions. They must
also develop the plan to work on each conflict, by starting with the most important one.
However (Government of Canada, 2018) says prospective management needs to know
about real, potential or perceived conflicts of interest to make an informed decision
about whether to participate or not to participate. Furthermore, regulators must explore
all possibilities.

RECOMMENDATION

For the audit firms to reduce or to prevent them from reputation, it is recommended that
the firm must split the audit. Regarding the auditing firms such as big four firms,
operation model auditors focus on addressing the areas that are most challenging and
objective audit rather than being close to consultancy businesses (sweet and

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White,2019). (Ananthanarayanan, 2018) continues to explain that the main concern is to
separate audit and advisory businesses to prevent auditors from being close to clients.
Furthermore, auditing companies must avoid choosing their auditors based on cultural
facts, rather they must choose auditors who offer the toughest scrutiny (Mcloughlin,
2018). More so. External auditors must be aware of internal control weaknesses that
might increase the opportunities for corruption (Kassem & Higson, 2016). Lastly, audit
firms must use mandatory joint audits, this improves audit independence (Jeong, Jung,
& Lee, 2005).

CONCLUSION

This paper has reviewed the literature on roles of audit functions in accounting, some
recent corporate accounting scandal happened in the region, conflicts that
compromised objectivity, way of salvaging audit firms under scrutiny and lastly on the
recommendations.