AF432: INFORMATION

SYSTEMS CONTROL AND

AUDIT

Group Research Assignment

Trimester 2, 2021

Namita Mala S11120899

Diviyashna Dutt S11133415

Shivneet Dutt S11119686

Shavneet Chand S11131781

Vishalni Lata Prasad S11084411

Accounting Bodies and Regulations after Corporate Collapse

In Australia one of the biggest collapse has been Harris Scarfe Limited with debts of $265
million . In the beginning of 2000s the collapse of OneTel, HIH Insurance and Ansett
Australia also happened within that same timeframe (Kavrar and Yılmaz, 2017). The
consequences of these collapse had a negatively affected the accounting profession in
Australia as such there has been implementation and improvements in the accounting bodies
and accounting regulations. This essay will be evaluating the pronouncements of the
Australia professional accounting bodies and regulation that were implemented after the
collapses of the business in the early 2000s. Thereafter, the essay will discuss if the auditors
role and duties has improves through the implementation in the accounting standards and
regulation. In addition to this, the essay will also elaborate to what extent the auditors should
be liable for the accounting to misstatements. Lastly the essay will focus on the strengthens
and weaknesses in the current regulation together with the recommendation to strengthen to
maintain and improve the auditors role and duties in safeguarding the integrity of the
financial statements.

A number of regulations were implemented by the Australian professional accounting body

following the corporate collapse in the early 2000. The Corporate Law Economic Reform
Program Act 2004 (CLERP 9) was implemented by the accounting bodies to restructure the
integrity in audit by stressing on the role of auditor independence and audit function. The
corporate scandals in the early 2000 were mostly due to the lack of auditor independence. For
example, in the Enron scandal, the auditors failed to notice the financial fraud and allowed
Enron Ltd to cover up its fraud.

A major reform of the Australian government to strengthen independence was rotation

requirements, auditor requirements, and non-audit services for clients. Auditors who remain
for a long period of time with the client could become a threat to independence as auditors
could develop an unsuitable relationship with the client. Thus, according to CLERP 9
auditors cannot audit a listed company for a period of five successive years and must be
rotated.

According to the regulation, a member of the audit team cannot be employed by the audit
client for at least two years. Under this act, the auditor can perform non-audit services for the
client, but the director needs to declare that the auditors have not compromised the audit
independence. In support of CLERP 9, the Accounting Professional and Ethical Standards
Board issued a set of codes of ethics for professional accountants, APES110. This focused
mostly on the fundamental principles of the professional accountants stating the
responsibility of the accountants in the benefit of the public interest and the independence of
the auditors.

The fundamental principles stated in the code are integrity, objectivity, professional
competence and due care, confidentiality and professional behavior. Integrity means that the
auditor should be honest in its professional relationships and they should be performing their
audit in compliance with the laws and regulation. Objectivity states that the auditor should
provide its reports and findings of the audit accurately without being bias and compromising
conflict of interest. Professional competence and due care states that the auditors need to
pertain professional knowledge and skill while performing their work. Confidentiality states
that the auditors are not allowed to share any information about the audit or the client for any
personal gain to any outside parties. Professional behavior states that the auditors need to
perform its services in compliance with all the relevant rules and regulations and work within
the law.

Moreover, after the corporate collapses in the early 2000s there has been lots of
improvements done to the accounting guidelines, standards and regulation. These
improvements and implementations has affected the integrity of the financial reports. CLERP
9 was a respective response which was aimed to rebuild the integrity in auditing by
emphasising independence.
(Chapple, Larelle & Koh, Boyce, 2007). HIH and One. Tel corporate collapse were the
examples of how the lack of auditor’s independence eroded the credibility of financial
reporting. “In discussing CLERP 9, Justice Owen highlighted the importance of auditor
independence in the HIH Final Report, as follows: Auditor independence is a critical element
going to the credibility and reliability of an auditor’s reports. Audited financial statements
play a key role promoting the efficiency of capital markets and the independent auditor
constitutes the principal external check on the integrity of financial statements.”(Ting-Chia
and Kuan, 2014). There had been greater financial losses to the shareholders and the
financiers due to the lack of confidence in the integrity of the financial statements. The
CLERP 9 was introduced to enhance the auditors independence with the objective to protect
the interest of the public. Over the years auditors there has improvements in terms of auditors
being more independence and transparent.

Furthermore after the corporate collapse, the CLERP 9 also focused on the ways to improve
financial statements presented to the stakeholders. There has been am improvements in the
disclosures made in the financial statements. The auditors has improved the presentation and
disclosure documentations. This gives shareholders a greater ability to question to the
auditors about the conduct of the audit the about the content of the audit report compiled by
the auditors.

The CLERP 9 implemented for the listed companies the auditors should be rotated after 5 or7
years depending on the size of the business. It is viewed that if an audit partner stays too long
with the client they become too familiar thus this would impair independence. As such,
rotation of the partners increases the independence and objectivity as the new auditing firm
would have their own perspectives, thus could be increased quality of work.

Over the years, there has been lots of reforms and improvements done in the accounting
regulation. All these has improved the integrity of the financial statements and however there
has been cost involved. After the corporate collapse there as a huge reduction in the investor
confidence, over the past years, rules and regulation has been implemented and the investor
confidence level has been increased. In order to maintain the confidence level, reforms are
still taking place.

Moreover, a material misstatement is incorrect information in the financial statements that

has impact of decision making of users of financial statement. A misstatement occurs when
something has not been treated correctly in the financial statements with compliance with
international financial reporting standards. For example, an incorrect amount has been
recognized for which an asset is not valued in accordance with the relevant IFRS
requirement. Factors which can increase the risk of material misstatement on a financial
statement are inadequate accounting systems and records, poor internal control and
management, declining economic condition of the industry.
ISA 450 requires that the auditors should identify all misstatements during the audit and
identify which ones are clearly important. The auditors need to use judgement to decide
whether this important are material in financial statement. It requires auditor to communicate
all misstatement on a timely basis with the appropriate level of management and request to
correct those misstatements. Auditors need to be specific with the types of misstatement and
should properly discuss with management for necessary changes. With judgmental
misstatement which include includes recording of item incorrectly in the financial statement,
auditor should item advise management to correctly record the asset. If any material
misstatement is identifying by auditors during audit should be refer to management to
provide information. For example, if the supporting document of the payments are missing or
not clear, auditor should require original and supporting documents to proceed with the audit.
Failure to do this auditor would be liable if they perform audit without proper supporting
documents. Management is expected to correct the misstatement which are requested by
auditors. ISA 450 requires the auditors to obtain an understanding if management refuses to
provide some correct information and to take that understanding into account when
evaluating whether the financial statements as whole are free from material misstatement.
The auditors of financial statements must detect material misstatements which are caused
either by fraud or in error. The auditors will only liable if they cannot identify fraud and error
during audit. Auditor who has negligent, directly or indirectly should compensate for
damages and loss if found not performing task diligently. If fraud was committed during a
period covered by the auditor’s report on the entity’s financial statements, but not detected
before the report was signed off, the auditor should be liable for some extent However, it
would not be realistic for the auditor to always be liable as auditor only use sample testing
and everything is been audit. Auditors are not liable for material misstatement as they are
external parties which are hired to audit and verify financial report.

One of the risks of material misstatement is fraudulent financial reporting. It means that items
recorded in the financial statement is incorrect. Data are manipulated and false supporting
documents are attached in the payment. It is intentional done by management by exclusions
of amounts or disclosures on financial statement to achieve desirable result. For example, of
fraudulent financial reporting is that company tries to overstates its revenue by showing more
sales revenue and record revenue as if it met all the criteria for revenue recognition. Also,
sometime there are some agreements which customer and companies which are not disclosure
to auditors as it does not meet generally accepted accounting principles. Misappropriation of
assets refer to incorrectly recording of assets in financial reports. It is accomplished in
various ways such as embezzling receipts, stealing assets and causing an entity to pay for
goods and services that have been not recorded. Assets are recorded at fair value or are
recorded incorrectly with false documents and valuation to meet management’s satisfaction.
Examples of misappropriate of assets are thefts of cash, inventory or securities. Sometime
auditors are more focus only on fraudulent financial reporting and disregard misappropriation
of assets and management have better controls to safeguards its asset.

Some of the threat that are related to auditors while identifying material misstatements are
self-interest, self-review and familiarity threat. Self-interest threat arises when an auditor
does or are related to companies through provide financial consultation or personal reasons.
Self-review threat arising when auditor have audited his own work or work of a colleague.
Some of the audit firms also provide other service to their client such as taxation and
payrolls. Familiarity threat arises when an auditor is being associated with close contact with
an audit client. For example, auditor and management of audit client are member of same
club and have long term contacts.
Furthermore, one of the weakness is Universal Standards. The purpose of developing a set of
international accounting standards that is combining the International Financial Reporting
Standards (IFRS) and the Generally Accepted Accounting Principals (GAAP) was to
reconcile differences in the US and the international standards. But failure to reconcile the
differences between IFRS and GAAP has serious implications in making investment and
acquisition decisions. For example, two companies are required to get their financial
statements reviewed which are prepared under different accounting standards. One is
prepared under GAAP while the other one is prepared under IFRS. Under each of the
accounting standards is going to report a different profit amount and also the return of equity
is also be going to be different under each standard. The impact of the differences is going to
be significant and large enough to change acquisitions decisions. Furthermore, each country
has its own set of accounting standards to follow. Mostly in developing countries where
enforcement and compliance are weak, the independence and the quality of the accounting
profession is often weak.

We recommend that the accounting standards board should do a more in depts study on the
factors that affect the development of countries accounting system. Furthermore, the
management of a company should analyse the investors need and mold its accounting system
and implement new accounting regulations in alignment with the international accounting
standards that best suites its investors need (POLOGEORGIS, 2018).

Another weakness identified in the current regulation is revenue recognition. Revenue

Recognition is also a major regulation that requires further clarifications. Inadequate
weaknesses in the revenue recognition have led to many companies to overstate and
understate its revenue, thus leading to unintentional misstatements its financial statements.

Under the current GAAP rules, there is no right way to measure the cost of future upgrades
when selling the contract of a product, therefore it is impossible to know the actual profit
from the sale of the product until the costs are known which can take upto few years. This
mostly apples to IT and software companies (Young, 2016). The short comings in the
revenue recognition measures have led to most companies using their own measures of
revenue recognition. Thus, they fail to give a true value for their revenue and expenses which
does not give the actual picture of the financial performance of the company.
In relation the above we recommend that the provision should be made in the revenue
recognition measures which will enable companies to provide an estimate of future costs. The
estimates should be based on reasonable judgements and the investors will also need to
closely see the underlying assumptions in determining the estimates for the estimated costs.

Moving forward one of the strengths identified in the current regulation is the provisions for
Auditor Independence. CLERP 9 Section 324CA requires an assessor or audit company
involves in assessment activity in relation to an assessed firm at a specific period and a
conflict of interest condition is present in relation to the assessed firm at that time. As soon as
an assessor or audit company knows that the conflict of interest condition are present, they
perform all sensible phases to confirm that the conflict of interest situation ends to occur.
(Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act
2004, 2004). This provision intended to cease conflict of interest as an auditor or the audit
company does not obligate any fault in relation to audit movement involved at a particular
time as they have sensible grounds to trust that the quality control scheme have provided
sensible assurance and has consequently improved on liability on financial reporting.
In addition another strengthens identified in the current regulation is provisions for
addressing threats. APES 110 Section 300.7 A1 have declared conditions and policies that
have influence the assessment of whether a risk to obedience with the essential values is at
satisfactory position. This condition’s relay to the customer and its operational surroundings,
the firm and its operational surroundings. For example, delivering a non-assurance facility to
an assessed customer that is a Public Interest Entity may lead to a greater level of risk to
obedience with the standard of independence with respect to the assessment. APES 110
Section 300.8 A1 has established necessities and application substantial for overcoming risks
that are not at a satisfactory position. This safety measure is, conveying extra period and
skilled individuals to do essential jobs when an appointment has been acknowledged
addressing a self-interest threat. Having unlike associates and appointment groups with
distinct reporting lines for the establishment of non-assurance services to an Assurance
Customer have address self-review, advocacy or familiarity threats. Including additional
company to execute or re-execute portion of the appointment have address self-interest, self-
review, advocacy, familiarity or intimidation threats (APES 110 Code of Ethics for
Professional Accountants (including Independence Standards), 2018). These safeguards
measures have improved audit performance of their duties and subsequently the financial
statements.
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