ACCT 20040 – AUDITING AND ETHICAL PRACTICE Essay Example

10Auditing and Ethical Practices

Auditing and Ethical Practices

Lecturer

Allco Finance Group Limited

The collapse of this company represents one of the greatest and largest Australia’s company failures. Thereports indicate that the company became too complicated as well as too opaque to understand it well (Fund2012). The structure of the company was too much complicated and really added to strife and stress of daily life inside the company.There emerged conflicts of interests emanating from related party transactions as well as complicated internal systems. These set the senior management and the directors of the company against one another and against themselves thereby making the group very difficult to manage (given the different responsibilities of the senior management and the directors). In addition to the complex management problems, the company started having problems in managing its debts. D’Amato (2012) indicates that this made it worse for the company and it eventually buckled under the debt problems. The debt problem was almost totally of its own making, as the auditors assert, but the global financial crisis did not make any good for the debt management. The company went in to administration and receivership immediately after these revelations.

Other reasons for the collapse of this company are fight over the control of the group’s subsidiaries. The group had more than 700 subsidiaries with individual ownership, web of relations and crossover management (Do & Chai 2012). These caused tensions and conflicts in the group’s hierarchy. Moreover, the company advanced too much financial help to its subsidiaries and to its senior management. Essentially, what led to the collapse of the group was at every level of the group the structure, internal governance, proper regulation, external oversight and control (both managerial and financial). Nevertheless, it was correspondingly a failure of honesty, trust, commonsense, triumph of competing egos, over ambition and ultimately hubris.

Forge Group Limited

The major reason for the collapse of this company is high levels of unmanageable debts (Hevia 2013). The company had accumulated a lot of debt. As a result, the financiers of the group withdrew their support for the company. The major financier of the company was the ANZ bank; the bank withdrew its support for company. Forge group was unable to find in its attempts to find new cash projections and source of equity (Baojiang & Li 2012). The company experienced difficulties and deepening issues with its projects and they saw the company haemorrhage cash.the financial report indicate that the company had more than $500 million debts in 2011 and this is estimated to have reached $700. The company appointed administrators immediately. The creditors and especially the ANZ bank was pushing for the refund of its debt advanced to the company. The company management appointed administrators to pay the creditors and dissolve the company (Staniland 2014).

The management of the group did not have the capacity to manage the company especially the financial control and therefore they ended up in misusing the debts borrowed as Garattini et al., (2013) asserts. The management was not effective in investing in viable projects and investments that could guarantee the company good and stable returns. As such, the inefficiency of the management contributed significantly to the demise of the group.

Breach Committed By the Auditors under the Corporations Act 2001 and APES 110- Code of Ethics for Professional Accountants

The review of the annual report and the financial statements of the companies reveal breach of code of ethics for professional accountants and also overstepping of the auditors role and responsibilities in the audit of financial statements of these two groups of companies. The two main concerns by the auditors for the collapse of the two groups of companies are failure to act independently and failure to exercise their duties correctly.

Allco Finance Group Limited

Section 220 of the APES 110- Code of Ethics for Professional Accountants requires members in the public practice to take reasonable steps to identify situations and circumstances that could present a conflict of interest (Wines 2011). Such conflict of interest may create compliance threats with fundamental principles such as objectivity and integrity (DeFond et al., 2011).The auditors of this company have conflict of interest and therefore they do not act in the best interest of the group. As such, they have compromised their independence by auditing the group while aware that there is a conflict of interest.The conflict of interest exists in that the senior one of the senior management of the group is a director with the audit firm.

The company act 2001 is very clear on audit engagement; it requires that an audit firm should not accept an audit engagement where an employee of the company they are engaging is a director or has stake or interest in the audit firm (Ye, Carson & Simnett 2011). In circumstances where, in the process of the audit engagement, the audit firm and the client share management or employees, the audit firm should withdraw the engagement and disqualify themselves. It was in the knowledge of the audit firm that one of their client employees has stake in the audit firm, the auditors and the audit firm was supposed to withdraw their engagement (Cowan & Deegan 2011). Therefore it is very likely that the auditors perform the audit with partiality as pertaining tocarrying out the audit process. The auditors break the code of conduct for professional accountants as evidenced by the non-observance and adherence to conflict of interest.

Forge Group Limited

The company got in to debt management problems; it was accumulating debts without directing the available funds to the appropriate projects in terms of viability (Thomson & Jain 2011). All this happened in the watch of the group auditors, Grant Thornton audit Pty Limited. The auditors did not raise alarm or indicate in the financial statements the growing debt and the group’s inability to repay its creditors. The company act 2001 requires that the auditors to bring to the attention of the management and shareholders matters that are material to the financial statements of a company (Chatterjee 2011).The auditors did not raise an alarm of the ever increasing debt and the high risk that the debts posed to the company.Although management of the group was aware of the problem, the shareholders of the companies composing the group were not aware and therefore they presumed that the company if healthy and stable financially. The auditors have a duty of care and this care involved bringing to the attention of the shareholders the state of the group debts and the deteriorating nature of the group finances.

The Major Factors for the Collapse of the Companies

The major factors for the collapse of the Allco Finance Group Limited are lack of poor management and control as well as liquidity problems (Ahn et al., 2011). The intentions of the senior management of the company were questionable. There were conflicts of interest relating emanating related parties. The senior management could not come to a common understanding and reach the same conclusion on running the company.They made the structure of the company so complex and they eventually lost the control of the company. The management was unable to manage the company debts and they increased year after another until they reached a point of claim by the creditors. Eventually, the company could not get finances capital for making investments.The remuneration of the senior management was based on the increase of the company profits, this made the senior management to use unorthodox means to inflate the company earnings and profits so that they receive higher perks. There was no clear reporting procedure and the senior management did not consult or agree on matters concerning the company, this indicated that the company was heading for the worst.

The major factor for the collapse of the Forge Group Limited was liquidity problems. The company accumulated a lot of debts for a very short period and it was not able to repay the funds borrowed.The management of the company was not efficiency in management of the company finances and thus ended up accumulating a lot of debt (Chan & Vasarhelyi 2011). The company invested in two main projects and committed a lot of capital in those projects, the projects failed to perform to the expectations of the management and ended up tying and eventually wasting capital as they were not viable.There were very lax credit checks; there were no tight procedures for credit control. There were no clear procedures for authorization of credit and borrowing capital. Late payment of installmentsand thereby attracting penalties, this added the burden of debt to the company.

There were no documentations of the minutes leading up to borrowing funds and this raised questions of following of the due process and procedures in borrowing funds. The company invested in projects and investments beyond its financial capacity(Ahn et al., 2011). There was no clear business strategy in place to drive the operations of the business; there was no management coordination and cohesion.The company involved in high risk projects but with very low returns. This was in contrast to the handsome management compensation packages; this made the company to start looking for external financing as it could not sustain itself with internal finances.Eventually, it was not sustainable and the company accumulated a lot of debts (Morris & Thomas 2011).

The Current Situation of Auditors of the AFGL and FGL Companies

There was obvious and imminent breach of the APES 110- Code of Ethics for Professional Accountants as well as the corporation act 2001 by the auditors of the two companies. More specifically, the auditors failed in duty of care and due diligence as well as conflict of interest and thereby compromising their independence (Elder et al., 2011).They failed to sufficiently inform the shareholders of the companies on the financial position and state of the company.Currently, the auditor firms of the companies are continuing with publicpractice. However, the audit managers responsible for the audit of the two companies do not practice, the audit firm disengaged them in all their engagements and therefore they were fired. The audit firmsargued that it is not right to wide up the whole firm because the firm was made up of audit partners and each partner was individually responsible for any his or her audit engagements.

The audit partners responsible for the audit of the two companies are criminally liable for failure to disclose crucial information while they were in apposition of trust. They are also responsible under the civil law.

Similarities and Differences Major Auditor Duties Outlined Under Corporations Act 2001 in Australia and Sarbanes Oxley Act 2002 in U.S

The similarities are Corporations Act 2001 and the Sarbanes Oxley Act 2002 has similarities. These similarities are forming an opinion as well as reporting to the shareholders after the completion of an audit (Hostak et al., 2013). This opinion is indicating whether the financial statements of the company complywith the respective act and whether the management applied the relevant accounting standards in preparation of the financial statements. Another similarity is reporting and describing any irregularity, defect or any other matter that should come to the attention of the shareholders (DeFond et al., 2011).The auditors are also supposed to inform the regulatory bodies the state of the company financial statements in terms of any suspense of contravention of the relevant act.

The differences or contrast of auditor duties outlined under the two acts is adequacy of disclosure. This is because the auditing standards in Australia differ from the auditing standards in the United States. There are major differences in the accounting methods and principles in the two acts.As such, the application of policies encompassing rules, conventions, procedures and principles are different and therefore the adequacy and depth of procedures differ. This is a major difference between the two acts concerning the duties of an auditor (Bedard & Graham 2011).

Conclusion

It is very clear that the collapse of the Allco Finance Group Limited and ForgeGroup Limited cannot be attributed to specifically one party. Factors such as complex structure, corporate governance, debt management problems and professional ethics are to blame for the collapse of these companies. These cases do send a message to the rest of companies in the market, the management and the auditors must play not only an active role but also effective role in running of their companies. Persons should be responsible for their actions. The auditors must be very careful in conducting their audit so as not to compromise themselves in any audit engagement.

References

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Thomson, D., & Jain, A. 2011.Corporate Governance Failure And Its Impact On National Australia Bank’s Performance. Journal of Business Case Studies (JBCS)2(1), 41-56.

Wines, G. 2011. Auditor independence: shared meaning between the demand and supply sides of the audit services market?. Managerial auditing journal,27(1), 5-40.

Ye, P., Carson, E., & Simnett, R. 2011. Threats to auditor independence: The impact of relationship and economic bonds. Auditing: A Journal of Practice & Theory30(1), 121-148.