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Ethics and Auditing

Ethics and Auditing

Tom Campbell
Keith Houghton
Copyright Date: 2005
Published by: ANU Press
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  • Book Info
    Ethics and Auditing
    Book Description:

    Ethics and Auditing examines ethical challenges exposed by recent accounting and auditing 'lapses' through a study of interconnected moral, legal and accounting issues. The book aims to engage a broad readership in the discussion of audit failure and reform. With its range of intellectual and practical perspectives, Ethics and Auditing provides critical analyses of auditor independence, conflicts of interest, self-regulation, the setting and enforcing of auditing standards, and ethics education.  

    eISBN: 978-1-920942-26-7
    Subjects: Finance, Business

Table of Contents

  1. Front Matter
    (pp. i-ii)
  2. Table of Contents
    (pp. iii-viii)
  3. List of contributors
    (pp. ix-xii)
  4. Foreword: Restoring public trust
    (pp. xiii-xx)
    Bill Edge

    Enron, Parmalat, WorldCom, HIH – these corporate failures and accounting scandals have shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets. There has also been public disquiet about the role professional auditors and audit firms have played in these corporate scandals.

    The consequences for many of the players in the market for financial information have been enormous; reputations both of key individuals and organisations are in ruins, jobs have been lost, and pension funds have been wiped out. The damage, both economic and social, has been incalculable, and the implications are far-reaching for...

  5. Introduction: The ethics of auditing
    (pp. xxi-xxxii)
    Tom Campbell

    Accountancy and auditing are complex and technical processes. Ethics, in contrast, might be considered relatively simple. The difficult part of ethics, it may be argued, is not knowing what we ought to do, but getting ourselves, and others, to do the right thing. Truthfulness, honesty, care, loyalty, integrity: we know what they require, but we do not know if and how these requirements can be met. If this is indeed the case, and we want to promote ethical auditing, then we need to attract decent people into the profession, train them well, and not subject them to more temptation than...

  6. I. Approaches to the critique of auditing

    • Chapter 1. Governance and accountability: a legal approach to auditing
      (pp. 3-24)
      Stephen Bottomley

      The legal regulation of company audits in Australia has come under significant scrutiny in the past three years, prompted by some significant corporate collapses in 2001, most notably HIH Insurance (which led to an inquiry by a Royal Commission) and One.Tel. In the wake of these events, there were four major and separately conducted reviews of the legislative framework governing auditors and audit work. These reviews culminated in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2003 (Cwlth).

      The first of these reviews commenced in August 2001, when the Federal Minister for Financial Services commissioned Professor...

    • Chapter 2. ‘Perfectly legal’: a sociological approach to auditing
      (pp. 25-44)
      Doreen McBarnet

      The perspective taken in this chapter is that of neither an accountant nor an ethicist but of a sociologist of law. It takes Enron as the starting point for an analysis of accounting practice and accounting law, and ends by raising questions for accounting ethics. In particular, it raises questions about the ethics of both auditors and management in their approach to and application of law, as evidenced not only in fraudulent accounting but in ‘creative accounting’. The great attraction of creative accounting over fraud is that it allows companies to circumvent legal control in ways which can nonetheless claim...

    • Chapter 3. Public oversight: an international approach to auditing
      (pp. 45-62)
      Roger Simnett and Alana Smith

      One of the key initiatives that has become a popular mechanism for reforming all of the recent ills attributed to the auditing standard-setting processes has been to instigate public oversight over these processes. The predominant structure initiated or proposed by various jurisdictions has been a public oversight (or equivalent) board (POB) (which includes mainly people independent of the audit profession), the purpose of which is to oversee the activities of the standard-setting board (which includes mainly auditing practitioners). The rationale behind this structure is that there is a public-interest dimension to auditing. It is generally, although not universally, believed that...

    • Chapter 4. The role of markets: an economic approach to auditing
      (pp. 63-84)
      Jane Hamilton and Donald Stokes

      Australia and other countries have been experiencing a new wave of regulatory ‘reform’ of the institutional arrangements governing audits of company accounts.¹ In Australia, key developments in the regulatory debate are the Ramsay Report (Ramsay 2001), the report of the HIH Royal Commission (HIH Royal Commission 2003) and various reports and submissions at government level, including the CLERP 9 discussion paper (CLERP 2002)² and subsequent legislation, the CLERP (Audit Reform and Corporate Disclosure) Act. Internationally, major reforms affecting auditors include the US Sarbanes-Oxley Act (2002).³ These reforms potentially affect the relationships between statutory regulation and other institutions and actors in...

    • Chapter 5. True and fair to whom?: a philosophical approach to auditing
      (pp. 85-108)
      Tom Campbell

      The crescendo of interest in auditing (and external accounting generally) arises from the perceived failure of auditors to do what has traditionally been expected of them – to alert shareholders and others with a stake or potential stake in a business to doubts about the published accounts of a company as a representation of the trading position of that company that is sufficiently accurate for them to make rational economic choices in relation to that company.

      Critiques of auditing failures range from allegations of technical incompetence (often due to cost-cutting and inadequately trained staff) and lack of diligence in getting beyond...

  7. II. Auditor independence

    • Chapter 6. Conflicts of interest in auditing: are they conducive to corruption?
      (pp. 111-128)
      Edward Spence

      One of the most important facilitators of corruption is conflict of interest. A conflict of interest occurs when a person or group’s self-regarding interest comes into conflict with their fiduciary duties, or when a person or group has two fiduciary roles and the duties of one compete with the duties of the other. For example, if a member of the Tax Office decided to adjudicate his own tax return, he would have a conflict between his personal self-interest and his fiduciary duty. Again, if an accountant happened also to be the manager of a football club, and as an accountant...

    • Chapter 7. Attachments between directors and auditors: do they affect engagement tenure?
      (pp. 129-158)
      Nicholas P Courtney and Christine A Jubb

      It has been argued that auditing is a service that is difficult to evaluate without being experienced, since its quality is not easily discernible (Pennings, Lee & van Witteloostuijn 1998; Craswell & Francis 1999). In such a circumstance, relationships between individuals are likely to influence the decision to select, or continue, relationships with service providers (Koreto & Harding 1996).

      The impact of personal connections in exchange relationships has been well-established (e.g., Pfeffer 1994), and these ties have been examined in the context of auditing service provision. One of these studies, Davison, Stening and Wai (1984), investigates the impact of personal...

    • Chapter 8. Where were the gatekeepers? Corporate collapses and the role of accountants
      (pp. 159-176)
      Barry J Cooper

      The day Arthur Andersen loses the public trust is the day we go out of business.

      Steve Samek, Country Managing Partner, Arthur Andersen US (Independence and Ethical Standards 1999).

      Looking back to 1999, it was inconceivable at the time that probably the world’s most respected accounting firm was predicting its demise; the stuff of fairytales – which leads us to the well-known ‘fairytale’ of Alice in Wonderland:

      There was a table set out under a tree in front of the house, and the March Hare and the Hatter were having tea at it: a Dormouse was sitting between them, fast...

    • Chapter 9. Management economic bargaining power and auditors’ objectivity
      (pp. 177-192)
      Carolyn A Windsor

      The magnitude of recent corporate collapses has provoked public and media ire. Yet again, the spectre of auditor independence and the ability of auditors to remain objective when employed by economically powerful corporate clients is in the news. Unfortunately, auditors have been implicated in fraud after fraud. The Enron scandal brought down Arthur Andersen, which had been one of the profession’s ‘Big Five’ firms. Now a scandal at Italy’s Parmalat that was uncovered in late 2003 threatens Deloitte & Touche, another global giant, as well as Grant Thornton, an important second-tier firm. But new scandals are still emerging (Economist 2004)....

    • Chapter 10. Criticisms of auditors and earnings management during the Asian economic crisis
      (pp. 193-218)
      Shireenjit Kaur Johl, Christine A Jubb and Keith A Houghton

      During and after the Asian economic crisis of 1997 and 1998, the large international audit firms were criticised for supplying uneven audit quality across their clients globally (see, for example, Wall Street Journal 1998; Accountancy 1998ac, 1999a & b, 2000a & b). This study examines whether in one country affected by the crisis – Malaysia – there appears to be, for the then ‘Big Five’ audit firms, heightened attention to audit quality in the form of constrained discretionary accruals in the post-crisis compared to the pre-crisis periods. If evidence of differential constraint of discretionary accruals post-compared to pre-crisis ceteris paribus is found,...

  8. III. Beyond the auditor:: the search for solutions

    • Chapter 11. Auditor independence: regulation, oversight and inspection
      (pp. 221-238)
      Keith A Houghton and Christine A Jubb

      The regulation of audits has undergone numerous changes since audits first became a part of corporate regulation. It is common for such changes to occur after a major corporate crisis – in particular, a major business failure that gains public interest or notoriety. Where these failures are linked to the belief that there has been audit failure, legislators, corporate regulators, the community at large and the accounting profession all tend to react. Sometimes these reactions result in change to the regulation of audits.

      Over time, many of the implemented changes have added to the quality of audit and auditing. However, it...

    • Chapter 12. Improving ethical judgment through deep learning
      (pp. 239-264)
      Kay Plummer

      Professionals are characterised by their unique expertise gained through education and training, a commitment to lifelong learning, service to society, a code of ethics, an agreement to abide by their profession’s code, and participation in the self-governance and monitoring of the profession. Society grants professions autonomy with the condition that the expertise will be used in the public interest and that members will abide by the profession’s code of ethics. Snoeyenbos, Almeder and Humber (1983) have described this as a ‘social contract’, in which the professional discharges his obligation by operating with high standards of expertise and integrity. When the...

    • Chapter 13. Can we teach auditors and accountants to be more ethically competent and publicly accountable?
      (pp. 265-288)
      Bryan Howieson

      Can ethics be taught? This is an ancient question that continues to exercise the minds of those in many different professions.² There are also many papers that have sought to explore the relationship between ethics and accounting and auditing practice. As a generalisation, many of these have tended to emphasise lamentations about the ‘poor’ ethical behaviours of accountants and auditors as exhibited in high-profile corporate crises.³ Alternatively, they adopt an overwhelmingly empirical perspective and test whether various types of ethical courses or interventions can change the ethical character and behaviour of accounting and auditing students and practitioners.⁴ There is very...

    • Chapter 14. Do auditor provided non-audit services (APNAS) fees impair auditor independence?
      (pp. 289-330)
      Christopher Ikin

      For more than 40 years, regulators, the accounting profession and academics have been debating and researching whether the joint provision of audit services and non-audit services by a company’s incumbent auditor compromises auditor independence in fact or in appearance. Regulators have reacted promptly to recent corporate scandals, despite the lack of convincing corroborative evidence from the auditing research literature. In this chapter I analyse that body of literature which investigates whether auditor independence is impaired as a consequence of the auditor’s fee dependence on auditor provided non-audit services (APNAS). I conclude that while there is some evidence supporting a perceived...

  9. Chapter 15. Conclusion: Restorative strategies
    (pp. 331-336)
    Keith A Houghton and Colin Dolley

    The focus for the discussion of ethics and auditing has been the recurring financial failures of large public companies not only in Australia but also in the Anglo-American accounting world. To the extent that these failures are evidence of systemic problems in the auditing and accounting profession, it is unlikely that regulatory responses that do not take account of the systemic issues will lead to an improvement in financial reporting and auditing. This summary is based around three themes developed in the book: frameworks for understanding the role and duties of the auditor, the analytical and empirical review of the...

  10. Index
    (pp. 337-354)