International Issue in Accounting and Audit (Research Paper Sample)

International Issue in Accounting and Audit
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The accounting profession in the United Kingdom has witnessed several scandals that have been majorly due to fraud. The country has seen various fraud cases such as Enron, Tyco, WorldCom and many more. A number of accountants have been involved in this menace that has run down several organizations in the UK. The accounting profession in the country has been faced with such negativity that has prompted significant changes in the business. Auditors and Directors have been handed the responsibility of ensuring that people maintain their faith on accountants. Such faith can only get restored when these auditors and managers can clearly understand their roles and responsibilities in ensuring they prevent and detect fraud before it could occur.
This report will look at the requirements of external auditors while carrying out their duties and responsibilities. The report will focus on the role of external auditors when it comes to detection and prevention of fraud. We will analyze these requirements to find out whether they are strong enough to enable auditors to detect and prevent fraud. We will also revisit some of the major frauds that have happened within the UK due to auditing error and find out why they were not detected early. The report will also refer to frauds that have occurred in other countries as well to make comparisons. Lastly, the report will focus on probable influence International Auditing Standards may have the external auditor in relation to this case study.
Role of External Auditor
This report will focus on external auditor requirements for companies within the United Kingdom. The United Kingdom is one of the major economies in the world today. However despite this status, several frauds have been witnessed among the country’s top companies in the recent past. We look at the roles that these external auditors should play so as to detect as well as prevent fraud from companies within the UK. In the UK, Internal Audit is tasked with the responsibility of ensuring that the financial statements of a company are free from any misstatements that may result from either fraud or error. According to the International Standards of Audit (ISA UK) in the UK, audit is a term used to refer to the process of reporting the financial statements of a business as well as other reports regarding the activity with relation to the auditor’s mandate. An external audit involves the process of carrying out an independent investigation into the financial activities of a firm to determine their authenticity. Such investigation is carried out in line with certain guidelines that, in this case, get offered by the International Auditing and Assurance Standards Board’s (IAASB) (Garcia, 2014).
The external auditor is charged with several responsibilities to ensure efficient detection and prevention of fraud. The International Standards of Audit UK is the primary regulator for auditing within the country. The external auditor is required to consider all ethical requirements while discharging his duties. He is mandated in the Act to perform his duties professionally to the best of his ability to ensure efficient results. The process of preparation and execution of the audit should be carried out by a professional decree. The auditor must also ensure they report all the evidence of audit to the relevant authorities in an effort to ensure appropriate conclusion is made after the audit. These requirements must be adhered to by all auditors while performing their duties to provide a high level of professionalism and objectivity.
In the UK, the rules governing the external audit of businesses are not as strict. The Companies Act of 2006 states explicitly the types of companies must carry out external audit and the ones that get exempted. All public companies together with their subsidiaries must carry out external audit according to this act. The law also calls on all companies that offer banking services to do the same. It also calls on all companies that have had their shares traded on a regulated market within the European market to carry out an external audit to its financial statements. The law, however, exempts small and medium companies according to the Companies Act 2006 (Legislation.gov.uk, 2015). The companies exempted by this act are supposed to meet certain standards as required by the Act. They should not have a revenue more than £5.6 million. The companies should also have balance sheet total, not more than £2.8 million.
Analysis of the External Audit Requirements
The United Kingdom has a set of rules that govern the operation of companies within the country. All large and medium companies that meet the requirements for carrying out the external audit must ensure they adhere to such requirements. However, the law is not as strong when it comes to smaller companies that can just operate without their financial records being subjected to review by an auditor. However, there are certain benefits that can be found in this act for most small companies. The costs involved in hiring an external auditor may be too much for some small companies thus this Act exempts them from unnecessary expenses (Omega Accountancy, 2014). Some small companies have their directors and shareholders as the same people thus the need for external audit might not be necessary.
These requirements might not be as strong especially for small companies, but they are necessary. The Companies Act might be useful in ensuring larger companies carry out the external audit, but it might encourage smaller companies to engage in fraudulent activities. Not all small companies have both directors and shareholders as the same people and thus the shareholders, in this case, might become victims of fraud. The law, however, allows any shareholder to request for an external audit of his company in cases such a company gets exempted. Such law ensures that even the smaller companies get subjected to external audit in cases where there is doubt of financial misappropriation by its shareholders. Recent reports suggest that fraud in smaller companies is on the rise within the country. There is need to tighten these requirements to ensure only the companies that don’t need external audit get exempted. Such a move would help protect these smaller companies from financial fraud or errors that might result in loss of funds.
Implications of Fraud to the External Auditor
Several major frauds have occurred in the UK in the recent past. Most of these frauds occurred as a result of neglect from relevant authorities and in some cases staff from these companies colluded with others to run dry these companies. The Polly Peck scandal was one of the major frauds that rocked the UK in recent years. The textile company under the leadership of the CEO Asil Nadir would witness one of the most controversial frauds in the history of the UK. An independent investigation into the company in 1988 found out massive misappropriation of company funds some of which were transferred to overseas accounts (Casciani, 2012). Most shareholders suffered losses as Nadir would run away with most of the company’s funds.
Several other frauds have also occurred in the UK mainly involving banks. The Bank of Credit and Commerce international fraud occurred in 1991 involving banking frauds such as money laundering and larceny. The most recent is the Northern Rock and the Royal Bank of Scotland Group that occurred in 2008. The UK also witnessed a significant fraud in the insurance industry in 200 when Equitable Life Assurance Society where the company directors misused the company’s funds. Several other incidences of fraud have been witnessed in smaller companies within the country, and that shows the need for stronger audit laws.
These frauds occurred mainly due to the lack of proper laws governing the external audit of companies. For example, it was only after the Poly Peck scandal that prompted the reform of UK company law. Such reforms led to the enactment of the UK Corporate Governance Code that has continually evolved with time. The frauds brought serious questions as to the work of external auditors if they could not detect such financial misappropriation in time to prevent such incidences. They serve as a wake-up call to external auditors to be more thorough when carrying out their functions to help in detection and prevention of fraud.
The issue of economic fraud is not unique to the UK; countries such as United States has been battling the vice for years. The United States has been faced by various frauds that have shaken the accounting world. The major frauds in the US include the Enron scandal that occurred in 2001. It was a major case of audit failure that led to the dissolution of Arthur Andersen that was at that time a major audit and accountancy firm (Thomas, 2002). It was a scandal that questioned the need for an external auditor if they could not detect such a fraud on time. WorldCom also witnessed fraud when it reported over $3.3bn in profits had been lost in its books between 1999 and 2002 (Tran, 2002).
Another serious case of auditing failure is the Tyco International Ltd. scandal that also occurred around the same time in the US. The company executives had been engaging in financial misappropriation and were squandering money meant for the business for personal use. It is hard to understand how external auditors were not able to detect such financial misappropriations early despite being paid to do so. Comparing these frauds with the ones that occurred in the UK, there are several similarities that can be drawn. The first similarity is the lack of strong legislation to govern external auditing of companies. These criminal activities were carried out because the auditor wa...