Auditing and financial evaluation of a certain business, an individual or a government organisation are crucial since it reflects on how their respective administrators manage the flow of their income, assets and transactions. For this reasons, companies and organisations hired several experts to do the auditing and financial evaluations. Aside from hiring accountants and auditors that will work for them internally, they also seek help of other experts to avoid biasness and also in order reveal the genuine stability of the entity being audited (AAO, 1986). According to Arter, (2002), these people are auditors or sometimes accountants. Basically, audit experts who perform an audit on the financial statements of a government, company, individual, or any other legal entity are crucial for business success (Cameron, 1982). These people are working independently to present an unbiased and independent evaluation on such entities. Actually, there are two types of auditors such external and internal auditors (Arter, 2002). External auditors' primary responsibility is assessing the risk management practices and strategy, management and governance processes of an entity. These experts are usually does not express any opinion on the entity's financial statements, they just evaluate and never do such recommendations. Similar to internal auditors, external auditors are considered by businesses and organisations to take a look at financial statement to confirm they are free of errors and obvious misstatements (Arter, 2002). With this regard, this paper will be discussing the role played by auditors, evaluate how these auditor's relationships with clients, users and the general public changed over the last decade and issues concerning the factors that have caused such changes and its impact on the work of auditors in the future will be also discussed.
As Barrett, (2000) argued, most CPAs offers tax and management advisory services but their major function is auditing. Actually, 60% of the annual revenue of an accountant/auditor are from their auditing services (Atrill & McLaney, 2004). For the past decade, auditing are crucial for most organisations and currently undergoing to such dramatic changes concerning to its relationship with the practitioners and the regulatory regime (Atrill & McLaney, 2004). Basically, the auditing process will enable the public accounting profession attests or provides assurance as to the dependability and fairness of financial statements. According to Hardman (1982), there are two stages of the confirmation function in auditing process. The first stage is the audit of the primary accounting records and supporting evidences. In the second stage, the issuance of the auditor's report has been considered. For Harvey (1990), typical auditing procedures comprises the confirmation of account balances, examination of tangible assets, observation of certain activities, vouching transactions, checking computations and questioning management.
For the past decade, most of the auditors especially the independent auditor's primary function was the evaluation of bookkeeping discrepancies, discovery of theft, and other indicators of improper or proper management for the benefit of the client. Nowadays, however, the most important purpose of an auditor was to present the unbiased report of the financial condition of the firm for the benefit of other parties. These changes in function were due to the imposed regulations of different auditing regulatory bodies. As for the new era, the auditor should complete the audit process's five stages (Guide to Public Financial Administration in Queensland 1982): (1) arranging the audit by considering the firm's accounting system and business process, (2) partial evaluation of the internal control system of the firm to create a basis for trust thereon, (3) doing some compliance tests that designate whether the internal control system is suitably working, (4) modifying and evaluating the planned audit program of independent auditor to match to the results of the compliance tests, and (5) appraising the acquired data to decide whether the firm's financial statements precisely marked the true economic situation of the firm. After such assessment, the auditor should issue a written report of the audit known as the "opinion." In the opinion, the independent auditor conveys "an opinion on the fairness with which the results of operations, present financial position, and changes in financial position . . ." (Hamburger, 1991). Incidentally, there are categories of audit reports disseminated by independent auditors and these are qualified or adverse opinions, unqualified opinions, and disclaimer opinions. In the unqualified opinion, the auditors, even though not guaranteeing that the mathematical figures in the financial statements are accurate or that fraud is not present, does report with no any reservations, exceptions, or qualifications that the financial statements of the firm fairly mirror its operations' results, financial positions, and changes in financial position (Sharpe, 1992).
Apparently, auditors may issue an adverse or qualified opinion, depending on the value of the insufficiency, if the financial statements of the firm are not in compliance with GAAP (Monaghan, 1989). Elements that are basis for a qualified opinion comprise: "a lack of capable evidential matter, limitations on the extent of the auditor's assessment, alterations in accounting principles being applied, financial statements departures from GAAP or significant doubts which influence the financial statements" (Monaghan, 1989).
If one of the previous grounds pervasively and materially affects the fairness of presentation of financial statements, the auditor should present an adverse opinion (GAO 2000). The disclaimer opinion specifies that the auditor who audited the financial statements articulates no opinion because it is impartially impractical to decide if the financial statements offered are constant with GAAP (Sharpe, 1992).
In doing the audit function of a certain entity, the auditor has a number of affirmative responsibilities. According to the Guide to Public Financial Administration in Queensland (1982), firstly, the independent auditor must be precise in strategies to find out and report the firm's genuine financial position. Secondly, as a representative for the public, the auditor must stay independent of the management of the firm. The auditor owes the independence duty to the shareholders of the firm, the public and the board of directors. Thirdly, the auditor must completely reveal all material features of the financial condition of the firm. The independent auditor duty of disclosure requires them to reject an improper engagement, report cheating, and place a caution on statements pertaining to the ability and liquidity of the company to continue as a going concern.
In auditor experts' affirmative duty to discover irregularities and material errors, including fraud, the auditor fulfils a function that the public considers the auditor's most significant role (Monaghan 1989). According to Harvey, (1990), fraud does not become visible on the face of a company's records, but frequently signs of it will likely in the form of irregularities, and, hence, the auditor can only divulge fraud by closely examining irregularities. Whereas the Statements of Auditing Standards (SAS) according to Arter, (2002) asserts the independent auditor's clear liability to identify management fraud, that same SAS does not oblige the auditor to guarantee the accuracy of the firm's financial statements.
Basically, the Court, in United States v. Arthur Young & Co. has classify the accountant as a public watchdog which is considered as the ultimate allegiance firm's stockholders and creditors including the investing public (U.S. Supreme Court 1984). With this, function stresses that the auditor maintains total independence from the client at all times and necessitates absolute fidelity to the public trust. As seen in this case, the Supreme Court articulated that the auditor's responsibility to identify, not simply search for, irregularities and errors, is based upon. To assist the auditor's detection of fraud, the AICPA has developed a list of business environment symptoms of financial statement fraud. The list enumerates the following symptoms (Raab M.S. 1987): (1) a governing senior management in concurrence with compensation wed to reported performance or an ineffective board of directors, (2) decline of quality or volume of sales, (3) excessive interest of top-level management concerning the accounting alternatives effect on stock's earnings per share, and (4) strange pressures existing, for instance insufficient working capital, extensive investment in a unpredictable sector, and debt limits that hinder management events.
Actually, most of the symptoms are present in previous experience of Boston Company (Chipello & Anders 1989). The said company is one of the top and highly performing businesses which admitted in 1989 that they were stormed by their financial books whereas overstating pretax profits of about $44 million for the first 3 quarters of 1988. The misleading accounting began in a moment after the October 1987 stock market collapse, when Boston Company was weak in business goals established by its glitzy and then terminated president, James von Germeten, and sponsor of swift development who came down hard on subordinates who didn't deliver (Chipello & Anders 1989). Weak business goals would render into stridently abridged management bonuses, which reached $1 million for most top executives.
As seen in the paper of Barrett, P. (2001), allegedly fraudulent activities of public firms divulges that 87% of the frauds are done through the use of deceptive information of financial records. Aside from this he found out the 66% of it belongs in high-level management. Apparently, only 45% of the cases involve failures in internal controls systems. In accordance to the view of Boymal, (1997), audit failure happens when a firm experiences severe financial difficulties shortly after getting an incompetent opinion by the independent auditor that the financial statements of a certain company are precise and correct. Basically, Monaghan, (1989) believed that fraudulent reporting is one cause of audit failures.
Even though a lot of cases of unlitigated fraud possibly will break out public detection, the number of litigated cases charging deceit and the combinations of reported allegations of financial fraud imply that more than 99% of all audits are free of financial fraud (Harvey, F. 1990). On the other hand, the occurrence of financial fraud results in enormous losses to investors and creditors. It also affects confidence in the process of financial reporting in general. Furthermore, lessened public confidence in the financial information consistency can badly affect all firms that concern financial statements since investors and creditors will insist higher return rates due to amplified ambiguity concerning accuracy of financial reports (Barrett, 2000).
To act in response to the expectations regarding the role of the accountant, the accountancy profession has taken certain regulatory steps. Basically, the NCFFR which is usually referred to as the Treadway Commission, was made to recommend customs to develop the reliability of the financial reporting of most firms. The NCFFR's 49 recommendations directed to the SEC, independent accountants, public companies, and the educational institutions have as their point the promotion of reliable and accurate financial reporting (National Commission on Fraudulent Reporting, 1987).
Among the NCFFR's recommendations are (National Commission on Fraudulent Reporting, 1987): (1) senior management should explicitly and decisively recognize in a report that the firm, not the independent auditor, has key accountability for the honesty and accuracy of the reporting process of financials, together with financial statements, (2) each public firm ought to set up an audit committee encompassed of independent directors, (3) the accounting profession must amend auditing standards that will improve the accuracy and quality of the audit and to develop public communication about the role of auditors in auditing financial statements, and (4) the auditor, though not expected to warranty the precision of the firm's financial statements, must take positive steps to evaluate the probable for fraud and is accountable for determining and detecting fraudulent financial reporting.
The internal audit function, as compared from the audit committee, the NCFFR should keep up an appropriate level of independence from the organization of the firm. One method of guaranteeing this independence is to necessitate the chief internal auditor to report openly to the chief executive officer of the firm whose task does not consist of preparation of the firm's financial statements. In addition, the chief internal auditor should have unfettered access to the audit committee.
As Hamburger, P. (1989) believed, sufficient communication between the auditor and the client firm is crucial. In addition, the nonaccountant's uncertainty with accounting standards should be also considered by most firms. One significant aspect that restrains significant information transmit from the independent auditor to the firm of the client is that the standard audit report. The audit report does not notify the client of the exact difficulties discovered with the accounting system of the firm.
Additionally, investors referring to the audit report more often than not are not adequately skilled to decode the financial reports (Hardman, D. 1982). The typical investor needs comparable and objective data, not unnatural language, jargons and terms understood merely by accountants (Hardman, D. 1982). Furthermore, Hardman, (1982) also argued that accounting statements enclosed in financial reports are frequently misleading to the nonaccountant because he or she does not comprehend the accountancy language. Actually, there is still argument among accountants as to what is "misleading" in language of financial statements. Consequently, details that emerge to signify the financial state of a firm may not do so since accounting "facts" signify probability and not absolutes (Hardman 1982).
Conceivably the accounting profession's most important response to the public belief of honest, reliable, and fair financial reporting is its adoption of ten Statements on Auditing Standards (SAS) in 1988 suggested by the Auditing Standards Board (ASB). Under the latest standards that displace SAS Number 16, the independent auditor has an enhanced accountability to report and detect fraud (Auditing Standards Board, 2009). The auditors are now capable to devise the audit to find out material irregularities and errors. A further standard, which shifts SAS Number 17, considers that the independent auditor may have a capacity to report illegal activities to authorities away from the firm (Auditing Standards Board, 2009). Moreover, the new standard that replaced SAS Number 34 necessitates the independent auditor to appraise the economic possibility of the firm and craft definite statements in the audit report if there is uncertainty as to the firm's sustained existence (Auditing Standards Board, 2009).
The entity's management administration and auditors plays an important role in any organization. This importance lies on the fact that they have good collaboration in able to protect and organize the relevant data in any organization. With this, their work and role must be given emphasis, including the approach that they can use to improve. In the case of financial fraud, auditors should be aware and be responsible in finding glitches in financial reports. Thus, it is vital for them to be fair in giving reports.
As for the future of auditing practices, it is vital that these people should create good and honest accounting practices. The financial standing will indicate very significant effects on business sustainability, even amidst the threats of unrest. Therefore, we could conclude that the business strategies such financial evaluation could still be expected to improve business sustainability faster than average. However, even though there is a good auditing practices, there still a need to reconcile both the inside-out and outside-in approaches in the business process.
In an age where the financial system has become simultaneously more complex and more accessible to the unsophisticated investor, it is essential that the challenge of effective management is addressed. On the other hand, harmful incentive structures, conflicts of interests, and the absence of transparency seem to be key issues in addressing shortcomings in current management. In addition, the interests of minority shareholders have to be protected as larger investors may abuse their power. These problems can effectively be addressed by the use of forensic audits after major bankruptcies or suspected accounting frauds, by encouraging whistleblowers, by fostering of a process of diluting ancillary links between audit firms and their audit clients as well as between investment analysts and their clients. Greater transparency in the process of credit rating by the relevant agencies is also required. Other suggestions for reform include measures to tackle concentration in the provision of audit services, perhaps by lowering entry barriers.