Recent experiences of big corporate failures in different courtiers have brought awareness about the quality of the independent audits of companies. Examples are laid by major countries that are Australia and India. Australia had experience corporate failure of HIH and One Tel and India had experience of failure of big software company Satyam Computers Limited in 2008. These failures brought the attention of the regulatory authorities and standards setters to make the amendments in the ethical and quality environment of audits of the companies to make them independent enough, so that audit opinion should be unbiased and free of faults. This discussion is based on comparative study of regulatory, ethical and quality environments for auditors in India and Australia. The first part of the report addresses the regulatory environment of both countries and represents the brief comparison as well. This part moves further to show the comparison of auditing standards in both countries. Second part of report shows the ethical environment for the auditors in both countries. Last part focuses on overall quality of auditing and experience in both countries.
Regulations for auditing:
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As stated in 'eStandards', (2010) in India auditing standards are knows as Auditing and Assurance Standards (AAS) and Auditing and Assurance Board (AASB) is the standards setting body in India. It is regulated by Institute of Charted Accountants of India (ICAI). If compared with Australia, India has Companies Act 1956, which provides the basic guidelines and requirements for financial reporting standards to all companies in India. Also Companies Act 1956 has mandated for auditors for all companies to be ICAI-Certified. As amended in 1999, Companies Act requires statements from auditors stating in audit report that financial statements comply with national accounting standards. Through Ministry of Company Affairs, the Central Government has enforced the Companies Law, also known as Department of Company Affairs (DCA). As per DCA's requirements it is mandatory to closely monitor general purpose financial reporting exercised throughout the statutory audit. India has two stock exchange that are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These are regulated by Securities and Exchange Board of India (SEBI). SEBI issues requirement for listed companies under Securities Contract (Regulation) Act and it is mandatory for the listed companies to comply with these requirements. Banking and financial institutions are regulated by Reserve Bank of India (RBI), under Banking Regulation ACT 1949. This act has mandated all banking and financial institutions' auditors to comply with general purpose financial reporting. Under this act, Private and Foreign banks need to seek the prior approval from RBI before appointing external auditor, whereas public sector banks can appoint auditor recommended by RBI. Insurance companies are regulated by Insurance Regulatory Development Authority of India working under IRDA Act. It maintains the auditing regulation in India for insurance industry. ('eStandards', 2010)
According to Jackling et al (2007), Auditing standards of Australia (ASA) are issued by Auditing and Assurance Standards Board of Australia (AuASB). AuASB is required to meet the criteria set by Corporations Law 2001. Arens et al (2010) states that according to auditing standards set under Corporations Act 2001, auditing and reviews of the financial statements should be conducted by auditors. This act applies to all corporations in Australia. Australia Stock Exchange (ASX) has listing rules for all the listed companies. It is mandatory for all the listed companies to comply with these regulations. These rules basically are concerned with Principles of Good Corporate Governance and Best Practices Recommendations. These are enforceable by law and it takes care of independent corporate governance of the corporations to maintain the integrity and objectivity of the audit reports.
Auditing standards in both countries:
Comparing the situation with Australia, as stated in Auditing, Review and other Standards, (2010), India also has set of auditing standards, known as Auditing and Assurance Standards (AAs), regulated by ICAI. These standards are formulated in Engagement Standards, Standards on Quality Control, General Clarification, Standards on Auditing and Guidance. Standards on Quality control are abbreviated as SQC 1 and these are basically concerned with maintaining the quality of the audit. Auditing standards under the General Clarification are derived from ISA's and resemble with Australian Auditing Standards. Auditing standards (AAS) 100-199 to 800-899 are exactly similar to ASA 100-199 to ASA 800-899. In addition India has 2000-2699, 3000-3399, 3400-3699, 4000-4699, which are about standards on review engagements (SREs), standards on assurance engagements (SAEs), applicable to all assurance engagements, subject specification standards and represents standards on related services respectively.. These all standards are based on international standards of auditing. (Auditing, Review and Other Standards, 2010)
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As stated by Arens et al, (2010) Australia has 7 set of auditing standards know as Australian Auditing Standards (ASA). Australia adopted these set of standards in July 2006, and these are based on International Standards of Auditing (ISA) issued by International Federation of Accountants (IFA) under FRC. ASA 100-199 is about introductory matters, ASA 200-299 refers to general principles and responsibility, ASA 300-499 are about risk assessment and response to assessed risk, ASA 500-599 represents Audit evidence, ASA 600-699 are about using work of others, ASA 700-799 show audit conclusion and reporting and ASA 800-899 are about specialised areas of audit.
Code of Ethics for Professional Accountants - Comparison
In Australia, as per Jackling et al, (2007), APES 110 Code of Ethics for Professional Accountants gives the five fundamental principles of professional ethics, which are Integrity, Objectivity, Professional Competence and due care, Confidentiality and Professional behaviour. Arens et al, (2010) all professional accountants are required to comply with these principles and they need to give compliance with these standards in engagement letter as well. These principles are meant to safeguard the integrity of audit reports by reducing the threats to independence of the auditing and safeguarding the minimum acceptable risk in auditing and by resolving other conflicts too. APES 110 are enforced by law under s 40 - 42 and by professional bodies that is Institute's Supplemental Royal Charter 1988 and CPA Australia. Hence APES 110 help in maintain and improving the audit quality in Australia.
Comparing situation in Australia, India does have code of conduct for professional accountants. It is regulated by Charted Accountants Act 1949, in which all the professional accountants are required to maintain the objectivity and integrity of audit and financial reports. This act is administrated by ICAI. This act formulates the schedules of sets of behaviours. It gives the definition of "misconduct" under law, which is not acceptable from Charter Accountants. This is also called 'Other Misconduct'. Also ICAI gives different guidelines for CA's to adhere to provide correct reports on auditing and other attestation services. These reports should give material information. If CA fails to comply with these guidelines then he is considered discharging duty of professional behaviour and is legally liable under professional misconduct, which can result in punishment under act such as suspension for a period of 5 years and forwarding him to High Court. The purpose of this act is to maintain the quality and professional behaviour of the professional accountants. ('Harvard style', 2010)
Overall comparison of quality of audit in India and Australia:
Overall quality of auditing has differences in India and Australia. Comparing overall scenario with Australia, it can be observed that Australia has got Corporations Act 2001 and ASX listing rules to regulate the auditing standards (He et al, 2009). Australia also has auditing standards based on ISAs. But differences arise on the enforcement of the laws and regulations. Professional accountants are enforced by law to comply with all the standards to maintain the ethical and professional behaviour under APES 110. An auditor can be held criminal liable too in worst cases resulting in imprisonment (Arens et al, 2010). Australia too did have bad experiences of big corporate failures such as HIH and One Tel due to poor corporate governance and audit failure. But Australia has taken corrective measures to improve this. These corporate failures had resulted in CLERP 9 reforms which made amendments in Corporations Act 2001. These reforms were basically concerned with making auditors more independent and to improve the quality and professional behaviours of the auditors (Dellaportas, Yapa and Sivanantham, 2008). This is not in case of India.
In India regulatory environment is strong enough to regulate and maintain the quality of audit as Companies Law 1956, Banking Regulation Act 1949, IRDA Regulation Act and Securities Contract (Regulation) Act ('eStandards', 2010). These all acts are regulating and maintaining auditing standards and quality in respective areas. But still there are issues related to quality of auditing and attestation services in India. SEBI has given its listing rules for all the listed companies listed in BSE and NSE. It has been depicted that SEBI has failed to proactively monitor the compliance with financial reporting requirements and it only reviews financial statement at the time of public offering or if there is any complaint against a listed company. According to Rama Verma, (1997), SEBI has given listing rules for listed companies related to corporate governance. Indeed, corporate governance structure is not efficient in India. He suggests this is because dominant share holders in India which creates the problems in three large categories which are Public sector units (PSUs), Multinational Companies (MNCs), and Indian Business Groups. In PSU's government is the major stake holder and reserve the rights to nominate the CEO and Board member. So far audit is concerned, in such political interference, Audit Committee cannot play an independent and important role unlike Comptroller and Auditor General does. It reduces the quality of the audit. In the case of MNC's problem of accurate and effective corporate governance is more severe as in this case Indian subsidiary hold more than 70% of the stack and foreign subsidiary holds the rest of the portion. In the case of Indian Business groups' situation is much more complex as compared to PSUs' and MNCs' because major shares held by state owned financial institution, which dampen the crucibles of effective corporate governance. SEBI has tried to control these problems but these are not much effective. In India, quality of the audit also varies because of the corruption and black money, as in many organizations business and transactions are carried on cash basis, and they are not recorded in books of accounts. According to Chakarbarti and Sarkar, (2009), India has experienced major corporate failures because of poor corporate governance and audit failure. Fresh example is Satyam Computers Limited, which collapsed in December 2008. They have suggested that due to poor corporate governance and accounting procedures Satyam had been fudging its accounts more than 7 years and when disclosed it was not holding any cash as shown. Their analysis shows that Indian market hardly has any care about composition and proportion of independent directors, SEBI regulations. This major corporate failure in India has raised the question about the quality and practices of accounting and attestation services in India. SEBI and other regulatory bodies have taken many corrective measures to improve the quality. But in India it is going to take some time to come up to level.
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In summary, it can be concluded that ethical and professional behaviour of the auditors play an important role in maintaining the quality of audit. This comparative discussion on audit quality, regulatory and ethical environment in India and Australia shows that both countries have got sufficient enough regulatory environments for the auditing standards. Both countries' auditing standards are based on international standards of auditing. Both countries have bad experiences of major corporate failures due to poor corporate governance and audit failure. Discussion reveals that both countries are legally enforcing ethical regulations to maintain the professional behaviour to maintain the integrity of the audit reports. But differences arise because of degree of enforcement. India is lacking to maintain the quality of the audit because of political interference and corruption, whereas situation is contrast in Australia as it is strictly maintaining the quality if audit. Also Australia has taken proper steps after the corporate collapses in the form of CLERP 9 reforms, whereas India has lacked in doing so. Hence in conclusion it can be said that though audit standards and regulations are at par for both countries, but because of degree of enforcement of laws Australia is performing better. India needs to reduce the corruption and political interference to make the professional more independent, hence to increase the quality of professional accountants.