Critical analysis of the Audit profession


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Audit Coursework

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A profession is a very important feature that contributes to society. However, it is becoming more difficult to define. Peter Wright (1959) discusses there are two definitions of profession: one being that it is an “expert qualified by training” and the other is “a self-disciplined group of individuals who hold themselves to the public as processing a special skill, derived from training or education and who are prepared to exercise that skill primarily in the interest of others.” Although both adhere to the “qualified expert” aspect it is especially important for the auditing profession to consider the characteristic of a duty to serve the interest of others as explained in the latter.

This essay will focus on the concern that many writers have debated that the auditing profession has lost its “credibility” in recent years as a consequence of scandals that have occurred in Europe and America. Continuing from this it will discuss whether auditing can be “categorized as a profession” and assess potential steps that might be taken to reinstate its credibility.

What is a profession?

Although a definition has been provided already it is important to collect other in-depth points. Frank Marutello (1981) cited two extremely useful definitions of the profession. First is from Luthans (1976) who states the criteria for a profession would include: a body of specialized knowledge or techniques, formal education and training, a representative organization, fees based on services to clients and an ethical code of responsibility. This is followed by Haga (1974) who states the criteria includes: a service to the public, it requires long training for entrants, embraces a code of ethics, publish learned journals to upgrade their practice, to hold meetings based on the profession, use examinations as barriers to enter the practice and they limit their practice to members licensed to the association board.

Both of these “checklists” are relevant to the auditing profession as it already encompasses if not all at least the majority of these points. This idea proves that at the establishment of auditing/accounting the main intention of it was for it to be a profession.

The traditional role of the accountant is a “professional with technical skills applied to compliance-type tasks is in rapid decline. The role of the bean counter is being replaced by the demands for accountants to add value in terms of competency in financial analysis and strategic decision-making skills” (Parker, 2001). Although, the responsibility that differentiates a certified accountant from any other accountant is that only a certified accountant can sign off on an audit report for a public company (Kranacher 2006). The auditing career has built itself to society as a challenging occupation to get involved in. This is critical because it is essentially people of society which form the opinion of a job and rates its worth. Despite that accountants have worked hard to earn the level of recognition that other professions have achieved, the status still lag considerably behind (The CPA Journal, 2006). It is disappointing that the profession has increasingly become associated with many negative connotations. “The common stereotype of the accountant — usually portrayed as male, introverted, cautious, methodical, systematic, anti-social and above all boring has been linked to the historical development of the profession” (Bougen, 1994; Cory, 1992 cited by Jackling 2002). People are connecting accountants to fiddling books (Macdonald 2000), doing work only in their interest or the company’s interest and having too much power in society (IFAC website, 2013).

Auditing/Accounting Scandals

Strier (2006) mentioned that people “have witnessed a widely perceived ethical breakdown of a trusted fiduciary institution that has been at the epicentre of a number of financial scandals: the public accounting profession.” It is unfortunate to comment on the amount of accounting and auditing scandals that have occurred and this is an obvious problem with the loss of credibility. Two main scandals that have considerably damaged the credibility will be discussed in this essay.

The first scandal to be considered is Enron which is an extremely significant case as there were so many different outcomes within it. A summarizing background from BBC News Business website (2014) is that it was a service based and energy company in Houston. “In just 15 years, Enron grew from nowhere to be America's seventh largest company, employing twenty-one thousand staff in more than forty countries. However, the firm's success turned out to have immersed an intricate fraud. Enron lied about its profits and was suspect of a range of shady dealings including masking debts so they didn't show up in the company's accounts” (BBC News Business website, 2014). It is important to note that the reason Enron got caught was because of a whistle-blower, Sherron Watkins, and because high stock prices fuelled suspicion (Accounting Degree website, 2014). Alongside Enron, the demise of Accounting Firm Arthur Anderson also happened. Arthur Anderson was the Accounting Firm that delved into Enron’s financial statements and audit work. Prosecutors had claimed that Andersen had a secret awareness of the intricate “off-the-book partnerships” that Enron used to enhance its appearance of financial health and mask debt before its collapse into bankruptcy in December (Hays 2002). After the result of Enron, changes had to be made in the profession as credibility had suffered immensely due to the “collapse of one of the Big Five Accountancy Firms”. The fraud “prompted the US Congress to pass the still controversial Sarbanes-Oxley corporate accountability law, which forces corporate executives to take personal responsibility for the accuracy of company accounts and requires organizations to put in place measures to prevent fraud” (Financial Times 2011). The relevant section is Sarbanes-Oxley 802 which “imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also enforces penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and wilfully violates the requirements of maintenance of all audit or review papers for a period of 5 years” (Sarbanes-Oxley Website 2014). This is important to note the development of the Sarbanes-Oxley Act as it shows the profession attempting to satisfy the public in their need for trust again.

The second scandal to be discussed is Polly Peck which has an interesting twist. Casciani (2012) summarizes that Polly Peck was a small textile company in Britain during the1980’s which soon boomed into one of Europe’s biggest electronics company. “By the end of the 90s, it was worth billions, making it a FTSE 100 player. Some investors had seen returns more than their original stake but very few of them got out before it collapsed. In the 1990s, the Serious Fraud Office began investigating Nadir by looking at claims of insider dealing (a line of investigation that it later abandoned). Instead, it found evidence that Nadir had stolen millions of pounds that belonged to shareholders. Nadir had an extremely high level of control over Polly Peck’s finances including that he had the “power to move money without requiring a counter-signature from another director.” The prosecution told the jury that from August 1987 onwards, “Nadir, assisted by close confidants, used more than fifty transfers to steal approximately £150million”. The businessman accepted in court that the majority of the transfers were on his instructions. The court heard Nadir used some of the cash to “protect PPI's stock-market valuation by buying its own shares.” Ultimately, it went to Nadir's “personal interests, including companies or trusts controlled either by himself, his family or close associates”” (Casciani 2012). Polly Peck is an interesting case because Nadir, the CEO, fled the country and was not brought to justice. Nadir apparently escaped “Britain because he was a broken man with no hope of a fair trial over allegations that he stole nearly £150m from the collapsed firm” (The Guardian 2012). This is obviously a major impact on the credibility as there was no punishment held against Nadir which evidently shook the public perception of the profession and its regulations. The Accountant for the case has been “excluded from membership of his institute and banned from calling himself a chartered accountant after admitting charges to a professional tribunal. He was found to have covered up the transfer of funds from Polly Peck accounts into a subsidiary” (Lea 1998). Another case is against Polly Peck's auditors Stoy Hayward who were given a record fine and costs which totalled £750,000. The punishment was “over the auditors' failure to spot fraud and overstated profits over five years” (Lea 1998).

Steps to restore the profession

The profession over the years has always tried to comeback from all scandals with some sort of punishment being dealt. Currently, the punishments in place for an Accountant in the UK caught “fraudulent professionally planned or carried out over a significant period is between £20,000 to £500,000 fines and with 18 months to 7 years custody”(Crown Prosecution Service Website). An Accountant in the US caught could receive “civil penalty up to $100,000, a criminal fine up to $5 million and imprisonment up to 20 years. It should be noted fines cannot be paid directly or indirectly by the company on whose behalf the person acted” (FCPA website). It is reasonable to state that the fines are extremely high, in both the UK and USA, therefore it can be assumed that this acts as a deterrent to those in the profession plus it will essentially be viewed by society as an extreme amount to be paid. Other penalties include exclusion, suspension, withdraw certificate of practice, censure, reprimand, and admonishment (Canning and O’Dwyer, 2001). Again it is seen as reasonable steps to take from the profession when a member of the body does wrong.

One proposal to restore credibility is “new restrictive or punitive legislation” and regulations (The CPA Journal website). This has been effective in the past as discussed earlier the introduction of the Sarbanes-Oxley Act, after the Enron scandal, did improve public perceptions that the profession took a form of control over the situation. However, in the Economia it warns against “simply adding further levels of regulation” deducting that “adding new rules in the hope that they will be the right rules to catch the next set of follies might be less effective than inspiring the (audit) profession with a passion for transparency, business improvement and public interest.” Another proposal is using education. Roth (2004) states that in 2002 a program was formed “Lead and Enhance the Accounting Profession” (LEAP), which aimed at getting high school students interested in the profession visiting only 58 public schools. A year later, 229 Missouri CPAs have volunteered to talk about accounting at their local high schools. The number of Missouri students taking accounting classes was 9,415 in 2003, a 16 percent increase from the previous year. This will have had a vast effect on credibility as the statistics obviously show that there is an increase in interest for the profession which is what they were looking for. A third proposal is from Cree (2014), is for the profession to “account for its social purpose through becoming more open and collaborative, and by focusing on organizations’ outcomes as much as outputs”. “Auditing should be a trust-producing practice rather than product in which the auditors use their judgment and position as trusted.” The CPA Journal (2006) advises that “shorter rotation periods” would also be effective and this would include all auditors not just the senior. This would regain more auditor independence and would restore credibility in their work as more rotation could lead to less scandals occurring. Another point to restore credibility according to the CPA Journal (2006) is that a “one year ban on former auditors is inadequate” which again relates to auditor independence being jeopardized. Again the CPA Journal (2006) suggests to “restore the importance of the quality of audits by establishing different systems of compensation incentives for audit partners”. In relation to this the article also recommends to “disabuse financial-report users of the common misconception that a proper audit can determine with a high degree of precision whether management has accurately portrayed a company’s finances”. Finally the last and most important recommendation to “restore credibility according to the CPA Journal is simply that the “Big Four should reassert the prominence of ethics and professionalism…maintain a culture in which the only acceptable behaviour is the most ethical.” Before the scandals, Arthur Andersen had extensively been known as the “gold standard” among CPA firms for integrity and high values. Its self-destruction is a metaphor for the tarnished image of a once proud profession and a clear call for rededication to its primary, fiduciary role” (Strier, 2006).

With these points in mind the restoration of credibility in the profession could easily be done. However, it would be implementing these steps which could be seen as the difficult stage. The fact the profession regulates itself could also be seen as it trying to protect itself. This could result in less attempts to restore what the profession needs and instead do what the profession wants. It could perhaps take another huge scandal to give the profession the motivation it needs to regain what has been lost.


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