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Gupta (2001 pp.10-12) claims that Indian accounting profession began its history with the enactment of the Indian Companies Act 1857 that introduced for the first time the concept of preparing company balance sheet on voluntary basis. Fredrick, Frost & Meek (2002) informs that, the first Australian requirement for the registration of company auditors appeared in the Victorian Companies Act of 1896.
The two main pieces of legislation governing the securities market in INDIA: According to (Gupta, 2001) Clause 41 of Stock Exchange Listing Agreements requires all listed companies to publish annual audited financial statements. Listed companies in India are required to comply with, Securities and Exchange Board of India (SEBI) Act of 1992, requirements as outlined even in the Securities Contracts (Regulation Act 1956.Further, the Companies Act 1956 specifies the audit of annual accounts of a company is compulsory and indispensable part of an incorporated business. (http://www.sebi.gov.in)
The study (Kapoor, 1995) states that section 226 of the Act provides for the qualification and disqualification of auditors that only individuals possessing the requisite knowledge and skill can be appointed as auditors and they should be independent in carrying out their work to give an unbiased opinion based on objective assessment of facts. The author further founds that the auditor should have no interest financial and otherwise whether directly and indirectly, in the company and/or in its management. Section 224 (1) of the Act seeks to ensure that the appointment of the auditors is not in the hands of directors rather vested in general body of shareholders. (http://www.mca.gov.in)
The Chartered Accountant Act (1949) governs the accountancy profession in India: The Chartered Accountant Act, 1949 (Act No. XXXVIII of 1949) states the following:-
Formation of Quality Review Board: Section 28A, the board would be an independent body mandated to fix the standards for audit services, guide members to improve the quality of services, and review the quality of services provided by the auditors.
Revision of disciplinary action procedure against ICAI member.
Increase in the proportion of Government representation on the ICAI council. (http://www.lexadin.nl)
Directors and management of company are required to ensure compliance with provisions of the Companies Act(1956). According to Bajpayee & Srivastava (2009, p.17) a company`s auditor has an obligation to bring to the attention of the shareholders any noncompliance with provisions of the Act with respect to the financial reporting and associated legal aspect.
Thus, a recent study (Cosserat and Rodda 2009) claims that (a) technical competence,
(b) professional independence play a crucial role in discharging duties in practice to certify what he does not believe to be true and take reasonable care and skill before he believes that what he certify to be true.
Structural and Regulatory Comparison: A comprehensive study on reporting requirements conducted (Wallace-Wanda, 2004) periodic reporting requirements vary significantly. ASX has a comprehensive periodic reporting framework in addition to continuous disclosure. All companies must provide full year accounts in addition to half yearly reports.
Arens et al. (2007, p.111) all disclosing entities, public companies and large proprietary companies are required by law to have their annual financial statements audited. Further (Fredrick, Frost & Meek 2002) states that in addition to have its half-year financial statements either audited or reviewed. Section 227B of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 establishes the Auditing and Assurance Standards Board (AUASB) as the independent statutory body, which, under section 227B of the Australian Securities and Investment Commission Act 2001, may formulate guidance on auditing and assurance matters. In the context of reforming framework Thibodeau & Frier (2007) states that the revised and redrafted Australian Auditing Standards (ASAs) will use the equivalent ISAs as the underlying standard and are expected to be operative for audit of financial reports with reporting periods commencing on or after 1 January 2010.
The Auditing and Assurance Standards Board (AASB) of the ICAI recognizes the development of Auditing and Assurance Standards (AAS) on the basis of continual adoption of ISAs. The AASB compares all AASs with current version of ISAs and examines any significant differences. (http://web.ifac.org/isa-adoption/chart)
"A landmark agreement between CPA Australia and ICAI highlights the increasingly global nature of the accounting profession" said President, CPA Australia, Alex Malley. (MOU with CPA Australia recognizing each others qualification) (www.caclubindia.com)
Arens et al. (2007, pp. 110-111) states the ASX Corporate Governance Council's essential corporate governance principles specify that a company should:
Promote ethical and responsible decision making
Safeguarding integrity in financial reporting
Making timely and balanced disclosure and; moreover
And, according to Johns (1995, p.35) the regulatory mechanism addressing corporate governance in Australia has emphasized 'accountability' and 'transparency' through required disclosures especially to shareholders. Arens et al. (2007 pp.110-111) claims that provisions of Corporations Act 2001 and regulations address audit quality as that how well an audit detects and reports material misstatements in financial statements.
Mukherjee, (2007 p,24) states that Indian GAAP (Generally Accepted Accounting Principles), will fall in line with International Financial Reporting System (IFRS) by 2009 as an Ernst & Young India Survey showed that 95% of CFOs of the companies wanted India to follow global accounting standards. The survey further reflects that 64% favoured IFRS and 31% supported US GAAP. Mukherjee (2007) further claims that the SEBI (Securities Exchange Board of India) does not anxiously monitor obedience with financial reporting requirements, which is different from many other international securities market regulators.
AUASB releases charter: McCabe & Dillon (2010, pp62-64) recommended that the AUASB has released three exposure drafts (ED) of Australian Auditing Standards in Clarity format. They are:
ED 18/09: Proposed Auditing Standard ASA 101 Preamble to Australian Auditing Standards.
ED 19/09: Proposed Auditing Standard ASA 520 Analytical Procedures.
ED 20/09: Proposed Auditing Standard on Review Engagements ASRD 2410 Review of a financial report performed by the independent auditor of the entity.
Clarity Standards: Implications For Australian Auditing: McCabe & Dillon (2010 pp 62-64) further states that on 30 October 2009 the AUASB issued the revised and redrafted suite of ASAs, which apply to audits of financial reports for periods commencing on or after 1 January 2010.
Corporation Act 2001- Sec 307A
According to study (Ravic 2004) claims that audit to be conducted in accordance with auditing standards:
If an individual auditor or an audit company, conducts
An audit or review of the financial report for a financial year; or
An audit of the financial report for a half year;
the audit or review in accordance with auditing standards and the lead auditor (who is primarily responsible to the audit firm or to the individual auditor as the case may be, sec 324AF Corporations Act 2001) must ensure that the audit or review is conducted with in accordance with the auditing standards.
Corporation Act 2001 sec 336 describes auditing standards and the power AUASBs to make auditing standards. (http://www.austlii.edu.au)
International Response to Auditing Needs: According to Portelli (2007, pp64-66) the establishment of the International Auditing and Assurance Standards Board (IAASB), of International Federation of Accountants (IFAC), to improve the quality and uniformity of practice throughout the world, by issuing International Standards on Auditing (ISAs) and guidance on its application is a certain response to the above need.
India's Response to Auditing Needs: The study on standards by Bajpayee & Srivastava (2009, pp52-55) states that the establishment of Auditing Practices Committee, or Auditing and Assurance Standards Board (as it is now known in September, 1982) is one of the steps by ICAI to ensure that its members discharge their duties with due professional care, competence and sincerity. The main objective is being issuance of auditing standards under the authority of the council.
Rationale of Auditing Standards: Bajpayee & Srivastava (2009, pp58-62) further explains that these standards represent a codification of the best practices of the profession, which already exist to help in optimum discharge of professional duties. These standards promote uniformity and comparability in practice.
International Harmonization of auditing Standards: The extensive study by Patel et al. (2002) found that the ICAI is a member of the International Federation of Accountants. Therefore as a matter of policy, the auditing standards issued by the ICAI are in harmony with the International Standards on Auditing (ISAs). According to Bajpayee & Srivastava (2009) currently, IAASB of the IFAC has issued 39 engagement standards, comprising 1 standard on quality control (ISQC), 32 ISAs, 2 International standards on review engagement (ISREs), 2 International standards on assurance engagement (ISAEs) and 2 International Standards on related services (ISRSs). The author further states that the ICAI has issued 35 Auditing Standards corresponding to the engagement standards issued by the IAASB of the ISAB.
ICAI uses IFRS and ISA extensively in developing the national standards. Patel et al. (2002, p.28) states that the ICAI duly considers the IFRS and ISA in standard setting process and may depart from these standards if justified, keeping in mind the local environment and practices.
The Ethical Scenario: Compliance with Auditing Standards
As per the study done by Jakubowski et al. (2002) it is recommended that while discharging their attest functions, it is the duty of the member of the Institute to ensure that the auditing standards are followed in the audit of financial information covered by the audit reports. Bajpayee & Srivastava (2009) states that if for any reason the member is unable to perform an audit in accordance with the generally accepted auditing standards, his report should draw attention to any material departures there form, failing which he would be held guilty of professional misconduct under clause 9 of part1 of the second schedule to the Charted Accountants Act 1949.
Comparative Position of Standards, issued by the International Auditing Assurance Standards Board of the International Federation of Accountants vis-à-vis. Auditing and Assurance Standards (AASs) issued by ICAI. The study by Gupta (2001) compares the relative position of Indian Standards with respect ti ISAs
Title of ISA
AAS/ Guidance Note
Objective and General Principles Governing an Audit of Financial Statements
Basic Principles Governing Audit
Objective and Scope of the Audit of Financial Statements.
The Auditor's responsibility to consider fraud and error in an audit of financial statements.
The Auditor's responsibility to consider fraud and error in an audit of financial statements.
Planning an audit of Financial Statements
Knowledge of Business (withdrawn pursuant to ISA 315 & 330)
Knowledge of the Business.
The auditor's procedures in response to assessed risks.
The Exposure Draft is under consideration, of the proposed AAS
Risk assessment (withdrawn)
Risk assessment & internal control.
Report on Special purpose audit
Guidance Note (project undertaken
New AAS No. (Old no.) Title of the Statement (Effective Date): Rawat (2010, pp.100-102) clarifies the current names of Indian Standards:
SA 200 (AAS 01) :Objectives and Scope of the Audit of Financial Statements (01/04/1985)
SA 200A (AAS 02) :Objectives and Scope of the Audit of Financial Statements (01/04/1985)
SA 230 (AAS 03): Documentation (01/07/1985)
SA 240 (AAS 04) :The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements (01/04/2003).
Australian Auditing Standards (ASAs): Portelli (2007, p66) recommends that ASA 200 (Objective and General Principles Governing an Audit of a financial report), ASA 240 (The auditor's responsibility to consider fraud in an audit of financial report and ASA 330 (The auditor's procedures in response to assessed risk) are in conformity with the ISAs.
Portelli (2007) further states that in Australia there is a issue about the legal status of auditing standards which were deprived of legal backing of the Corporations Act 2001. But, McCabee & Dillon (2010) states that CLERP 9 seeks to redress this issue.
Harmonisation of AUASB with ISAs: The research done by Gendron, Suddaby & Lam (2006 pp.190-192) found that Australia made an undertaking to adopt ISAs by January 2005. The new Australian Auditing Standards included AUS 202 (Objectives and General Principles Governing an Audit of a Financial Report [revised]), AUS 406 (The Auditor's Procedures in Response to Assessed Risks [new]) and AUS 502 (Audit Evidence).
Comparability of Australian Auditing Standards with the ISAs:
Niven (2010, p.68) states that the ISA 920 (Engagements to perform agreed-upon procedures regarding financial information) is basically consistent with the Australian Standard except for the matters discussed below:
AUS 904.11 is additional to ISA 920 stating that in addition to ensure that there is a clear understanding, the AUASB is of the view that the auditor & entity should agree on the terms of the engagement.
ISA 920 requires to comply with the ethics of IFAC & AUS 904 requires an auditor to comply with the ethical requirements of CPA & ICAA. Unlike the IFAC ethics which requires covering supervision of staff, whereas CPA & ICAA do not deal with this issue.
The Auditing & Assurance Standards Board is of the view that the independence of the auditor in carrying out the agreed upon procedures and reporting the factual findings is fundamental in the context of an agreed upon procedures engagement. This is inconsistent with ISA 920 which indicates that the independence of the auditor is not a requirement, but requires the auditor o state in the report of factual findings when the auditor is not independent.
Reconciliation of the above Indian Standards: Bajpayee & Srivastava (2009) discovered the underlying:
ISA not relevant to the Indian Legal Environment: ISA 720 (Other Information in Documents Containing Audited Financial Statements) & ISA 545 (Auditing Fair Value Measurements and Disclosures)
ISAs corresponding to which the drafts of AASs are under consideration of the Council: ISQC 1(Quality Control for firms that perform Audits and Reviews of Historical Financial Information, and other Assurance and related services engagements).
ISA yet to be considered by the AASB of ICAI: ISA 701 (Modifications to the Independent Auditor's Report), ISA 800 (The Auditor's Report on Special Purpose Audit Engagements & ISA 2410, ISA 3000.
Indian Auditing and Assurance Standards are broadly in line with ISA: The extensive study (Rawat 2010) found that the text of AAS generally replicates the text of the equivalent ISA with modifications that adapt to local circumstances when considered necessary. For e.g. Indian AAS, Responsibilities of Joint Auditors, does not have an equivalent ISA due to the prevalence of joint audits in state-owned enterprises, banks and insurance companies.
The Gap between AAS and ISA is significant in its material affect on assurance engagements, except in few areas: Bajpayee & Srivastava (2009) states that the standard on "audit sampling and other selective testing procedures," both as written and as practiced in the country, significantly differs from ISA.
APES; Accounting Professional and Ethical Standards: The standards issued by the APES Board include the code of ethics for professional accountants. The unique mark of the accountancy is the responsibility to act in public interest.
APES 110 and amendments to this Code conform to the Code of Ethics for Professional Accountants Section 290 (Revised) issued by International Ethics Standard Board for Accountants (IESBA) in July 2006. The auditor independence requirements in APES 110 are aligned with the Australian Corporations Act.
Difference between APES 110 and the IFAC Code:
Section 290 in APES 110 generally refers to Audit Clients whereas the IFAC code refers to Financial Statements Audit Clients.
Section320.2 of APES 110 additionally states that a member in business should ensure compliance with professional standards.
Code of professional conduct rule comparison: (Cross country comparison)
Jakubowski et al. (2002, pp111-129) explains the comparative arena of codes of auditing as under:
Members are prohibited from expressing an opinion on financial statements if they have a substantial interest, unless it is disclosed in the audit report.
Members must be free of any interest that which is incompatible with the integrity.
Members should perform their services with pride in preference to personal gains.
Members must conduct in a consistent manner with the good reputation of the profession.
Compliance with professional standards
Members must conduct audits in accordance with generally accepted auditing procedures.
Members to carry out their work in accordance with relevant technical and professional standards.
CCI (Confidential Client Information)
Members are guilty of professional misconduct if they divulge CCI.
Members must not disclose CCI to 3rd parties without specific authority or unless there is a legal duty to disclose.
Members are prohibited from charging fees based on percentage of profits.
Members are prohibited from performing services for a fee contingent on the results or findings.
Thus, Jakubowski et al. (2002) further explains that independence in India is impaired:
If any relative of the member is deemed to have a substantial interest in the concern
As a result of loans to or from clients.
And; as per the findings of Jakubowski et al. (2002) stresses that the Australian code states members may hold shares in a private company or be a member of a firm carrying on a commercial undertaking if these are merely investments; provided the member doesn't substantially participate in the active management of the firm. And, moreover Australian code 'only' states to carry out the work in accordance with the technical and professional standards relevant to the work.
Comparison of Similarities:
Jakubowski et al. (2002) explains that even in the face of disparate economic, political, social, legal and cultural environments between these two countries, there is some degree of convergence in the ways different professional accounting organizations define their rules of conduct. The extensive study done by Patel et al. (2002, pp12-28) recommends a certain degree of unanimity is detected in the comparison of codes, but certain ethical rules are important and should be of concern irrespective of national application. Such unanimity tends to adopt some common ethical parameters and principles. The research by Jakubowski et al. (2002) found that rules related to independence, integrity, conflicts of interest are few examples of universal applications regardless of nationalities.
Revising the ICAI Code of Ethics, to bring in line with the IFAC code of Professional Ethics: The in depth research (Rawat, 2010) found that some restrictions prescribed under the current ICAI code of ethics need immediate revision in order to increase the competitiveness of Indian Audit Firms. Rawat, (2010, 212-214) further found that the Naresh Chandra Committee has made several recommendations in this regard that should be legislated. The author concludes that several rules defined by ICAI appear stricter than those defined by IFAC.
Cultural Influences: Gendron, Suddaby & Lam (2006 pp190-193) recommends that in the codes of professional conduct two aspects of audit independence are recognized generally
Independence in fact which establish the importance of financial, business or family relationships that may affect auditor-client relations.
Independence in appearance or perception is more a matter of mental attitude and potentially influenced by cultural background.
The study by Patel et al. (2002 pp28-31) recognizes that Australia proxies for the Anglo-American cluster (UK, US, Canada) and India proxy for the Asian Indian clusters. But, both are members of the "British Commonwealth" model of accounting, inherited from UK, corporate legislation and accounting practices where "true and fair" view and exercise of professional judgment are as important. Further Patel et al. (2002 pp30-31) explains that the concept of an individual as a separate person to decide and differentiate the ethical and unethical is generally absent among majority driven Indians, whereas Australians (Anglo American Cluster) place more importance to individualism and independence. In the context of auditor-client relationship the client is regarded as more powerful party because of the option of switching auditors. Patel et al. (2002) claims that because of cultural setup of maintaining harmonious interpersonal relations Indian Accountants are more likely to accede to clients and the second reason as compared to Australia people in India are influenced in their own judgement and assessment of others judgement. The methodology adopted by Patel et al. (2002) found the responses to the questionnaire to "big-six" firms in India and Australia in which Indian academics regarded importance of; (i) having good working relationships with superiors, (ii) duty, sincerity and dedication at work and (iii) avoidance of conflict and maintenance of hierarchical equilibrium and harmony. And, Australian academics professed the importance of development of an individualistic "competent self" and striving for power equalisation. Thus, the Australian accountants are less likely to accede to clients than the Indian accountants. Therefore, according to Gendron, Suddaby & Lam (2006 pp.150-156) four items differentiating Australian Accountants from Indians relating to the evaluation of auditor's behaviour are:
Fair/unfair, 2. Just/unjust, 3. Acceptable/unacceptable to family, 4. Culturally acceptable/unacceptable. Therefore, the first three items differentiate on the basis of evaluation of decision in terms of inherent fairness and justice. The last being a component of relative ethical judgement influenced by cultural backgrounds.
Indian Audit: Elusive Independence: The critical research by Mehra (2009 pp.56-58) states that the Satyam scam an event of "Horrifying Magnitude". Mehra (2009) states that on January 12, 2009 elected representatives of accountants and auditors debated the scam and PriceWaterhouseCoopers's role in it. The recommendations by Mehra (2009) states that the demand is for greater independence from the companies they audit. Mehra (2009) further points that the question is 'How can the statutory auditors be independent if they are paid by the company they are supposed to audit? Mehra (2009) found that the fees can influence the report card, it is the final round of discussions within the management where corners are cut and the accounts are window dressed. "Independent" directors on the Satyam board were not truly independent and that auditors often acted in collusion with corrupt company managers. Moreover, the accounts had been audited by internationally reputed firm PWCs.
Australian Scenario: The study by Gendron, Suddaby & Lam (2006) depicts that the collapse of Arthur Anderson in 2002 is often viewed as having generated considerable stress on accounting. Andrews (2006 pp.66-67) explains that the independence of Andersen was highly questionable as three former partners of the firm sat in the HIH board. But, according to McCabe & Dillon (2010 pp.62-64) the true and fair criterion in Australia was undermined and now under the CLERP 9 Act, directors are now required to explain that why the compliance with accounting standards shadows the true and fair view. This saga unfolded equal evidence as to poor corporate governance and as to any default on the part of the auditor, Arthur Anderson (Andrews 2006). The collapse of HIH was only one of other dramatic failures including Harris Scarfe and One.Tel (Andrews 2006). According to Gendron, Suddaby & Lam (2006 pp.168-170) Harris Scarfe's CFO Alan Hodgson served a leading role in the adulteration of company accounts and reports. The study by Andrews (2006 pp.66-67) expains One.Tel's strategic decisions drove such financial strain that its accounts were manipulated to hide losses (by converting expenses into capital expenditure) and ensured the continuance of bonus and salaries (unreal) being paid.
Effective Approach: corporate collapse after-effects; Thibodeau & Frier (2007) claims that Australia, as effected by international and domestic corporate collapses took a mixed approach to contribute to their self-regulation by using the powers of regulatory bodies and ability of professional bodies. The study (Thibodeau & Frier 2007) found that this is reflected by significant changes proposed by Corporate Law Economic Reform Program CLERP 9 and the AUS 1 which requires an auditor not only to be independent, but also appear to be independent.
Critical Review of ICAI (INDIA): Highlighting the very beginning of professionalism: the recent study (Rawat 2010) found the following:
University courses in accountancy focus on the Indian Standards and do not cover International Financial Reporting Standards and International Standards on Auditing.
The Chartered Accountancy curriculum includes professional ethics as a topic in a subject, and not as a separate subject
Thus, improvements can be achieved by development and dissemination of practical guidelines on the implementation of auditing standards.
According to Pandia (2002 pp.7-9) the audit profession in India has brought certain measures to increase its own rule for example "limited" half yearly reviews. But, Pandia (2002) further states that whenever there was an inadequacy of SEBI to prevent corporate scams and UTI entering into controversial transactions the accounting standards of US were adopted as benchmarks. Mehra (2009 pp.56-58) clarifies that the small shareholder is the ultimate victim of all scams who realize on audited accounts and is deceived by the irresponsible conduct of not only the company management but also the statutory and internal auditor.