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Recent years have been stained with mishaps and fraudulent activities of numerous corporations that ruined many lives and crippled the financial world. Although caused by many factors, it taught us the significance of needed regulations, effective internal controls, independence of outside auditors, and the professional conducts of these agents, which are needed to be revisited in order to expanded and strictly enforced. The professional code of conduct and ethics' fundamental function is to give the members of professions principals to maintain their professional attitude and manner. The major downfall of corporations back then was the discovery their misrepresentation on the financial records that many investors and the public community depended upon. However, in order to avoid such events from repeating, we must consider the auditors' code of ethics, professional conduct and the imposed obligation in the works that auditors do so that the public may once again rely with more confidence on financial reports of these entities.
The first major component to an effective audit is how an auditor carries out their responsibilities as public professionals, with emphasis on their objectivity, integrity, and diligence in performing their given duties. The external auditor's role is making sure that the information of the financial reports of its clients is accurate and unbiased. Their main responsible is to serve the public, steering clear of any fraudulent or inappropriate activities and improve professional quality (Gaffikin and Lindawati, 2012, p.5). The AICPA Code of Professional Conduct goes on to say that the auditors must continue to be responsible for anyone who uses their professional services and the cooperation with other auditors to improve their field and public confidence in their works.
It is clear that such concepts are essential to providing the overall framework of an auditor's ethics. For example, if the auditor was not responsible for his reports, then the audit process may not be correctly performed. The auditor may be prone to outside influence and other adverse to the interest of public or client. Another example is, if the CPA firm gets sued by investors because the firm's clients falsify some financial statements overstating certain items, the auditor would be held responsible if they knowingly overlook their client's action. By applying the concept of being responsible for their work and all those who use them, the auditor would be professional sensitive and exercise moral judgment in their work. This lays the foundations for auditors to perform all services with the idea that they would be held responsible and heavily depended upon on their reports.
Another principle of the professional code of conduct is that the auditors' actions are in the public interest and not that of themselves or anyone else. This aspect is most correlated to the fact one of the foremost reasons for the professional code of conduct is so that the users of the auditor's report may depend on the information with confidence. The auditors are the gatekeepers of financial reports of companies, making sure that such reports are corrected and free of misstatement. They must act with genuine interest in serving the public and in doing so it would in return acquire the confidence from the public.
This principle can also be the most conflicting if the auditor, by behaving in the public interest, can also as a result damage a client's interest. Therefore, when the auditor desires to prevent harm to their client, sometimes he will find this code morally conflicting (Gaffikin and Lindawati, 2012, p.5). For example if a company would not disclose reasons for a change of accounting principal since by doing so it may lower the value of its share, but the auditor however, serving the public's interest, would disclose this in their independent report. This would effectively demonstrate how the auditors should honor the public trust. For example, if management of the CPA firm is pressuring the auditor to adhere to the client's say in their audit process, the auditor might face a moral dilemma of two choices, listening to the management and won't be reprimanded by his seniors or act independence of the client, disobeying management orders and possibly lose his job. When the auditor has strong sense of moral to act in the best of public interest, he would act independently, despite the tone at the top. Consequently, by the devise of such code, the auditing process would efficiently serve the public.
In order to broaden and uphold public trust, such a professional as an auditor must perform their duties with the upmost integrity. With integrity, comes trust and that's the beginning for users to place reliance on the auditor's judgment. The auditor should follow a high degree of honesty and fairness which would eventually test all decision they make. They must not act in self-interest or swayed by personal gain but instead reveal such potential conflict of interest. Ultimately, what is expected of an auditor is the development of moral reasoning since it is a professional that is profoundly relied on.
An illustration of this principle is for example when an auditor exceeded the budgeted hours forecasted when assigned to an audit job. Because he took too long, his work inefficiency may impact his job evaluation and yearend bonuses thus tempting him to underreport his hours (Whittington and Pany, 2012, p.67). If the auditor performed his duties with a high sense of integrity, he would report actual hours worked. By doing so, this demonstrates the effectiveness of this code of ethics on the audit processes because had he intentionally underreport his hours, one of the consequences would be the development of unrealistic budget that would affect other employees' work and false performance evaluations, eventually reducing the efficiency of the entire firm. A second example may be that the auditor was assigned to a job involving a client which his spouse has financial interest in, like shares of stock. Though the auditor's employer may have no knowledge of that, the auditor should divulge his involvement so management may take appropriate to remove him from this assignment. If the auditor had been secretive about his situation, his audit process may be improper and biased.
Another characteristic that auditors must maintain is their objectivity and independence in regard to their work and clients. This is important because as the AICPA Code of Professional Conduct emphasizes, it "imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest." An auditor must have the independence of mind and in appearances. He must perform his duties without any distractions or influences that would compromise his professional judgment. Moreover, he must avoid such situations that would threaten his independence and objective mentality. Individuals can't solely depend on firms' financial reports to be factual, since management have every incentive to misrepresent the financial condition of their company. The hiring of auditor and their services were mainly for verification of such documents. Therefore, objectivity and independence is crucial when one investigate and comply report in a morally hazard environment.
An example of threats to an auditor's objectivity and independence is when auditor has familiarity with the client's key personnel. A CPA is assigned to an audit of financial statements of a small company that coincidentally employs his spouse as the treasurer. Due to the circumstances, had the CPA took the assignment without revealing these facts, the audit process would not be considered to be independent and objective since he is evaluating his spouse's work. Hence, undoubtedly objectivity is important to an effective audit process. Another case is when on a job an auditor may be given generous gift while performing his duties. By refusing such items, auditors prevent undue influence leading to a more successful audit.
Article V of the AICPA Code of Professional Conduct center upon due care that must be always exercised on the job. Acting with due care, as broad as it maybe, generally means being professionally responsible, competent and diligent while caring out their duty. The Auditor continues to improve their expertise, experience, and the education of necessary knowledge and skills. While performing his assignment and writing report, the auditor must have consistency, accuracy, and supporting observations and interviews as evidence (El-Moukammal, 2009, p.3). In addition, the auditors' opinion must be result of factual data and completed with no omissions. Also should interact with the client in a respectful and diligent manner.
Assume an accountant was recently hired to the CPA firm and while the senior accountant is on sick leave, the manager gives the junior accountant complicated work regarding a client's internal audit with a limited deadline. However, the junior accountant feels that he is not sufficient experienced to perform the work. The Accountant should act with due care and recognized not to engage in assignment with the lack of knowledge and proficiency. Had the auditor neglected due care, the audit report might be done incorrectly and may damage the practice's reputation. Another example of due care is in a case where a internal audit is taking place and the auditor becomes aware that employees' purchase of goods manufactured by the audited company are put off the books, and the proceeds were used to fund holiday office parties. Though the managers of the company knows this, it is the professional competence and due care of the auditor to guarantee that the financial reports produced reflect any omission of such items and is in accordance to professional standards.