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This report provides an evaluation of auditing and accounting practices in Australia and India. The major purpose of this report is the comparison of current regulatory, ethical and quality environment for auditors in both countries. This report also discusses about the listing rules, laws and legislations and use and regulations of Auditing Standards in Australia and India and how these are helpful in quality auditing. Finally report discusses ethical environment and overall audit quality experiences in these countries.
The findings assist to assure that Listing Rules Security and Exchange Board of India (SEBI) and the Australian Stock Exchange (ASX) are very useful to regulate and maintain high standard of the securities markets and also helpful to support quality auditing in their countries. All of these listing rules are associated under the Corporation Act and Companies Act 1956 for Australia and India respectively. It also describes that Auditing Standards setting in both countries are relevant for economic strength and growth for private and financial sectors. Auditing Standards of the both countries are established on the basis of International Standards. This report also analyses the legal and professional ethical requirements for an audit professional and provides a basis for discussion on professional ethics and conduct. It is also very clear from the findings that India and Australia have put considerable efforts to get international recognition for its standards and codes.
The following recommendations are made for both countries that they should further improve or enhance the quality of auditing and take steps for improving compliance with the appropriate rules and auditing standards to achieve the desired goal and for the progress in auditing field.
In Australia, the major collapse of HIH happened in 2001 and it represented one of the biggest collapses in Australian corporate history. The Royal Commissioner identified substantial conflicts of interest on the part of the HIH auditor, Arthur Andersen as a factor in the collapse and also found that Anderson, yielded to management on controversial accounting issues, breached professional standards and failed to display independence. Remarkably, the accounting firm Arthur Andersen was included in conflicts of interest while auditing a number of companies in the USA as well. The subsequent Royal Commission in their final report focused attention on the importance of auditor independence, professional ethics and auditing standards. This focus was concerned with the improvement of ethical behavior and overall quality of the audit.
The purpose of this report is to describe the regulatory, ethical and quality environment for auditors. In audit services area, the Royal Commission prescribed a range of measures including some outlined to accommodate greater disclosure of the scope of audit services as well as non-audit services supplied by audit firms and also prescribed changes to the Australian Stock Exchange Listing Rules and the destruction of some State and Territory levies on general insurance to decrease premiums. These recommendations strongly influenced the subsequent legislation and regulatory measures in Australia.
All the data of this report collected from various academic sources such as books, journal articles and websites which provide the information for the report on quality of auditing in India and Australia.
1 Regulatory environment in India and Australia:
Listing rules in Australia:
According to Leung, Coram, Cooper &Richardson (2009), The Australia Securities Exchange (ASX, originally the Australian Stock Exchange) was established in 1987 through the amalgamation of six independent stock exchanges in Australia .pursuant to s.769 of the Corporation Act, the ASX makes or adopts listing rules in the interests of the public. The listing rules provide prerequisites for the admission and continuation of listing. The continuing listing rules supplement the disclosure requirements of the Corporation Act (Leung, Coram, Cooper &Richardson, 2009). The Listing Rules are not just connecting contractually. They are applicable against listed materials and their affiliates covered by the Corporations Act. Look sections 793C and 1101B of the Corporations Act. The Listing Rules build commitments that are added, and equivalent, to common law agreements and statutory responsibilities. Listing rule amendments must be lodged with ASIC, covered by Corporations Act. ASX's Listing Rules provides a benevolent and fine instructed market for financial securities andÂ providing an internationally competitive market. It will provide international diversification to domestic Australian investors with all the convenience of a local listing. Investors will also get unique exposure to economies, markets, industries and management teams not available through existing ASX-listed securities. ASX attracts many leading global companies who are primarily listed on other stock exchanges (ASX 2010).
Australia is one of the oldest and most stable democracies in the world. Its political and legal institutions are recognized globally for their transparency, impartiality and robustness. Australian Security Exchange (ASX), Australia's leading licensed market operator plays a key role as front-line regulator, maintaining high standards of market integrity. This role is supported by the Australian Securities and Investment Commission (ASIC), which has overall regulatory responsibility for capital markets (ASX 2010).
The corporate governance rules and recommendations of the ASX can significantly affect the relationship between the auditor and the board of directors of a client company, through the ASX's listing rules, but do not directly affect auditors. The roles of regulatory agencies are determined by legislation. The main regulatory agency is the Australian Securities and Investments Commission, which administers the Corporation Act 2001.
Corporations Act 2001 and Support to Quality Auditing
According to Arens, Best, Shailer, Fiedler, Elder & Beasley (2007), The main legislative provisions pertaining specifically to auditors are in the Corporations Act 2001.
This contains specific provisions that require:
The financial audit of companies
Prescribes the auditor's function
Regulates auditors' activities
All financial statements audits of incorporated entities in Australia are under the auspice and requirements of the Corporations Act 2001. The imposition of the statutory duty to audit the financial statements of the corporation and report on their truth and fairness is the main source of auditor liability under the Corporations Act 2001. The statutory tort of misleading or deceptive conduct is included in the Corporations Act. An auditor must provide a formal declaration to a company's directors that the auditor has complied with the independence requirements of the Corporations Act and corporation regulations (Arens, Best, Shailer, Fiedler, Elder & Beasley, 2007).
The two main government legislation in the security market of India:
The Securities and Exchange Board of India (SEBI) is a regulatory body which oversees the Indian securities markets. This includes public issuance of securities, the secondary market and registration for brokers. The purpose of SEBI is to protect investors' interests, promote, develop, regulate and supervise the securities market. There are 2 major stock markets in India, The Bombay Stock Exchange (BSE) and the (NSE) National Stock Exchange (Accelteon 2010).
The companies those are listed with India desired to acquiesce with SEBI concerns as outlined with SEBI Act and the Securities Contracts (Regulation) Act. To safeguard the interest of the investors, SEBI point to listing concerns specifying disclosures those are opposite to companies those are listed in addition to other accounting requirements for auditing. SEBI, through this agreement, needs compliance with the Institute of Chartered Accounted of India-issued accounting standards (SEBI 2010).
The Companies Act 1956 specifies the audit of annual accounts of a company is compulsory and indispensable part of an incorporated business.
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. Section 226 of the Act provides for the disqualification and qualification of auditors that only individuals possessing the requisite skill and knowledge 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. Thus the auditor should have no interest financial and otherwise whether directly and indirectly, in the company and/or in its management(Worldbank 2010).
Regulatory environment in the context of audit quality
Securities and Exchange Board of India: The SEBI does not dedicatedly monitor acquiescence with financial reporting necessities, which is unlike many other international securities market regulators. SEBI only gives attention to financial statements that are in the prospectus at the time of a public offering or in case of a complaint against a listed company. Those companies are required to give in their financial statements to the Stock Exchange. The Stock Exchanges closely check acquiescence with requirements of their Listing Agreement and fastly acting on publishing of any information that could deceive investors. The Stock Exchanges in India are usually satisfied if a publicly traded company issues audited financial affirmations on a timely basis, and such affirmations are attended by an amateur audit opinion. The Corporate Relations Department of the Stock Exchange go after any accomplishment by the auditors with the company and needs alterations by the following year-end. The Stock Exchanges deficit acceptable number of qualified professionals and financial resources to consistently carry out monitoring of compliance with accounting and financial reporting requirements (SEBI 2010).
The Companies Act (1956): Needs the anticipation, introduction, publication, and exposure of financial statements. Few considerable changes have been made through the Companies (Amendment) Acts 1999, 2001, and 2002. The alteration of the Companies Act (1999) needs all companies to accord with (Indian) Accounting Standards, admit any alteration, give reasons for such deviation, and state the encounter of the alteration on the financial statements. The changes also need the auditor to clearly state in the audit report whether the financial statements are in accord with these Accounting Standards. Provisions in the Companies Act (1956) with respect to financial reporting are in the method of being amended. A company's auditor has an responsibility to convey to the concentration of the shareholders any noncompliance with provisions of the Act concerning to the financial reporting and associated legal conditions (MCA 2010).
The Companies (Amendment) Act (2000) granted necessary character for the first time to the view of an audit committee. Every public company that has a paid-up share capital go beyond Rupees (Rs) 50 million is needed to aggregate an audit committee. The audit committee can make directions on any matter relating to financial management, containing the audit report; and the board of directors is restrict to maintain these directions (MCA 2010).
2 Use and Regulation of Auditing Standards in India and Australia
Auditing Standards setting in India:
The Accounting Standards Board (ASB) and the Auditing and Assurance Standards Board (AASB), are responsible for assisting the Institute of Chartered Accountant of India in setting standards. ICAI uses IFRS and ISA extensively in developing the national standards. The Central Government makes official notification of accounting standards applicable to companies and guidance notes on accounting and auditing practices are issued by ICAI, particularly in areas where standards do not exist (eStandardsforum 2009).
ICAI has issued 32 Accounting Standards. These are numbered AS-1 to AS-7 and AS-9 to AS-32 (AS-8 is no longer in force since it was merged with AS-26). Compliance with Accounting Standards issued by ICAI has become a statutory requirement with the notification of Companies (Accounting Standards) Rules, 2006 by the Government of India (ICAI 2010).
As of 2010[update] ICAI has issued 43 Engagement and Quality Control Standards (formerly known as Auditing and Assurance Standards) covering various topics relating to auditing and other engagements. All Chartered Accountants in India are required to adhere to all these standards. If a Chartered Accountant is found not to follow the said standards he is deemed guilty of professional misconduct. ICAI has classified the standards under five headings to demonstrate compliance with international standard on auditing issued by the IAASB of IFAC. It is mandatory for ICAI members to ensure that Auditing and Assurance Standards are followed in the audit of financial information covered by their audit reports (ICAI 2010).
International Auditing and Assurance Standards Board (IASSB)
The establishment of the International Auditing and Assurance Standards Board (IAASB), of International Federation of Accountants (IFAC), to improve the uniformity and quality 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.
International Harmonization of auditing Standards:
According to Soltani (2007), The institute of Chartered Accountants of India (ICAI) develops national Auditing and Assurance Standards (AASs) based on the International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB).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. 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 related services (ISRSs) and 2 International standards on assurance engagement (ISAEs) The ICAI has issued 35 Auditing Standards corresponding to the engagement standards issued by the IAASB of the ISAB (Soltani 2007).
Overall, the Indian authorities seem proactively pursuing better compliance with international standards. Accounting and Auditing Standards of India are established on the support of international standards and the country has several accountants and auditors who are well skilled and capable of providing international-standard services. A good example of that is India is been agreed to combine its practices with international standards by 2011 (eStandardsforum 2009).
Auditing Standards in Australia:
In the Australian context, we consider that it will be essential for the Auditing and Assurance Standards Board to continue to base the Australian Auditing Standards on the standards distributed by the (IAASB) International Auditing and Assurance Standards Board (Treasury 2010). The three professional accounting bodies CPA Australia, NIAA, and the Institute of Chartered Accountants (ICAA) in Australia have a role in the monitoring of compliance and enforcement of accounting, reporting and auditing requirements on members. The professional bodies each contribute money and technical 'know-how' to the setting of accounting and auditing standards (eStandardsforum 2010).
Functions of Auditing and Assurance Standards Board (AUASB):
The AUASB - an independent statutory body - is the auditing standard-setting body in Australia. The AUASB was established by the CLERP Act with responsibility for the development of high quality audit standards. The primary functions of the AUASB are:
To make auditing standards under the Corporations Act for the purposes of the corporations legislation.
To formulate auditing and assurance standards for other purposes.
To formulate guidance on auditing and assurance matters and
To participate in and contribute to the development of a single set of auditing standards for world-wide use.
According to Arens, Best, Shailer, Fiedler, Elder & Beasley (2007), The standard setting process in Australia has changed since the enactment of the CLERP 9 Act. The main auditing standard setting functions now reside with the AUASB, under the supervision of the Financial Reporting Council. The remaining private sector body is the Australian Accounting Research Foundation (AARF), which was originally established by CPA Australia and the ICAA on 23 November 1966. It was instrumental in the formation and issue of accounting and auditing standards.
Australian Auditing Standards (ASAs): 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.
eStandardsforum (2010), Australia attains high total acquiescence with international standards and codes, with a point of 69.17 out of 100 in our Standards acquiescence Index. The government has had a long-standing procedure of moving toward merging of national standards with International Standards on Auditing (ISAs). Australia properly made the International Financial Reporting Standards the basis of Australian Accounting Standards in July 2004 (eStandardsforum 2010).
3 Comparison of Ethical and Quality Environments
Ethical and Quality Environment in Australia:
According to Leung, Coram, Cooper & Richardson (2007), In July 2006, the APESB of Australia released Code of Ethics for Professional Accountants APES 110 which replaces the joint code of professional conduct established by CPA Australia and the ICAA.
The Code of Ethics has three parts. Part A (Sections 100-150) provides an introduction and fundamental principles that are applicable to all professional accountants. Part B (Section 200-290) and C (Section 300-350) illustrates how the conceptual framework described in Part A is applied in specific situations (Leung, Coram, Cooper &Richardson, 2009).
APES; Accounting Professional and Ethical Standards
APESB is responsible for the (APES 110) Code of Ethics for Professional Accountants which contrivances the ethical rules accepted by the International Federation of Accountants (the IFAC Code) in similar to non-audit benefits. 13 Australian Auditing Standard ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements requires an auditor to comply with relevant ethical requirements. An auditor is to have regard to the applicable requirements of APES 110, which are to be taken into account in determining whether relevant ethical requirements have been met (Leung, Coram, Cooper & Richardson, 2007).
APES 110 recognize that non-audit services may build hazards to the audit firm's independence and needs auditors to check the significance of any hazards constructed by the provision of such benefits.
APES 110 bring that in some cases it may be easy to remove or decrease the hazards developed by the operation of protections. In other ways, no protections may be applicable to decrease the hazard to satisfactory level, and if this is the case,
APES 110 needs either the audit advantages or the non-audit benefits to be declined.
Difference between IFAC Code and APES Code:
1 In section 290, APES 110 refers to Audit Clients whereas IFAC refers to Audit Clients Financial Statements.
2 In Section 320.2, APES 110 states that a member in business should ensure compliance with professional standards.
The three professional bodies CPA Australia, NIAA, and the Institute of Chartered Accountants (ICAA) jointly issued a revised version of their Independence Guide: Interpretations in a Co-regulatory Environment in June 2008. The guide is intended to provide a clear indication of the conceptual approach adopted in Section 290 of APES 110 Code of Ethics, with practical examples of independence issues encountered by accountants and auditors (APESB 2010).
According to Arens, Best, Shailer, Fiedler, Elder & Beasley (2007), The Code of Ethics for Professional Accountants (APES 110) includes some detailed rules, but the Australian accounting bodies have chosen to emphasize the conceptual elements of professionalism through general statements of ideal conduct.
Code of Ethics for Chartered Accountant in India
The current ICAI Code of Ethics needs immediate revision in order to increase the competitiveness of Indian audit firms. Other limitations require to be presented through the Code in order to improve auditor independence. Rawat (2010, pp.212-214) stated that The Naresh Chandra Committee has made many commendable directions in this attention that should be legislated.
Code of Ethics, to bring in line with the IFAC code of Professional Ethics:
Rawat (2009) found that the Institute of Chartered Accountant of India Code of Ethics explains many rules; these rules may looks to be harder than those explained by the IFAC Code, which can be acquiesce with to the letter but deceived in substance. Therefore it is directed that a broad revision of the Chartered Accountants Regulations and ICAI Code be attempted to enter a principle-based imaginary framework while containing few of the rules. Members of the ICAI are required to follow a detailed code of ethics as prescribed under the Chartered Accountants Act. The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement (Rawat, 2009).
ICAI Code objectives (highest level of performance and meet the public interest requirement) require four basic rules:
Quality of Services
These objectives of attestation are done by professional accountants, who are Chartered Accountants in India. For the achievement of the profession of accountancy a self-imposed Code of Ethics is important to command the admiration and determination of the general public (CVC 2010).
Financial Statements of ICAI:
Institute of Chartered Accountant of India has brought out various statements, Auditing and Assurance Standards, Accounting Standards and Guidance Notes, which are mandatory for a practicing Chartered Accountant to be adhered to while discharging his professional duty of attestation of financial statements. These sets of documents necessitate that financial statements are depicted in a definite manner, and give the required information in the desired manner, which are professionally verified by applying scientific audit techniques to ensure material correctness to a large extent. The objectivity and integrity of the financial statements attested by a Chartered Accountant following these sets of documents are of a very high degree, and which enhance the credibility and reliability of these statements to the user.
Code of Professional; Rule comparison between both countries:
Jakubowski et al. (2002, pp111-129) explains the comparison of codes of auditing:
Interest which is incompatible with the integrity, members must free from that interest.
If the members have substantial interest then they are prohibited from expressing an opinion on financial statements, unless it disclosed in the audit report
Members should conduct in a consistent manner with the well reputation of the profession.
Members must perform their services with pride in preference to personal profits.
Compliance with Professional Standards
Members to carry out their work in accordance with professional standards and relevant technical.
According the generally accepted auditing procedures, members should conduct audits.
Without specific authority or unless there is a legal duty to disclose, members must not disclose CCI to another parties.
If members are divulge CCI, they are guilty of professional misconduct.
(CCI) Confidential Client Information
Members are restricted from performing services for a fee contingent on the findings.
Members are restricted from charging fees based on profit's percentage.
4 Overall Quality of Auditing:
Arens, Best, Shailer, Fiedler, Elder & Beasley (2007, pp.11), "Audit Quality means how well an audit detects and reports material misstatements in financial statements". The detection and reporting is a reflection of auditor competence, ethics or auditor integrity respectively, particularly independence.
Audit quality involves a wide range of inter-related factors such as the legal framework relating to audit regulation (including the company auditor registration system, the auditor independence regime in the Corporations Act 2001 and the accounting and auditing standards), the ethical standards applying to the members of the professional accounting bodies, the professional qualities and skills of auditors and their staff and the role and activities of the audit regulator and other bodies involved in the audit review process (Whittington, OR & Pany, K, 2006).
Overall Comparison and Analysis of Auditor Independence in context of Audit Quality:
According to Leung, Coram, Cooper & Richardson (2009), in 2001, the HIH insurance case in Australia was the largest corporate failure disaster, resulted deficiency of up to $5.3 billion. According to Royal Commissioner the main cause of HIH's failure was mismanagement, poor business decision making and execution. There were three former Arthur Andersen partners on the board and they dominated the audit committee, which was unfortunate because Andersen were the auditor who failed to blow whistle and signed off on the idea that HIH had net assets of $940 million six month before it collapsed. Andersen, HIH's auditor, participated in an unethical corporate culture. Royal Commissioner's report found that the auditor, Arthur Anderson, yielded to management on controversial accounting issues, breached professional standards and failed to display independence (Leung, Coram, Cooper & Richardson, 2009).
Also, in 2009, in India, in the Satyam scam, it was noted that company's financial records had been manipulated and fudged for the last several years. Naresh Chandra in his report described the financial wrongdoing in Satyam as an event of "horrifying Magnitude". Independent directors on the Satyam board were not truly independent and included that auditors often acted in collusion with corrupt company managers. The associated directors and employees with Satyam were involved in the fraud and PricewaterhouseCoopers also played role in it. Satyam story is also one of the auditor failures (Hopt, 2005).
The main reasons for both disasters were:
Lack of attention to details and skills.
Lack of accountability for performance
Lack of integrity in the company's internal processes and systems.
It was lack of attention on the quality Auditing and Auditor Independence of the companies. Quality audits are essential to ensure that the profession meets its responsibilities to clients, to the general public and to regulators who rely on independent auditors to maintain the credibility of financial information. To help assure quality audits, the profession and the regulators have developed a multilevel regulatory framework (Leung, Coram, Cooper, Richardson, 2009).
Similarities and Differences in Audit Quality between both countries:
Jakubowski et al. (2002) through his result stated that rules related to conflicts of interest, integrity, independence are some examples of universal applications in the place of nationalities. The global crisis has emphasized the necessity of audit quality in terms of boosting and cultivating market confidence in both countries. Consequently, auditing as its been practiced with international context, it will be really important that the key stakeholders and directors should consider new administrative initiatives concerned with audit quality that has been opted by foreign administration, where the impact of global financial crisis is far more devastating than in Australia. Jakubowski et al. (2002) stated that even in the face of disparate legal, political, social, economic and cultural environments between India and Australia, there is some degree of convergence in the ways different professional accounting organizations define their rules of conduct. Leung, P, Coram, P, Cooper, BJ, & Richardson, P (2009) stated that Australia's framework of audit regulation is very sturdy and balanced and it is very much go side by side with international audit system. The audit regulation framework and the audit review processes are key drivers of audit quality in Australia. Australia's national corporate regulatory system and the way it has been embedded within the framework of the Corporations Act is a distinguishing feature of Australia's audit regulation framework compared with the regulatory systems in some foreign jurisdictions (Treasury 2010). India from the very beginning had a very active macroeconomic component as apparently seen from the relatively great consent it received from the international standards and codes. India accomplishes medium overall consent with the codes with an accomplishment of 58.33 out of 100. Legal and authoritative framework needs to be developed in the area with the standards relating to market infrastructure as India is not getting along with this area of standards (eStandardsforum 2009).
Australian Audit performance:
The accounting standards, the auditing standards and the auditor independence requirements applying to audits under the Corporations Act are all legally enforceable under the Act. The auditing standards require an auditor to comply with relevant ethical requirements, including those pertaining to independence, when performing audits, reviews and other assurance engagements (Cosserat, Rodda, 2009). The quality review programs conducted by each of the three professional accounting bodies perform a valuable role in promoting audit quality and ethical conduct within the audit profession as an important component of the co-regulatory framework in Australia. In some Fields of audit quality Australia performing better than India but mostly both have equal focus on the value of the quality auditing in their countries.
It can be concluded that Australia and India both have greater awareness on the importance of the quality of independence auditing in their countries. Auditor independence is essential for an auditor because users of financial statements expect an unbiased viewpoint in the auditor's attestation to truth and fairness of the financial statement. If users believe that auditors are not independence, the value of the audit function is eliminated. Without auditor independence, the auditor's opinion is worthless.
The research shown that Listing Rules and code of ethics in India and Australia both provides a fair and well informed and an internationally competitive market and equivalent regulatory and ethical environment for auditors. The findings indicate that Set of auditing standards in Australia and India both are based on International standards and helpful to boost auditing and assurance standards and the quality and homogeneity of practice all over the world, thereby enhancing public confidence in the worldwide auditing profession and providing the public interest by establishing high quality control standards. Australian Auditing Standards, whilst developed in the context of financial report audits, are to be applied also, as appropriate, to all audits of other historical financial information. It states that Code of Ethics for Professional Accountants requires firms and members of assurance teams to analyze, estimate, and address hazards to independence, rather than hardly acquiesce with a set of distinct rules which may be approximate, is, therefore, in the public interest. All over it can be concluded that the Regulatory and Professional bodies and auditing standards all plays vital role in quality of auditing and provides most probably equivalent ethical, regulatory and quality environment for auditors.