The Introduction To The Public Interest Accounting Essay

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According to an on-line dictionary, Cambridge Business English Dictionary Public Interest can be defined as A noun used when talking about peoples rights to know the facts about a particular situation in general business (source 1). Moreover in an accounting view, International Federation of Accountants stated it as ''the net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy"(source 2). It can be concluded that it may be referred to be the main factor when a decision is being made on behalf of the people in a society; Seeing that it can cause a great impact.

Furthermore, IFAC has defined the terms "Public" and "Interest" separately to clarify the extent of their responsibility towards the users. As IFAC is a worldwide organization that can affect a wide range of people, it described the public financially with "individuals and groups sharing a marketplace for goods and services", and non-financially with those that share a mutual aim such as satisfying life maintenance. This consists of investors, stakeholders, customers and sellers, and basically all of the residents. As for the public's interest has been defined as "all things valued by individuals and by society"(source3). It can be briefed as things that people deserve to get and wish to attain. It is known that there are a lot of benefits that a society demand such as a good living condition includes receiving a health care and education, having political freedom, and practically efficient financial markets. Meanwhile, IFAC is considered to benefit the public in achieving their interests that are related to financial matters and available scarce resources, which comprises minimizing economic risks in financial markets and institutions, producing sufficient, helpful and comprehensible financial and non-financial reports and very nearly similar that help all interested parties in comparing in order to allocate their resources, quality auditing on every level in an organization, insuring that government's and public sectors' information and actions are transparent to citizens, a well-structured corporate governances and ethical managers, and excellence and wisely management of natural resources that can expand for further generations' consume (source 4).

Current regulatory environment

The Financial Reporting Council is an independent regulator which has been established to assure and develop the quality of corporate governance and reporting in the UK. It comprises of six operating bodies, the Auditing Practices Board, the Board for Actuarial Standards, the Professional Oversight Board, the Accounting Standards Board and the Accountancy Investigation and Discipline Board, the Financial Reporting Review Panel (source 6). IFAC aims for a sustainable successful financial environment to encourage stockholders to invest effectively. They take into consideration the actions of professional accountancy bodies and actuarial profession and act independently by disciplining them in raised cases that concerns public interest. They assist in improving the efficiency of audit quality and engage in the discussion for future audit market competence. Likewise, they impose standards and codes for accountants, companies and auditors. (Source 5)

Sarbanes Oxley Act of 2002 introduced in response to the major financial crisis such as Enron to protect the investors' confidence in the financial market, which had been corrupted and caused a lot of losses. (Source 9) It concentrates on improving the constancy and accuracy disclosure of financial statements. Essentially, SOX emphasised the responsibility of the truthfulness of published financial statement on directors, and established new penalties for illegal behaviours. Regarding auditing section, they have been concerned intensely on effective internal control on an organization, which can be used as a confirmation about the accurateness financial statements and figures generated. And an internal control report should be written by the directors, as a supporting document for their confidence of the truthiness and fairness of the company's financial position. And an auditing firm should participate on assuring the adequacy of the internal controls by inspecting the company's overall techniques and policies. (Source 8).

The International Federation of Accountants is a worldwide institution which has been serving the public interest by strengthening the communication of financial information about an entity to the users. In order to accomplish strengthen, IFAC assure that international standards are have been followed and implemented properly by accountant professions, and they can manage to achieve the assurance by guiding them. The international standards which IFAC support are very valuable standards that have a great impact of practically maintaining the entire economy. And IFAC is supporting four independent standard-setting boards which are International audit and assurance standards Board (IAASB), International accounting education standards Board (IaesB), The IAESB sets International Education Standards (IESs), International ethics standards Board for accountants (IESBA) and International Public sector accounting standards Board (IPSASB). Pointedly, IFAC stands up for the public and speak out for them in cases, related to accounting and auditing professionals, which are in public's interest. (source10)

The Public Interest Oversight Board is a global organization created to observe and assure that the standard-setting boards, under the IFAC that are in the part of  audit and ethics, education, and assurance, are focusing on public interest. PIOB had improved the quality of financial reporting through encouraging audit profession to practice with more transparency and reliability. Especially after the enormous financial collapses of fundamental great companies, such as WorldCom, that weakened the public trust on the truthiness, efficiency and independency of auditors' opinion. Thus, an independent body that observes the audits opinion and sets standards is needed for investors to make accurate decisions, increase their trust and engorge them to invest, and thus the market will flourish. Another advantage of having an international body guard international standards it will help in comparing performances of worldwide firms easily. (Source 11)

Audit quality

According to Titman and Trueman, audit quality is a term describes the correctness and reliability of information provided by auditors to users, In other words, the capability of auditors in detecting misleading or inaccurate information in financial statements (source 12). However, IAASB states that audit quality cannot be defined precisely, it changes from which perspective you are looking at it. In investor perspective, audit quality is measured by auditor's reputation, reporting and expectations from their work. The better reputation the higher quality is assumed in audit. In audit committee member perspective, the quality of audit is influenced by the quality degree of the auditor, skills and experiences, the audit process, which method and evidences were used, and auditor's interactions with others, if in a way whether it affects his independency or does not. (Source 13)

The International Standards on Auditing (ISAs) takes a fundamental role in participating in audit quality by setting a globally accepted benchmark. In addition, their standards have been improved with the help of IAASB, which is independently carefully supervised by PIOB. (Source 13)

The need of audit quality is raised from asymmetric information and conflict of interests (source 12). It can be conducted that audit quality is demanded because a lot of stockholders had worthless investments for the reason that false information were recommended to them or unfair audit reports were issued. Moreover, some auditors loss the independency, which is a primary principle for an auditor, by working for a firm by providing dishonest opinion just to keep their job or they have been bribed. In addition, it can be determined from a study that the higher audit quality results a higher degree of investor's capability to expect future earnings (source 12).

Audit report

Audit report should be attached with a firm's annual financial statements to state their opinion of the truthiness and fairness, or not, of the financial figures (source 14). It could be issued by internal auditor or external auditor. The report can affect a firm's stakeholders, lenders and shareholders. If it was unqualified report, then more investors will be attracted to the firm, shareholders' confidence in managers will increase, and it will satisfy their lenders, due to enhanced performance, by guaranteeing the firm's repayment their money. Qualified opinion could be a reason of except for, disclaimer of opinion or adverse opinion. Except for opinion is used when there is a limitation of scope, an auditor does not have enough evidence that can help him in assuring a matter. Disclaimer of opinion is when a manager refuses to give the auditor the authority to gather information or he does not participate with him, and when an auditor misses an opportunity that is material to the subject being audited. And lastly, adverse opinion is the worst because it indicates that a company is not complying with the standards, financial statements contain misleading information, or involve significant uncertainties (source14).

In order to generate quality audit reports the ICAEW Audit and Assurance abled to organize the Audit Quality Forum in 2004. Since the increase in complexity of business environment and the significant impacts of several financial failures that forced the world into recessions, they are trying to strength the relationship and communication between managers and directors and all participates with more transparency. Thus, confidence will increase due to the clarifying every process and decision making, which finally will result with highly reliable reports. (Source 15)

Till today the auditor's report are under changes in order to meet the user's demand. There are two main flaws that should be eliminate or minimize in reporting, which are the expectation gap and the information gap. The expectation gap occurs when user's expectation from auditor's information provided in a report differs from the actual audit itself. For example, auditors' materiality term is considered differently than the concept understood by the user. Besides, the audit report is conducted with general nonspecific language that doesn't show the actual procedure of auditing, objective investigated or to which extent the audit covers. As for the information gap "the existence of a gap between the information they [users] believe is needed to make informed investment and fiduciary decisions, and what is available to them through the entity's audited financial statements or other publicly available information"(Source 16). In other words, investors think that they can base their decision on audited financial statement, which reflect the organization's overall performance and financial position. However, in real practice there are information in an entity that are not related to audit, somehow it is much useful for efficient financial analysing and decision making. Therefore, in an entity financial report, managers should mention clearly crucial financial reporting risk and how they are being stated, on the other side, auditors should be more transparent about the audit carried and especially areas concern audit risks.