Importance of Auditors, Relationship between Public Companies and Auditors - Essay Example

Audit oversight Contents Contents Introduction 3 The Importance of Auditors 4 Accuracy 4 Regulatory Considerations 4 Strategy and Improvements 5 The relationship between public companies and auditors 6 Protection of the society 7 Strengthening of Auditing 7 The supervisory role 8 Internal control mechanisms of auditing 9 Reliability and Evidence 9 Conclusion 10 Bibliography 11 Introduction Auditors have a significant role that they play in the oversight of both government and private business activities. Companies in all industries recruit external and internal auditors to assess their operational activities for a second time. Furthermore, the central role of auditors forces the government in any part of the world to legitimize their presence in checking business records either annually or semi-annually.The real corporate world constitutes the audit committee for long periods with the perception that the society has over its function evolving as the world and the corporate world continues to evolve. People hold varied views on the relevance and responsibilities of auditors in both the European Union as well as the United States of America. The two economic super power blocks formed the model, which the entire world copied before the turn of the twenty-first century. However, an agreement reached by professional bodies and market regulators has brought a consensus in promoting the relevance of auditors along with techniques applied in the same field. Auditors make an audit committee that constitutes a minimum of three persons charged with the responsibility of taking a second glance at the reporting and accounting practices of either private business companies as well as those of government institutions.This aims at overseeing the integrity and quality of the same operations. The audit committee of auditors undertakesoversight responsibilities. This explains why auditors must remain independent having no links with the institution or organization under evaluation. The United States for instance, established the PCAOB in the last decade of the twentieth century after the public lost trust and confidence in financial and auditing reporting following several years of financial reporting scandals. Therefore, accountants have the critical role of maintaining public and shareholders’ confidence in their business activities. The Importance of Auditors Accuracy Auditors undertake the role of verifying the accuracy of financial information as one of their greatest functions to both investors and the public. They cross-check financial statements including income statements, inventory records, cash flows, as well as retained earnings. This is in addition to evaluating expenses incurred by either the institution or business organization by analyzing tax write-off forms and receipts among many more. It is also important to remember that internal auditors have the responsibility and powers to transfer information form one record sheet of book to another (Millichamp, & Taylor, 2012, p. 213). By transferring information, the auditor acts as facilitators of information where an internal auditor may for instance, transferring an airline ticket price from the manual register to the computerized database. This could be for the purposes of review by the external auditor cum assessor. Other scholars posit that auditors enjoy a lot of flexibility when carrying out their duties as reporters of business omissions and errors. Auditors in this case, lessenthe authenticity of ratios of businesses, which include inventory turnover, debt to assets, and gross profit to net sales. Regulatory Considerations It is the responsibility of auditor oversight on private and public business as well as government businesses to satisfy government legal requirements. The United States of America for instance, enacted a law through the Congress in two thousand and two dubbed the Sarbanes-Oxley Act giving authority to the commission in charge of Securities and Exchange to make sure that all business companies whether private, public, or government to have independent oversight from authorized and licensed auditing firms. The same act gives the auditing company and the auditors to amend and in other cases confirm financial reports disclosed to proprietors quarterly and annually. This prevents the management of these organizations from distorting information in financial records such as, balance sheets and in the process changing information to satisfy investors and stakeholders (Wallace, 1980, p. 51). While undertaking their responsibilities, auditors enhance transparency in the entire financial market.Furthermore, auditors in the United States protect the institutions from lawsuits filed by the Commission in charge of Securities and Exchange besides others from bodies charged with similar duties across the globe. History shows that auditors have a significant obligation to the people investing in both private and public business. Scholars hold that the public felt that auditors were underperforming following failures from the financial reporting departments in the last decade of the twentieth century. This was despite the fact that most auditors performed their duties in an exemplary manner following their professional code of ethics (Moore, Tetlock, Tanlu, &Bazerman, 2006, p. 19). The government of the United States responded to the high profile financial misreporting by requesting the congress to enact the legislation to reinvigorate investor confidence. The scandals entailed big companies as well as more than enough restatements given a clean bill of health by auditors. The disappearance of huge sums of money in the market value warranted the legislation of such an act. The collapse of big companies such as Arthur Anderson, WorldCom, and Enron remain examples of that time. WorldCom and Enron went bankrupt leading to great losses while Arthur Anderson was a huge auditing firm that fell with the hammer for aiding corrupt deals in the nineties. Strategy and Improvements Audited organizations as well as government institutions benefit from lessons by auditors on ways of improving their record-keeping abilities.This comes through the description offered by the Bureau of Labor Statistics that defines the roles of an accounting manager as including among others aiding with product and strategy growth and development of business organizations. Auditing managers carry out this role by reviewing information in financial records while determining the ability of the organizations to attain the objectives and goals set in their projects. Auditors carry out the great role of improving performance of business organizations and private business activities by enhancing their management capacities. This happens when auditors make sure that performance measures and financial information is reliable in addition to it more relevant.This leads to the public and stakeholders feeling confident that their organizations and institutions are applying the most appropriate performance measures. Furthermore, the stakeholders and the public become sure that the decisions they make will rely on reliable information. It becomes easy to convince the public to have confidence in the performance of public institutions. The relationship between public companies and auditors The passage and legislation of the Sarbanes-Oxley Act transformed the relationship between auditors and public companies completely. This happened through four important avenues that constitute the relevance of auditors and their auditing methods today. The act limited the capacity of auditors to offer consulting business sharply. On another front, the act required companies to constitute audit committees established by the Board. This official independent body received the duty of overseeing overall management of a company on behalf of stakeholders as well as creditors. Through resolutions, the board generated matters for business or institutional records because the law holds board members liable for any activity conducted. The audit committee carries various roles among them improving rules compliance, controls from within the company or institution,auditing activities, as well asefficient corporate financial reporting (Wood, & Wilson, 1989, p. 197). The audit committee undertakes its duties by first engaging in helping the Board of Directors in its oversight role. Auditors have a role of making sure that the companies convince the public that they havegenuine confidence. The Act authorizes the auditors and company management to communicate the information regarding financialreports to the public. This makes the public aware of the effectiveness ofinternal control measures applied by companies on financial reporting matters.By stopping the auditing firms from regulating themselves, the act increased the confidence of the public by creating the PCAOB. Protection of the society Strengthening of Auditing The auditing profession strengthened with the creation of the Public Company Accounting Oversight Board that introduced independent oversight. Work done by auditors becomes accurate and precise when the auditor understands a different agency will evaluate the same performance (Guy, 1999, p. 112). . This makes the auditors undertake their duties with utmost care and thought. Furthermore, this improves the efficiency with which the auditors document their reports. The Congressional Act protects the society by giving the Public Company Accounting Oversight Board powers to review strong accounting and auditing issues completed by auditors by putting auditors in situations to resist pressures and incentives from various management boards of institutions and organizations. The public is thus, shielded from questionable accounting as well as financial records. In the process, auditors can ignore unethical pressures.The biggest challenge faced by the society is administration of inspection programs simultaneously giving due respect to the function of judgment. The complexity arises from the fact that auditing is a professional career where scholars in this discipline make decisions based on their professional judgment following audit exercises. However, professionals propose that the PCAOB ought to remain tough during audit failures while at the same time evaluating the legitimacy of the judgment of the auditors. This will help to maintain the standards of auditing in the financial markets. The supervisory role Provision of incentives improves audit exercised as opposed punishment threats.This is considering the fact that scholars in the auditing profession commit themselves to work with integrity to deliver their services appropriately (Milgram, 1974, p. 71). Therefore, having oversight mechanism and bodies should enhance auditing firms to isolate their weak operational areas and strengthen the same. An enactment by the government of the United States puts into consideration this protection. The Act passed by the Congress stipulates that the Board of Directors shall never make public their critique elements of the quality of an auditing firm. It only allows the same if the firm fails to take corrective measures as advised by the Board after an entire financial year. This element of supervisory approach makes sure that both the public and the auditing firms retain their integrity. This approach makes sure that everybody involved in auditing improves the efficiency of auditing practices. This operates based on auditing companies offering their services following the guidelines set by the Public Company Accounting Oversight Board. This replaces the disciplinary measures proposed initially.Through this mechanism, auditing firms undertake to audit performance, compensation of partners, evaluation of the same partners, acceptance of continuance of customers, independence of its employees while on duty, as well as supervisory roles of foreign partners and affiliates (Dart, 2011, p. 179). The biggest predicament faced in this approach constitutes indecisiveness on when to be aggressive and carrying out restraining. Scholars hold that some of the omissions and errors by auditing companies are on the extreme end of the yardstick to have the board give such companies time to undertake corrective measures. The board members find themselves at pains to make a decision on when to apply evaluation reports to instill improvement measures.People involved in such boards ought to have clinical judgment abilities to avoid exerting unnecessary punishments or allowing firms escape unscathed following serious errors or omissions. Internal control mechanisms of auditing Actions introduced by J-SOX in Japan act as the best models that enhanced internal control auditing. The legislation by the Congress allowed the Public Company Accounting Oversight Board to provide guidelines that make sure that internal auditors and management of different government institutions and business organizations communicate to the public the effectiveness of respective internal control methods regarding reporting of financial information. J-SOX helped offer a solution to the challenges involving balancing of costs and benefits in this area that seemed technical. To improve this area, securities markets provide premiums on companies that demonstrate efficient controls during their business operations.However, companies that implement internal controls accrue extra costs. Reliability and Evidence Appropriateness of auditing services underlies the reliability and relevance as the weighing scale of the quality of evidence during auditing. The ability to offer supportive conclusions based on the views of auditors makes the entire exercise reliable and relevant. This comes through appropriate methods and designsof auditing processes. The procedures must apply to controls and assertions of tests.This means that professionals must split the procedures depending on whether they are evaluating overstatement or understatement, and whetherthey are analyzing the control or assertion one-on-one (Carcello, & Nagy, 2004, p. 68).Moreover, the timing of the procedures involved in auditing determines the relevance of the auditing exercise. Professionals dedicate this time to testing controls or assertions. On the hand, the sources of evidence along with the nature of the same evidence are essential in determining how reliable theauditing services appear in the eyes of both professionals and the public. Auditors make an audit committee that constitutes a minimum of three persons charged with the responsibility of taking a second glance at the reporting and accounting practices of either private business companies as well as those of government institutions Conclusion Businesses add to the quality and efficiency of auditors by paying for its reviews. Ratings by agencies such as, those of the AAA provide the best examples to such scenarios. This took place to toxic assets in the mortgage meltdown. Experts explain why it is important for auditors to remain independent without any connections to institutions under investigation to avoid incidences of corruption. Bibliography Carcello, J. V. and Nagy, A. (2004). Audit firm tenure and fraudulent financial reporting, Auditing. A journal of Practice and Theory, 23(2), pp. 57-71. Dart E. (2011).UK investors’ perceptions of auditor independence, The British Accounting Review, 43(3), pp. 173-185. Guy, D. M., (1999). Auditing.Fort Worth, Dryden Press. Milgram, S. (1974). Obedience to authority (NY: Harper and Row). Millichamp, A. H., & Taylor, J. R. (2012). Auditing. Andover, Hampshire, Cengage Learning EMEA. Moore, D. A., Tetlock, P. E., Tanlu, L.,&Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling, Academy of Management Review, 31(1), pp. 10-29. Wallace, W. A. (1980). The economic role of the audit in free and regulated markets.[New York], Graduate School of Management, University of Rochester. Wood, D. J., & Wilson, J. A. (1989). Roles and relationships in internal auditing.Altamonte Springs, Fla, Institute of Internal Auditors Research Foundation. Read More