AAA Model and Good Corporate Governance to Reduce the Audit Risk - Assignment Example

AAA Model and Good Corporate Governance to Reduce the Audit Risk Student’s name Institution AAA Model and Good Corporate Governance to Reduce the Audit Risk Question 1 The American Accounting Association (AAA) model is a seven-step process aimed at providing logic in decision making through taking ethical issues into consideration. The seven steps involved are: establishment of the facts of the case, identification of ethical issues in the case, identification of the principles, norms and values in the case, identification of the available courses of action, compare values with the alternatives stated, consider and assess the consequences of the alternatives, and finally, the decision is made (Flanagan & Clarke, 2007). This part follows the American Accounting Association (AAA) model to analyze the given case and then make a final decision on the same. 1. Determine the facts The facts are that the CEO of Complete Cancer Care Limited (CCCL), Adam Chase, knows clearly that the linear accelerators are old and have adverse radiation impacts on patients, and despite this, he tries to bribe Belinda Batterby, the audit partner responsible for the financial report and requests her to give a false opinion that the accelerators are fit for use. Adam knows that the opinion given on the linear accelerators will have an impact on the decision made by the Battersby and Associates on the tender. The decision to be made is on whether Belinda should just follow Adams instincts or she should say the truth about the actual state of the linear accelerators. Telling lies may have a positive impact on Adam’s company, but the real thing is that this may negatively impact on the reputation of Belinda, who is a professional auditor and by law, she is supposed to always say the truth of the matter (Flanagan & Clarke, 2007). 2. Define the ethical issues The ethical issue in this case is whether or not the auditor, Belinda Batterby should accept giving false information about the actual state of the linear accelerators as a way of bribe from the CEO of Complete Cancer Care Limited (CCCL), Adam Chase. If Belinda accepts to tell lies on the same, she would be acting illegally and at the same time, she would also be negligent of her professional duties. 3. Identify the major principles, rules and values The principles, rules, norms and values in this case are that shareholders of companies as well as other active stakeholders in capital markets tend to assume that auditors have a perfect integrity and that they provide a ‘true and fair view’ of the financial situation of the company at the time when the audit is being done. Auditors are people who are highly trusted to assure a company’s financial accounts, and anything that interferes with this is termed as a failure of the auditor to shareholders (Flanagan & Clarke, 2007). 4. Specify the alternatives There are two main alternatives or options in this case. Option 1 is to accept to give false opinion about the Adam’s Company, CCCL, and option 2 is to refuse such kind of a bribe, report the actual facts and then take appropriate actions against Adam and the Company. 5. Compare values and alternatives The course of action that is consistent with the values, principles are rules indicated in step 3 is to refuse the bribe and say the truth about the linear accelerators and then report the CEO of the company so as to ensure that similar cases like this are averted. The auditor, Belinda Batterbywould report that the accelerators are old and indeed have adverse effects to patients and then go ahead and report the CEO of his malpractices. 6. Assess the consequences Alternative 1: Under option 1, the auditor would accept to give false opinion about the accelerators as bribed by the CEO. This is expected to come out with some form of financial bribe that will increase the auditor’s wealth as well as her standard of living. However, this would expose her to the risks of legal and professional troubles if the bribe case is uncovered. Chances are that at one time, her plans with the CEO would be known and this will definitely affect her reputation as a professional auditor(Flanagan & Clarke, 2007). Under option 2, the auditor would refuse the CEO’s bribe and then give true opinions as to what she seen on the ground. This would definitely mean that the CEO’s will have lower chances of being considered for the tender and possibly have unfortunate consequences on the client-auditor relationship. However, on the auditor’s side, this decision would maintain her reputation as well as enhance the social standing of auditors in general and also public confidence in the field of audit and at the same tie serve the interest of the shareholders. Under this option, the auditor will refuse the false opinions given by the CEO, report the true state of the linear accelerators and also probably report the CEO to the relevant authorities for trying to tarnish her professionalism in the field of audit. 7. Make your decision To conclude, it can be stated that the ethical decision for this case is option 2. The auditor should refuse the bribe from the CEO and report a true and fair view on the status of the Complete Cancer Care Limited (CCCL). Question 2. Introduction An independent or outside director refers to a member of a company’s board of directors who has been brought from outside the company and does not have any pecuniary or material relationship with the company. Independent directors play a key role in the board and it is a requirement for companies to have a board representation from outside the company. This report describes the current recommendations in Australia on the inclusion of independent directors in a company’s board of directors. It also assesses the continued need for independent directors among companies; and finally, it identifies the barriers that prevents independent directors from executing their roles effectively. Current Australian recommendations Before the 1970s, members of a company’s board of directors were presumed to be part of the company’s management. However, most recently, there have been a series of corporate governance failures within companies and this has triggered several changes to regulation as well as policy, including the new requirements for the recruitment of independent directors. In Australia, the Australian Securities Exchange (ASX) Governing Council guidelines recommends that a majority of a company’s board should be independent directors. Any company that does not meet this in its board must always disclose this fact in its annual reports (Beekes& Brown, 2006). The requirement to have majority of independent directors is based on the need to avoid fiduciaries from entering into states of conflict between their own interests as well as those who they serve. The Australian Securities Exchange (ASX) Governing Council thus recommends companies in Australia to have majority of the members of board being independent directors. According to the ASX Council, independent directors are free of any business that could interfere materially with the independence of the judgement in the board. These directors hold less than 5 percent of the company’s stock and should not have worked in an executive or management capacity for the company or an associate of the commonly for a period of atleast three years (Beekes& Brown, 2006). Evaluation of the continued need for independent directors According to the ASX Council, good governance in companies requires the majority of directors in the board to be independent. The reason why companies should continually have majority of directors being independent is that they do not have much share of stock in the company and so the decisions they make are independent and not based on their personal interests. Due to the current requirement on the share of independent directors in companies’ board of directors, many shareholders tend to prefer companies that follow this recommendation by the ASX. This means that such companies make informed decisions based on the actual facts but not on their personal interests, hence chances of success for such companies are high (Beekes& Brown, 2006).Thus, independent directorship is an important concept, especially for publicly owned entities. Barriers to the effectiveness of the role of independent directors Monitoring and advisory roles are two main roles played by independent directors in companies. In doing these roles, these directors need a lot of support from the shareholders, the company itself, employees and other stakeholders so as to enable them effectively execute these roles. Various barriers also prevent them from executing their roles effectively(Ryan &Wiggins, 2004).One of the major barriers is that in most cases, they do not receive the required support from the company’s management, who feel that they are the right fit for the position given to the independent director. Most members of management do not support the new recommendations on independent directorship where majority of members of board should be independent. Also, it takes time before independent directors get to know about the company’s culture and policies and this may affect their performance as far as advising the company is concerned. Other companies do not have the right resources to enable independent directors execute their roles effectively. Lack of independence also forms part of the barriers (Ryan &Wiggins, 2004). Conclusion This report has identified the main roles of independent directors as monitoring regulations in the company as well as advising them on effective governance. In Australia, the requirements for independent directorship have changed with the ASX recommending that all publicly traded companies should have the majority of members of the board of directors being independent. This report has also assessed the continued need for independentdirectors and has stated that they need support and adequate resources for them to effectively execute their roles. References Beekes, W., & Brown, P. (2006). Do Better‐Governed Australian Firms Make More Informative Disclosures? Journal of Business Finance & Accounting,33(3‐4), 422-450. Flanagan, J., & Clarke, K. (2007). Beyond a Code of Professional Ethics: A Holistic Model of Ethical Decision‐Making for Accountants. Abacus, 43(4), 488-518. Ryan, H. E., & Wiggins, R. A. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73(3), 497-524. Read More