Impacts of Commercial Pressures on Audit Performance

Impacts of Commercial Pressures on size up PerformanceGiven the commercial pressuresare canvasors doing a good job? incomingFor two decades the debate has raged regarding whether audited accountors are perform their tasks adequately, within the bounds of the commercial pressures they are under. In preparing this paper, we have studied current research and comment border this issue. Our opinion is that, although thither are areas of serious concern and issues that guide to be addressed, gener all in ally the auditing profession is doing a good job.The debacle of Enron has shaken core assumptions just about tenders and auditing. (Kay and Carsberg 2002). Following the collapse of Enron, and its auditors Andersen, the role, competency, quality and standards of auditors came under increasing scrutiny, resulting in a raft of headlines such as the one quoted.The call from Kay and Carsberg, and others, for issue and international standard committees to be set up, was quickly responded to. The US Sarbanes-Oxley Act (2002) and UK Combined Code of bodily Governance (2003), both of which imposed stringent conditions onto the audit process, were swiftly introduced. As a result, the profession, through the IFA1 (2006) responded with a complete overhaul of standards.All these regulations and standards have been subject to constant revision since their inception. However, concerns still exist regarding auditor performance as recent attempts by the UK government to criminalize certain audit failures shows (Parliamentary Correspondent 2006). In the same article audit firms responded, stating such a move would be both followly and ineffective2 and that the proposed offence will inevitably lead to defensive auditing, which is not in the interests of the profession or nodes.3 .The auditing process, in particular in respect of Plcs4 is a complex procedure. There is a significant amount of preparatory work to be undertaken prior to the audit itself, including an understand ing of the clients business, evaluation of the risk, and the costing and construction of the audit itself (Dassen et. al. 2004, ch.6). This will determine the depth, breath, and percentage of testing required, fulfilling their tasks and complying with the requirements of all the applicable regulations and codes. This process also includes reaching an discernment on the fees to be charged. The audit task is even more complex when the organisation involved is a multi-national or transnational corporation. In addition, auditing firms have to get wind that they, and all of the persons involved in the audit, when preparing the audit, need to take into account all modifications and improvements to IFA standards, Company Law and the Combined Codes (Grey and Manson 2004).To monitor audits standards the government set up the Audit Inspection Unit (2006). The task of this unit is to ensure audits have complied with all current regulations (see page 6 of the report). Their latest report cove red the big quadruple firms and, for first time, the next five largest auditing firms. Seventy-seven audits were reviewed, over a number of sizes and industry sectors (see Appendix 1). Although, in general terms, the report responded positively, concluding that auditing firms are maintaining a reasonably high standard, there were some concerns. They found that progress on previous recommendations had been slower than expected, although there were mitigating circumstances (see section 4.1.1, p.11). In addition there was some concern expressed regarding the audit documentation (section 4.4.7, p.21). However, in other areas, such as leadership and human resources (section 4.2), improvements had been seen. In their final analysis, only in three areas did the Unit make further recommendations.Addressing the position from the government viewpoint, a report was commissioned by the FRC5 (Oxera Consultancy Group 2006). This report concentrated on the availableness of auditor choice to corpo rations, and the competitive aspect of the profession in general. Whilst agreeing with the Audit insurance coverage Units conclusion that generally the audit profession was performing their tasks well, this report expressed concerns in other areas. These focused on the dominance of the major audit firms within Plc and international fields. The fear is this leads to lack of choice and has produced increases in fees that exceed inflation by a significant amount, as much as 11%. There was also recognition that, from a logistical and cost point of view, it was virtually impossible for other auditing firms to compete for this market.One of the resultant fears that most corporate management expressed, was the problem that would be caused if there was a integrating from four to three firms, and the impact this would have on other accounting and financial services, as well as the audit choice.ConclusionHaving studied all of the research, we would concur with the conclusion that in view of the commercial concerns, audit firms are generally performing a good job. However, in our opinion, there is a need to address the competitive issues surround audit firms in the cases of quoted company audits. We would recommend that the laws of competition should be applied to the audit industry to ensure the numbers of firms do not reduce still further, and that ways should be considered to enable other firms to compete successfully in this market.ReferencesAudit Inspection Unit (2006) 2005/6 Audit Quality Inspections. Financial Reporting Council. London. UKDassen, R., Schilder, A., Wallage, P. and Hayes, R. (2004) Principles of Auditing An Introduction to International Standards on Auditing. FT Prentice Hall.Gray, Iain and Manson, Stuart (2004). The Audit Process Principles, Practice and Cases. Third edition. Thomson Learning.Handbook of International Auditing, Assurance, and moral philosophy Pronouncements. (2006). International Federation of Accountants. New York.Kay, John and Carsberg, Bryan (2002) Stiffening the auditors backbones. Financial Times. UKOxera Consultancy Group (2006). Competition and choice in the UK audit market. Report prepared for Financial Reporting Council. London.Parliamentary Correspondent. (2006). Auditors may escape criminal sanctions. Accountancy Age, UK.Sarbanes-Oxley Act (2002) Retrieved 6 November 2006 from http//www.sarbanes-oxley-101.com/sarbanes-oxley-TOC.htmThe Committee on Corporate Governance (2003). The Combined Code on Corporate Governance. Financial Reporting Council. London.Footnotes1 International Federation of Accountants2 Baroness Noakes, a former KMPG partner3 An Ernst Young spokesman4 Public Limited Companies5 Financial Reporting Council