Auditing Measurements Challenge Fair Value -Myassignmenthelp.Com

Question: Discuss About The Auditing Measurements Challenge Fair Value? Answer: Introduction The accounting scandals have been a common occurrence in todays economy. Such scandals have shook the entire world economy and evidently reflected the fact that in spite of the existence of auditing regulations and frameworks, the auditors do not adhere to such regulatory procedures which often lead to firms undertaking unethical techniques for the fulfillment of their personal interests. The issue that has been presented in this particular study is that the role of the auditors in mitigating the accounting scandals has been asked to identify. The accounting scandals have been a common occurrence and it has been found that the firms that have been involved with such corruptions usually have been the big players of the industry. The accounting scandals that have been chosen for understanding the role of the auditors and other related issues are the particular scandals by Rolls-Royce and Olympus Corporation. Auditing Scandal by Rolls-Royce The leading automaker company, Rolls-Royce had been charged guilty of crimes like falsifying accounts, interference with the investigations that have been going on and illegal payments in amounts of tens of millions of pounds for the securing the ownership of the contracts in Thailand, Russia, Indonesia and China. The company had made a payment of 671 million to the Serious Fraud Office as a fine. The corruption charges that the leading automaker company was accused of ranged back for more than over twenty years. The leading car brand company had been bribing hugely for the purpose of gaining the ownership of the contracts and had been carrying out such unethical operation from 1989 till 2013. A particular instance of the financial corruption undertaken by the company had been the $100 million order in regards to the supply of Trent 700 jet engines to the Garuda airlines in Indonesia in 1991. The general prediction by the stakeholders had been that the deal in regards to the Garuda a irlines belonged to the US rival Pratt Whitney. However, the proceedings of the deal rolled in favor of Rolls-Royce. It had been later revealed that the senior executives involved in the particular deal of Garuda Airlines had made a payment of $2.25 million along with a Rolls-Royce Silver Spirit car to the agent for securing the deal of the Trent 700 engines. Furthermore, Rolls-Royce also had made a payment of $2.2 million to Air Asia for the purpose of securing the ownership to the orders. Thus, it is evident from the above instances that the particular company had been maintaining goodwill and had been securing the position of a top automaker in the industry by undertaking unethical and corrupted measures (Bingham and Druker 2017). Auditor of Rolls-Royce The auditor of Rolls-Royce had been the famous KPMG group. The KPMG had been the firm responsible for executing the audits of Rolls-Royce. The accounting scandal of such enormous volume has allegedly led to the Financial Reporting Council look into the particular auditing procedures carried out by the audit firm. It should be noted here that there have been several instances where the auditing firm (KPMG) had mentioned in the auditors issues related to materiality and other financial concerns. However, there have been no such strict measures taken by the auditor firm to identify the illegal business operations carried out by the British giants (Bowman 2014). It can be further concluded that the issues that led to the accounting scandals had been majorly the unethical use of third party intermediaries. The third party intermediaries generally consisted of the distributors, brokers, resellers and intermediaries. Furthermore, it had been later accepted by the company that the company had made use of a complex accounting system that enabled it to record a 800 million pound loss as a profit in the financial report of the company (Cannon and Bedard 2016). Thus, all these evidences help in deducing the fact, that the evaluation of the financial and the non-financial aspects of Rolls-Royce that had been carried out by the auditing firm, were not proper. It should be noted here that the primary duty of an auditor lies in ensuring that the financial statements of a company reflect the true and fair view of the financial condition of business. Therefore, it can be concluded here that the KPMG as an auditor of Rolls-Royce had failed to execute the primary duties of an auditor. Furthermore, this is an instance of audit capability. This means that the auditing evaluation executed have not been proper, as the firm has not engaged into looking in the proper areas that need to be examined or monitored (Cannon and Bedard 2016).. Initiative taken by KPMG The particular initiative taken by KPMG had been that the firm had mentioned in the annual report of Rolls-Royce in 2014 that the company had made use of estimations and assumptions that resulted in mildly cautious profit recognition. Moreover, the annual report of 2013 disclosed the fact by KPMG that the firm was at risk of bribery. However, the audit firm did not delve further into the issues which clearly rules out the case as lack of audit capability. the auditing firm should have been much more strict with the audit proceedings and further looked into the areas which indicated the occurrences of bribery. Thus, the lack of adherence to the proper auditing standards (as seconded by FRC) led to the financial scandal of Rolls-Royce take such a vast form (William, Glover and Prawitt 2016). Auditing Scandal by Olympus Corporation The Olympus Corporation had been a respectable organization in Japan along with its CEO Tsuyoshi Kikukawa until the date of April 1, 2011 when the former COO of the company accused the management of a financial statement fraud. The company had incurred a humongous amount of loss in regards to certain bad investments. This loss had been covered up by the three consecutive presidents of the conglomerate along with a number of executives. The company had even made a payment of 17 billion yen to a former employee who had proposed the unethical cover up scheme. The whistleblower in this particular accounting scandal had been the non-Japanese CEO who revealed the proceedings of the scandal to the entire world. An instance of the fraud conducted in the Olympus Corporation can be summarized by the over 2000 e-mails that had been exchanged between the CEO of the Olympus Corporation and three other employees in regards to the technique that should be adopted in order to hide the losses. These employees each had received a total of 1.1 billion yen as compensation. The investigation committee also identified that the group had exchanged emails with the former vice president of the Olympus Corporation, Hisashi Mori. Furthermore, it had been found out that the former president of the company also had illegally acquired the Gyrus Group PLC by Olympus Corporation (Hu 2014). Auditor of Olympus Corporation and initiatives taken by them The auditors of the Olympus Corporation had been two well-known auditor firms that were KPMG and Ernst Young. Both the auditor firms though had refused to comment on the issue pertaining to the protection of customer data. However, the occurrence of certain events gives us insight into the financial scandal by the Olympus Corporation. To be more precise, the auditing firm, KPMG had been relieved of its duties in the financial year of 2009. This indicates the fact that there had been disagreements between the firm and the management of the corporation which ultimately led to such outcomes. This had been seconded by the reports that stated that there had been certain conflicts in opinions in regards to bad acquisitions between KPMG and Olympus Corporation that led to the removal of the firm (Hu 2014). Next, the auditing firm, Ernst Young had been appointed as the external auditors of the Olympus Corporation. However, there has been no strong accusation either by Ernst Young that could reveal the corrupt procedures carried out by the company. In spite of the availability of enough evidence like the payment of $687 million as advisory fees in regards to the unfair acquisition of the British medical firm, Gyrus, both the auditing firms did nothing to publish the accounting scandal in the auditors report. This has been another instance of the lack of auditing capability. Both the auditing firms have not adhered to the established auditing framework or the auditing procedures which has resulted in such an outcome. Moreover, the firms also violated the agency theory and the signaling theory (Hu 2014). Improvements that have taken place in the auditing standards and principles since then The improvements that have taken place after the financial scandal carried out by the Rolls-Royce had been one of the international accounting bodies, ICAEW that are in charge of framing and modifying the regulatory principles had established an completely new reporting model for ensuring that the occurrence of such issues are not repeated in the future. The new reporting model that has been prepared keeps the investors and the stakeholder of business well aware of the happenings and events in the organization at a stipulated interval. The financial reporting model that has been framed by the ICAEW also maintains a degree of clarity and transparency that makes it easier for the stakeholders of business or the users of the financial statements to interpret and understand the financial proceedings of the firm. ACCA, another accounting regulatory puts stress on the collection of enough audit evidence for resolving the problem of lack of audit capability (Larcker Tayan 2015). As mentioned earlier in this report, the required investigations in the accounting scandal had been carried out by the regulatory body, FRC. After, the Rolls-Royce case, the FRC has made it a mandatory rule that an organization is required to change the auditing firm carrying out its annual audit in every ten years (Larcker Tayan 2015). Another globally known regulatory body, CIMA has established a framework for preventing risks arising out of the occurrences of such financial scandals. CIMA also has stated in its report that the maintenance of the required ethical standards in regards to the business operations that are carried out by a business firm not only is beneficial for the business unit but also for the stakeholders of the particular business (Larcker Tayan 2015). On the other hand after the occurrence of the Olympus Corporation scandal, the Congress had passed the Sarbanes Oxley Act. This further resulted in the creation of the Public Company Accounting Oversight Board which restricted the control that the Certified Public Accountants had (Jackson 2017). Recommendation The particular recommendation that can be arrived at after going through the discussion in the preceding paragraphs is that the occurrence of such accounting scandals have further led to the strengthening of the auditing framework. All the auditing and accounting bodies, all over the world have acknowledged the fact that there have been a gap in the auditing framework and procedures which led to the lack of auditing capabilities on the part of the auditing firms. Moreover, it should also be realized by the auditor firms that it is their sole responsibility to highlight the areas of doubt in the financial statements of the concerned company. This will not only enable them to properly adhere to their duties but also save the stakeholders of business who depend on the corporate entities for their earnings. Conclusion The only conclusion that can be arrived at is that the role of an auditor is very important in a corporate world. Thus, it is the primary duty of the auditor is to safeguard the stakeholders of the company that they are auditing, ignorance of which will lead to such accounting scandals. Moreover, the corporate bodies have to understand that adopting fraudulent techniques will definitely harm the business in the end. References Askary, S. (2017). Can Accounting Regimes Protect the Public Interests?. Middle East Review of Public Administration (MERPA), 3(3). Bingham, C. and Druker, J., 2017. Acting With Integrity Across The World? What Do Multinationals Say About Labour Standards?. Bowman, C., 2014. When are Executives Paid Too Much?. Cannon, N.H. and Bedard, J.C., 2016. 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