Auditing and Ethics
PART FORM ANU AUSTRALIAN UNIVERSITY :
Enron, Parmalat, WorldCom, HIH – these corporate failures and accounting scandals have shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets. There has also been public disquiet about the role professional auditors and audit firms have played in these corporate scandals.
The consequences for many of the players in the market for financial information have been enormous; reputations both of key individuals and organisations are in ruins, jobs have been lost, and pension funds have been wiped out. The damage, both economic and social, has been incalculable, and the implications are far-reaching for corporate management, company directors, audit firms and the investing public.
An array of factors contributed to these events, but one thing is for certain – the billions of dollars in corporate value lost was due in significant part to unscrupulous management and boards of directors that failed to meet their responsibilities. The accounting profession, including auditors, also played a major role in these events. While the story behind these corporate failures is always complex, a lack of ethical behaviour by many individuals is a big part of it.
For the audit profession, these developments have again highlighted the gap between public expectations and the reality of the role of the auditor. With Enron in particular, the public perception was that the auditor should have acted as a control on unscrupulous management practices. The conclusion reached by many members of the public (and parliamentarians) was that the auditors failed in this responsibility because their independence from the management of Enron was compromised. While it is by no means as simple as that, the audit profession must acknowledge and address these types of perceptions, or indeed facts, if it is to restore trust in both the capital markets and itself.
The biggest challenge
Enron, Parmalat, WorldCom, HIH – these corporate failures and accounting scandals have shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets. There has also been public disquiet about the role professional auditors and audit firms have played in these corporate scandals.
The consequences for many of the players in the market for financial information have been enormous; reputations both of key individuals and organisations are in ruins, jobs have been lost, and pension funds have been wiped out. The damage, both economic and social, has been incalculable, and the implications are far-reaching for corporate management, company directors, audit firms and the investing public.
An array of factors contributed to these events, but one thing is for certain – the billions of dollars in corporate value lost was due in significant part to unscrupulous management and boards of directors that failed to meet their responsibilities. The accounting profession, including auditors, also played a major role in these events. While the story behind these corporate failures is always complex, a lack of ethical behaviour by many individuals is a big part of it.
For the audit profession, these developments have again highlighted the gap between public expectations and the reality of the role of the auditor. With Enron in particular, the public perception was that the auditor should have acted as a control on unscrupulous management practices. The conclusion reached by many members of the public (and parliamentarians) was that the auditors failed in this responsibility because their independence from the management of Enron was compromised. While it is by no means as simple as that, the audit profession must acknowledge and address these types of perceptions, or indeed facts, if it is to restore trust in both the capital markets and itself.
The biggest challenge
References: Albrecht, W. S. 1992, Ethical Issues in the Practice of Accounting, South-Western Publishing, Cincinnati, OH. Bentham, J Duska, R. F. & Duska, B. S. 2003, Accounting Ethics, Basil Blackwell, Oxford. Fried, C Hare, R. M. 1981, Moral Reasoning, Clarendon, Oxford. HIH Royal Commission 2003, The Failure of HIH Insurance, Commonwealth of Australia, Canberra Kant, I. 1953, ‘The Moral Law’, in H. J. Paton (trans.), Groundwork of the Metaphysic of Morals, Hutchinson, London. Libby, T McBarnet, D. & Whelan, C. 1999, Creative Accounting and the Cross-Eyed Javelin Thrower, John Wiley & Sons, Chichester. Maurice, J Mill, J. S. 1910 (1861), ‘On Liberty’, in A. D. Lindsay (ed.), Utilitarianism, Liberty, Representative Government, Dent, London, pp. 65-170. Nagel, T Smart, J. C. C. & Williams, B. 1973, Utilitarianism: For and Against, Cambridge University Press. Tweedie, D IMA. (1997). Statements on Management Accounting: Objectives of Management Accounting, Statement No. 1B. New York: Institute of Management Accountants. IIA Code of Ethics. (1988). Altamonte Springs, FL: Institute of Internal Auditors