Analysis of an auditor and previous scandals in the UK Essay

Submitted By Amalielo
Words: 2214
Pages: 9

Michelle Obama once said “We learned about honesty and integrity—that the truth matters…. That you don’t take shortcuts or play by your own set of rules … and success doesn’t count unless you earn it fair and square.” (John Cassidy, 2012). Integrity and honesty is the lifeline for most accountancy firms. Their clients rely on their ability to be efficient, truthfully and knowledgeable, and accountancy firms rely on their clients to be the same. Mutual respect and integrity is what equals success, however some recent financial scandals such as for example the Northern Rock scandal in 2007 and the US Enron Company’s bankruptcy in 2001, have led to an enormous impact on our economic society. Because of this, the trust among the public has been broken (D. McHugh, 2013, A. Brummer 2008).

In this essay we will therefor look at the role of the auditors and the roles of the board of directors and elaborate on their tasks and responsibilities. We will look into the depths and consequences of the Northern Rock financial scandal in the UK and look at how the regulatory authorities handled this crisis, but also how government intervention and the implementation of the Companies Act 2006 have affected the current financial situation in the UK and how this can help prevent similar crisis and scandals in the future.

Board of Directors
In large companies the shareholders of the company are choosing the managers or directors to run the day-to-day business, this includes to prepare a report regarding financial and non-financial issues and is to be presented at the end of every reporting period. They will conduct an audit committee that will contain directors and external consultants, and together they will outline a report and a financial statement. Later on, this financial report needs to be assessed by an audit company or an individual auditor who will make sure the information provided is correct. Mainly, this report will consist of a business review, which will give shareholders and possible investors an insight in the company.

Auditors
An auditor is an external source that is chosen by the shareholders of a company. An auditor can either be an individual, or as in most cases a company of their own. Their job is to control and oversee the financial statements of a company from a critical and objective point of view. They will conduct a research and find the suitable solution to conduct their opinion about a firm’s financial situation in a professional and evidence-based manner. An auditor’s job is to make sure the companies follow the accounting principles and that their accounting estimates are correct.

Companies usually have an audit committee that includes board of directors and external consultants. Their job is to conduct the financial statement of the company before it is given to the auditors. Sometimes the consultants are also worker for an audit company and this can in some cases be an issue and a question of thrust and quality may arise.

The importance of audit quality and audit independence
High audit quality is important for shareholders and the validity of a firm’s financial situation and a potential audit failure for a firm may have severe consequences for all the parties involved. According to Fearnley and Beattie (1999) there are two important factors for avoidance of audit failure; Audit independence and audit competence.

An independent auditor is an external source whose job is to give an objective and neutral opinion about a company’s financial statement. An audit company’s independence is a reflection of their ability to stay objective and their integrity.
“Independence means that the auditor will ensure that management puts the problem right or, failing that, will qualify the audit report” (Fearnley and Beattie 1999). As to independence, you have the appearance of independence and independence of fact. This shows how your integrity as an auditor can be questioned as to appearance and…