Corporate frauds, bankruptcies, and unemployment have more or less become the
order of the day. Economic downturn is believed to add fuel to these. The risk
of frauds is heightened during the recession, leaving most corporates vulnerable
both from within and without. Against this backdrop, there is significant pressure on the
corporate to perform and manage earnings, leaving the enterprise-wide risk management
highly vulnerable. Most corporates do have internal controls in place, but during these
troubled times internal controls are compromised. Monitoring internal controls assumes
importance in the light of the current economic turmoil. The Committee of Sponsoring
Organizations of the Treadway Commission (COSO) released, `Guidance on Monitoring Internal
Control Systems' in February first week to help organizations monitor better the effectiveness of
their internal control systems. It is expected that an improved approach to effective
implementation can enhance the efficiency and effectiveness of internal controls and reduce overall costs.
The new economic climate emphasizes the proactive and constructive role of
internal auditors. They are best placed to add value to management as the cornerstone of
strong corporate governance coupled with an in-depth understanding of systems and
processes. Besides bridging gaps between the board and the management, assessing
effectiveness of operations, compliance with rules and regulations, internal auditors should
endeavor in ensuring strong adherence of the corporate to internal controls.
International Financial Reporting Standards (IFRS) are set to become global reality.
The Securities Exchange Commission's (SEC) road map for potential use of IFRS, reveals that
the US issuers would mandatorily use IFRS beginning 2014. As such, the new financial
reporting environment poses challenges and threats to internal auditors. Addressing this issue,
the Institute of Internal Auditors and Deloitte are partnering to provide training to Internal
audit professionals on IFRS and Extensible Business Reporting Language (XBRL). Another area
of challenge to auditors is the Enterprise Resource Planning (ERP) system that integrates
two or more business modules into one system. The ERP poses unique and complex
internal control and audit challenges to auditors. The first paper, "IT Audit Approaches for
Enterprise Resource Planning Systems" by Richard G Brody and Grover Kearns, throws light on
the issues that auditors face while auditing clients with an ERP system. The authors
suggest the increased use of automated audit routines; electronic transaction logs and data
file interrogations. With extensive training in IT, expertise in GAS and CAAT, and
assistance from IT specialists, auditors can achieve effectiveness and efficiency in auditing
these systems. The authors also suggest two different models that can be of assistance
to practitioners while conducting IT audits.
The KPMG Audit Committee Institute, in its Conference Report, brings out the
risk that Earnings Management (EM) is exposed to, especially during economic
downturn. Corporates structure transactions and alter financial reports to mislead users about
the economic performance of the company. The second paper, "A Comparison of
Earnings Management Patterns Between Private Listed Companies and State Owned
Enterprises: Evidence from an Emerging Market" by Arvind Patel, Pranil Prasad and Dharmendra
Naidu, is a study comparing the EM practices in State Owned Enterprises (SOEs) with
Private entities in Fiji. Using Modified Jones Model and discretionary accruals as the proxy
of EM, the authors conclude that the magnitude of earnings management is similar in
SOEs and private entities. As SOEs depend on state funds, the fact that EM is prevalent in
SOEs calls for immediate and stringent action from the state, regulators, and auditors.
Even as Price Waterhouse defends its role as the auditor of the disgraced
Satyam Computer Services, it is very apt to question the high audit quality that the Big 4
are associated with. The third paper, "Questioning the Big 4 Audit Quality Assumption:
New Evidence from Malaysia" by Tyrone M Carlin, Nigel Finch and Nur Hidayah Laili,
examines the audit disclosures made during the transition period under Financial Reporting
Standards 136Impairment of Assets, of a sample of large Malaysian listed corporations, which
have engaged the Big Four (Deloitte & Touche, Ernst & Young, KPMG, and Price
Waterhouse) auditors. The findings suggest that the financial statement disclosures made by
Malaysia's largest sophisticated businesses diverged from Financial Reporting Standards
136 requirements. The paper also reveals the poor compliance levels and questions
the robustness of regulatory oversight institutions.
The last paper, "Audit Quality and Equity Liquidity: Case of the Listed Tunisian
Firms" by Fateh Hakim and Abdelwahed Omri, examines the association between the
bid-ask spread arising from the information asymmetry and the quality of audit in Tunisian
capital market. Results indicate a negative relationship between Big 4 auditors and
specialization, and bid-ask spread. This reveals that the market perceives audit quality as higher
when a Big 4 auditor and a specialist auditor audit a company. Also, results reveal that the
clients with longer tenure auditors, have higher spread than the clients with shorter tenure auditors.
This issue provides wealth of information on Audit Quality, Earnings Management,
and how to enhance the quality of audit in the IT environment.
-
C Padmavathi
Consulting
Editor |