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The IUP Journal of Audit Practice
Focus

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 136—Impairment 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

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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Audit Practice