Introduction
Over the last few decades, there have been several changes in the roles of audit companies notably due to challenges that have affected the ethics and integrity of the institution of auditing. Traditionally, audit companies are mandated with the responsibility of analysing the financial systems, financial records as well as the compliance of companies’ financial reporting procedures with the specific national regulations. The effectiveness of audit companies in implementing these duties is extremely important in the public trust in business organizations around the world.
Local and international investors rely on the accuracy of audit reports produced by audit companies in making investment decisions. As such, it is detrimental to the investors if the audit companies fail to produce accurate audit information to the society, which would, in this case, lead to misrepresentation of the performance of a company (Knapp, 2016, p. 112). Some of the scandals that have occurred in the business world including the Horsemeat scandal in Europe, the phone hacking scandal, and LIBOR manipulation scandal including several others have necessitated a revolution in the field of audit to increase the trust of the society in business corporations.
In the wake of unethical practices on the part of business organizations and the failure of the most reputable audit companies such as Deloitte, Price Water House Coopers and the likes, there has been projects development geared towards the improvement of the practice of audit (Hall, 2015). Improvements in the field of the audit would come in a time where there is a need to create and enhance an ethical business field for the benefit of different stakeholders such as investors and consumers of products and services from various types of business organizations. In this way developing projects such as the Audit Futures project by ICAEW will go a long way in reducing the cases of business misconduct as far as adherence to accounting standards is concerned. As a result, this will restore the trust of the society in businesses, which have otherwise been tarnished by various account ting scandals in the past.
Overview of the Issues
Over the last few years, there have been several accounting malpractices by business organizations. As such this has increased of the responsibility of the big four audit companies in scrutinizing the management of earnings, accounting systems adopted by companies and the financial reports by the same to identify their qualitative accuracy (Hall, 2015). Even with this, there has been a notable prevalence of some high profile errors on the part of these reputable audit companies. As a result, this has led the public to question their ability to produce accurate audit information, which is very much necessary to the general society for the reasons named above.
In this light, the purpose of this paper is demonstrating some of the most recent failures of the big four accounting firms namely PWC, Deloitte, KPMG and Earnest and Young that have affected their credibility in the eyes of the public as far as ethics in audit practice is concerned. The issue emanates from the fact that hiring any of the big four companies comes with a lower risk of firms falling in accounting scandals as it has been the case of clients who hire other audit firms. With the increase in the prevalence of accounting, misconducts on allowed by audit firms, the federal government developed the Public Company Accounting Oversight Board (PCAOB) to facilitate the regulation of the activities of audit companies (Knapp, 2016). This control was driven by the need to protect the interest of the public as far as financial reporting by audit companies is concerned.
Annually, PCAOB releases grading reports on the performance of audit companies in their audit activities. This information is made available to the public. The information released over the years has consistently shown weaknesses of the companies in conducting audits in the stipulated ways. On the surface analysis of the PCAOB report of 2012 reveal significant failures in an audit. PWC, which is one of the most reputable audit firms around the world, received the worst score according to the report, as only 21 of the 54 inspected audits were correct. EY followed with a 41.3 % failure. KPMG and Deloitte fared better with failures of 34 and 5 % respectively.
There is a wide range of reasons that have led to these firms performing poorly as far as the controls system of the PCAOB is concerned. Some of the most significant failures include the banking failures and the failure of the big four companies in quickly identifying the same for the necessary corrections to be made misrepresentation of the value of some clients companies leading to the public believing that these firms are highly profitable to invest. Specifically, PWC have been accused of such allegation. One of the incidences of this nature is the overstating of the value of Tesco Corporation. The investigation of the matter by a British official found that PWC, the firm hired to audit Tesco’s financial reports had received a bribe of £ 10.4 million to overstate the firms value (Mohd, et al., 2015).
Although the latter denied this allegation, this is clear evidence of the possibility of the involvement of fraudulent activities in the big four accounting firms to misrepresent the value of their clients. Other failures by that have been identified by the PCAOB over the years is the failure of the latter to use the necessary information in preparing audit reports for their clients. The lack of using adequate or the lack of use of the same have resulted in the big four accounting firms producing misleading audit reports. The most affected companies of these deficiencies are PWC and Deloitte. Below is a discussion of some of the recent failures in the case of each of the big four audit firms. There will be a determination of the correlation of these failures concerning the integrity of the audit companies delivering their mandate to the society. The information will be extremely useful in developing the approaches that would effectively increase the effectiveness of audit companies and make them efficient in determining accounting misconducts by their clients and their integrity in reporting the same.
Recent Audit Failures by the Big Four Accounting Firms
Audit failures of various natures have been a common scene in the field of audit as reported by the PCAOB and other accounting regulatory bodies such as the Securities and Exchanges Commission (SEC). Most recently one of the most consistent failures of the big four accounting firms is their failure in using the relevant information in preparing audit reports. For example, according to the PCAOB, PWC and Deloitte were found to be using assumptions in preparing audit reports for some of their clients over the last three years.
According to the PCAOB rules and regulations, it is unethical and unlawful to use assumption or use inadequate information on the part of professional auditors such as the big four accounting firms. Arguing from the position of the audit companies, accessing the most recent accounting information from their clients can be a time-consuming activity mostly because of the vast number of clients their represent. Using assumptions in the preparation of audit report or using past data for the same purpose is detrimental to the investors who rely on the accuracy of the reports produced to make important investment decisions (Mohd, et al., 2015). At the same time, this affects the government taxation activities as the true value of a firm could be affected by the using assumptions or past data in issuing audit reports for their clients. Closely associated with this is the deficiency of the big four accounting firms to use or design appropriate control systems in testing the data provided to them by their clients for audit.
In most cases, PWC has been found to have the most cases of lacking the use or design of control system to determine the accuracy or legitimacy of accounting information issued to them by their clients for audit. This has had detrimental effects on both the company and the society in general. In most cases, firms strive to compete for investors by representing high annual earnings. According to the PCAOB accounting control recommendations, it is the mandate of accounting firms such as Deloitte, KPMG, EY and PWC to develop appropriate control systems to identify potential misrepresentation of financial information provided to them by their clients (Crane & Matten, 2016). The case of PWC fraudulently increasing the market valuation of British corporation Tesco (2014) is a good example of unethical practice by accounting firms to falsely attract investors. At the same time, companies around the world have been known to understate their earning by colluding with their auditors to reduce the tax remittance to the government.
The big four accounting firms have been heavily linked with the 2008 financial crisis, which led to the collapse of the world economy. Even though the accounting firms accused with this blame avoided the accusations, recent failures to detect failures and unethical practices in the banking sectors have resulted in detrimental effect in certain investment sectors and the loss of customer’s trust in the banking industry (Mohd, et al., 2015). To begin with, KPMG was found guilty of failing to scrutinise the loss of loans from a tier one bank in the USA, which is almost similar to the incidences that led to the world economic crisis in 2008. EY have also been accused of the same error as some of their clients were found to overstate fake value ion their financial statements to improve their ranking as far as banking performance ranking is concerned.
Banks are usually classified into various tiers depending on their performance, and it is the sole responsibility of their auditors to ensure that their financial records are accurate to enable the professional bodies (the central banks) in ranking them according to their performance. KPMG and EY have failed in recent years to identify cases where their bank clients have misrepresented their bank reserves to rank higher in their national central bank ratings (PCAOB, 2015). Notably, such failures by the accounting firms are significant enough to lead to loss of millions of customer’s money saved in the failing banks.
In the case of PWC failing to detect or been involved in fraudulent misrepresentation of their clients market values, EY have in recent years been found guilty in more or less similar issues. For example, in 2012, an Indian technology company called Satyam audited by EY had admitted that they had remitted financial reports with fake amounts of up to $ 1 billion with the intent of raising their market valuation mostly to attract new investors (Knapp, 2016). This incident led to the delisting of more than a hundred of Asian companies from the American financial markets as they were also found guilty of falsifying their financial information under the watch of the big four accounting companies.
Another failure that has been associated with the big four companies revolves around their collusion with underperforming firms as well as those which employ illegitimate methods to carry out their operations. Concerning the failure of the audit firms to detect inappropriate product and service offering techniques is the Horsemeat scandal that took place in some United Kingdom market at the beginning of 2013. The scandal began with the UK food industry officials detecting the presence of undeclared Horsemeat and other animal meat in some food products in England, Scotland and Ireland.
The victim of the scandal, Tesco is a British multinational company situated in the grocery and general merchandise processing and supply (Hall, 2015). Specifically, the main issue that revolved around the Horsemeat scandal is the breach of the customer loyalty for the customers to Tesco. At the same time, the scandal represented a breach of the national and institutional standards concerning the production of consumer products (Hall, 2015). As in the ICAEW project, one of the objectives of the big four audit companies is the protection of the public safety and interest of from such unethical practices by companies. Following this on the part of the auditor, it was their duty to detect the use of undeclared horsemeat and pork in the company’s products.
Concerning the failure of the big four audit companies to detect and report underperformance in companies they audit have also been noted by the PCAOB and similar national agencies outside the USA. One of the incidences occurred in 2013 where Jon Carnes, a Chinese based apparel company falsified their production activities under the watch of KPMG. As seen above, most of this failure of a company’s actual performance occurs to use of past information or assuming of the same by the auditors.
Response of the big Four to Accounting and Unethical Audit Problems
In this time where each industry has stiff completion in the industry, even accounting firms have to develop policies to ensure they remain competitive and in favour of the society. One of the most significant developments in the big four has been the development of oversight committees to detect failures on an internal basis and preventing these from been detected by external oversight agencies such as the PCAOB. Such internal commission has gone a long way in ensuring that the companies use the most up to date audit information which has, in turn, restores the trust of the public in the latter’s audit reports.
The internal commission has at the same time continued to develop internal policies to detect fraudulent activities on the part of their clients as far as financial reporting is concerned (Crane & Matten, 2016 ). At the same time, other external agencies with the help of the federal government have helped the big four accounting companies ensure fewer cases of accounting, performance errors as well as detection of malpractices in maintaining the expected quality. For example, with the introduction of the Sarbanes and Oxley’s Act in 2002, companies are now required to implement internal controls to ensure the accuracy of their financial statement before remittance for an audit of the same by big four audit companies (PCAOB, 2015). Even with this, the latter have developed control systems to identify fraud and inaccuracy in the financial statements provided to them for audit. This has gone a long way in reducing the percentage of ethical problems and failures by the big four audit companies, as it has been the case over the last few years.
Conclusion
The primary goal of the big four accounting companies is ensuring the accurate representation of their clients in the eyes of the society mostly regarding their financial performance and ensuring the procedures followed by their customers are appropriate as set by the national and international standards. In the past, the failure of the big four audit companies has led to the reduction of the society in trusting their ability to provide accurate information concerning the performance and methods employed in providing services and products.
With the new development on both the part of the audit companies and external agencies such as PCAOB, it is now possible to restore the destroyed trust of the accounting firms. For example, with the development of internal commission of accounting firms, it is possible to detect more cases of false reporting of company’s financial records. This will also contribute to the development and implementation of better systems to detect unethical or unlawful practices in supply chain management. All these will be effective in restoring the trust of the society in the big four audit companies.
References
Crane, A. & Matten, D., 2016 . Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization. 4 ed. London : Oxford University Press .
Hall, J. A., 2015. Accounting Information Systems. 4 ed. New York : Ceanage Learning .
Knapp, M. C., 2016 . Contemporary Auditing. 4 ed. New York : Ceanage Learning .
Mohd, M. N., Smith, M., Ismail, Z. & Nahar, H. S., 2015. Unethical Audit among Malaysian Auditors. An Exploratory study, 6(16), pp. 1-14.
PCAOB, 2015. Ethics in Audit Processes, Washington : PCAOB .
