Independence and Diversity in Board Composition - Free Samples

Question: Discuss about the Independence and Diversity in Board Composition. Answer: Introduction: The process of auditing is explained as objective examination and analysis of the financial statements of an entity in order to assure fair and reliable representation of the claimed transactions. This process could be conducted internally and externally as well. The internal procedure would be conducted on the part of the staffs, while external procedure could be performed on the part of outside consultant (Ahmed and Ndayisaba 2016). In addition, the financial statement users often watch out for the audit reports before they indulge in reviewing the financial reports of the firms. Hence, it is necessary for the auditors to be separate from their client firms in order to provide unbiased audit opinion to conform to the auditing standards. In this particular assignment, a critical dissection would be made to ascertain the accountability of the company management and auditors. This is because certain corporate downfalls have been observed to take place because of the unscrupulous organisational practices and the auditors associated with them. One such downfall identified in this assignment is the collapse of One Tel, since it had adopted various unethical measures, which were supported on the part of its auditors. As a result, this assignment would lay emphasis on highlighting the contributory factors leading to the downfall of One Tel. The article provided clearly states that G.Medcraft is the past chairperson of ASIC (Australian Securities and Investments Commission (ASIC). The individual has raised concerns about the responsibilities and obligations of the auditors while performing their audit operations. In addition, the individual opined that corporate collapses like Enron might hit the Australian economy and this could be avoided only with the dramatic change in the auditing standards of the big four accounting organisations (Abc.net.au 2018). One procedure through which such situation could be prevented is to ensure effective conduction of duties on the part of the auditors and assurance needs to be provided about the financial reports free from material misstatements. On the contrary, the international corporate downfalls have caused the financial statement users to lose confidence and trust on the entities, as the auditors were not successful in discharging their obligations appropriately. In this context, Albeksh (2016) remarked that sufficient evidence needs to be accumulated on the part of the auditors for ensuring the reliability of the financial information of the organisations to conclude that they do not contain material misstatements. Another significant reason for which Mr. Medcraft made this statement is the detection of errors and frauds in the financial reports of the corporation for adopting suitable actions. The individual has identified that innumerable investigations were carried out in the previous six years, out of which 80 people were sent to prison, 600 firms were banned and amount of $1.3 were provided to the investors as returns (Abc.net.au 2018). For ensuring that such situations do not repeat in future, it is crucial for the auditors to follow the norms laid out in Accounting Professional and Ethical Standards (APES 110). Moreover, it is clearly evident from the article that there was lack of professionalism and scepticism in the role of the auditors. Based on this evidence, the big four accounting firms are needed to enhance their standards of auditing, as such move would assure the lost confidence and trust among the financial statement users on both the entities and the auditors. Purpose and audit report in the context of One Tel: The intention of preparing an audit report is to give independent judgement regarding the lucidity and fairness in the financial statements of a firm to the respective users (Arnold and Bonython 2016). In case of One Tel, Ernst Young has prepared the audit report and the intention is considered to be identical as above. It is expected that Ernst Young would develop the audit report in such a manner for revealing the true financial condition of the business to the users in order to enable them in undertaking decisions. There are both external and internal users of financial statements for One Tel. The internal users could be identified as managers, staffs and owners and the external users include suppliers, banks, customers, investors, government and communities (Clarke and Dean 2014). Ernst Young clearly stated in its audit report that the financial information of One Tel is free from material misstatements. However, the audit judgement is not qualified in terms of nature. The audit report further stated that One Tel has complied with the prevailing guidelines as laid out in AASB, while the auditor has conformed to the norms of APES 110 as well at the time of performing the audit activities for One Tel. Degree of adherence to the purpose and audit report: It has already been discussed that both the financial reports and audit reports of One Tel are developed in compliance with the essential guidelines laid down in the auditing and accounting standards of the nation. However, the reports obtained from outside investigations state that there were huge variations in the real financial position of One Tel in contrast to the one represented in its annual report. It has been observed that the organisation was geared specifically in gaining money through share market speculation. Another renowned market report identified that Keeling and Rich received bonuses, which were tied closely to the shares of the firm rather than profit or any other indicator (Coleman 2016). One Tel has made rapid expansion beyond its financial capability due to the misguided decision of the management. As the network providers in Europe have changed, such change has adverse effect on the financial position of One Tel and specifically, the organisation could not proceed due to the international downfall of dotcom ventures (Dakhelalla 2014). In addition, another deficiency could be observed in business model, since it has offered services at a price lower than its cost to the customers. The two tables below signify the global growth rate of One Tel; however, the achievement was made by lowering the shareholders returns. The first signal, from which the troubling financial position of One Tel was identified, was the resignation of Rich and Keeling. News Corporation and PBL started conducting examination on the books of accounts of the firm and promise was made of providing $132 million to reassure the markets. However, after further investigation, they have detected that $400 million was required for ensuring sustainability of One Tel and hence, they were compelled to withdraw the offer. This situation clearly sheds light on the inability of Ernst Young to detect material misstatements in the financial information of One Tel and therefore, it failed to follow the ethical norms of APES 110 to prepare the audit report. Due to this, One Tel had reached insolvency in June 2001 and eventually, it was liquidated. The management of the business firms play a considerable role in auditing process except the auditors. Thus, the management needs to develop its financial statements by complying with the needed standards of accounting (Nuryanah and Islam 2015). On the contrary, the management of One Tel had carried out various unethical measures and they are summarised as follows: Various principles of corporate governance are laid down in ASX so that the organisations maintain their ethical integrity. The initial recommendation is independent directors need to be present in the board of directors of an organisation (Pandit, Conway and Baker 2017). In case of One Tel, the recommendation was not followed, since its founder has significant influence on the board opinions about the overall organisational performance. Thus, it is evident that only one director was in full control over the board and thus, the firm failed to maintain ethical values. Two different persons need to be accountable for the positions of the chief executive officer and the chairperson (Ramsay 2015). As observed in One Tel, only one person formulates the opinions of the board and as a result, the decision-making ability and independent functioning of the board was hampered. It was clearly laid out in ASX; the board of a firm is to be formulated in a way that raises its entire value. It is crucial for the board members to have relevant knowledge about the firm, which would help them in reviewing management performance (Riaz and Kirkbride 2017). For One Tel, the activities and composition of the board implied that the board members obtained incomplete and selective information regarding significant business aspects, as the job responsibilities were not clear to them. Hence, the ethical values of One Tel were not maintained. As One Tel had lack of common goal to be achieved, as its focus was on increasing profits, there was absence of this aspect. In addition, the directors were not aware of their old clients along with lack of knowledge regarding effective management and delegation of authority and as a result, the organisation was liquidated. There were absence of future planning and common vision in One Tel. The old customers were not paid adequate attention, since the directors have concentrated on profit-making by creating new customers (Sun and Farooque 2017). Due to this, there was significant decline in goodwill of One Tel. This implies supervising or taking care of a business entity. For One Tel, Keeling and Rich had intended to increase business profits, which had lead to ineffective compliance with their obligations. They aimed to increase profit through market diversification for earning profits; however, they ignored the cash availability required to ensure liquidity. Therefore, these acts are not made to ensure the overall organisational interest. For One Tel, Ernst Young had not provided any information to the shareholders regarding its true financial condition for assuring personal benefits. Thus, the objectivity principle highlighted under Section 120 of APES 110 is not followed. Moreover, the auditors need to formulate their internal control mechanisms (Wheeler 2016). In case of One Tel, there was absence of the usage of internal control mechanism of the auditor. Instead, it has used the mechanism of One Tel leading to violation of the audit profession. Hence, as per Section 130 of APES 110, the principles of due care and professional competence were not followed. The auditors are needed to provide accurate and trustful information to the users for fulfilling their requirements. In case of One Tel, the auditor had not laid stress on the requirements of the users due to its personal benefits and this has violated the common good principle. Ernst Young failed to make any effort in checking the invoices of the business transactions of One Tel. The auditor failed to make crosschecks to the debtors, assets and inventory valuation balances. In addition, no physical verification was made rather than relying on the prepared financial statements of One Tel (Yahanpath and Islam 2016). Hence, as per Section 150 of APES 110, Ernst Young did not comply with the professional behaviour principle. Conclusion: The above discussion clearly lays out both One Tel and Ernst Young did not perform their respective obligations and duties. One Tel has made rapid expansion beyond its financial capability due to the misguided decision of the management. As the network providers in Europe have changed, such change has adverse effect on the financial position of One Tel and specifically, the organisation could not proceed due to the international downfall of dotcom ventures. The auditor failed to make crosschecks to the debtors, assets and inventory valuation balances. In addition, no physical verification was made rather than relying on the prepared financial statements of One Tel and thus, it has breached the principles laid out in the auditing standards. References: Abc.net.au., 2018. [online] Available at: https://www.abc.net.au/news/2017-11-03/asic-boss-concerned-over-poorauditing/ 9114490 [Accessed 11 Apr. 2018]. Ahmed, A.D. and Ndayisaba, G.A., 2016. Effect of corporate governance on ceo pay-risk taking association: empirical evidence from australian financial institutions.The Journal of Developing Areas,50(4), pp.309-344. Albeksh, H.M., 2016. Compliance of Auditors to Ethics and Rules of Professional Conduct and Its Impact on Audit Quality.Imperial Journal of Interdisciplinary Research,2(12). Arnold, B.B. and Bonython, W., 2016. Villains, Victims and Bystanders in Financial Crime. 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AN ATTEMPT TO RE-BALANCE THE BALANCED SCORECARD TOWARDS A SUSTAINABLE PERFORMANCE MEASUREMENT SYSTEM.Asia-Pacific Management Accounting Journal,11(2).