Unit 7 Auditing

Auditing is the accounting profession's most significant service to the public. An audit is the independent examination that assures the reliability of the accounting reports that management prepares and submits to investors, creditors, and others outside the business. In carrying out an audit, CPAs from outside a business examine the business's financial statements. If the CPAs believe that these documents are a fair presentation of the business's operations, the CPAs give a professional opinion stating that the firm's financial statements are in accordance with generally accepted accounting principles, which is the standard. Why is the audit so important? Creditors considering loans want assurance that the facts and figures the business submits are reliable. Stockholders, who have invested in the business, need to know that the financial picture management shows them is complete. Government agencies need accurate information from businesses.

Internal auditing is performed by a business's own accountants. Many large organizations − Motorola, Bank of America, and 3M among them − maintain a staff of internal auditors. These accountants evaluate the firm's own accounting and management systems. Their aim is to improve operating efficiency and to ensure that employees and departments follow management's procedures and plans.

Audits and their transparency

Every company appoints auditors, specialist external accountants who audit its accounts. The auditors approve them if they think they give a true and fair view of the company's situation. If not, they specify the qualifications they have about the accounts. If auditors do this, it certainly gets investors worried! But auditors complain that there may be an expectation gap between what they are required by law to do and what clients and investors sometimes expect them to do − auditors say that they should not be expected to pick up every problem.

Following the scandal of Enron and other corporate collapses in the US, investors are increasingly worried about accounting irregularities, and they are demanding that auditors should be more strictly regulated − the authorities should supervise them more closely.

Regulators − government agencies checking that the law is applied − are demanding more transparency: they say audits should ensure that the company's accounts give a clear picture of its true financial situation.

They are particularly concerned with:

• auditor rotation: the principle that companies should be obliged to change their auditors regularly

• conflict of interests: some say that a company's auditors should not be allowed to do its consultancy work, for example giving tax advice or doing management consultancy.

Unit 8 Tax Accounting

The purpose of any business is to make a profit. Profit is not a dirty word. It simply means that the resources which have been entrusted to us have been used effectively. The more effectively the resources have been used, the more profit will be made. If all the businesses in a country were making a loss there would be an economic disaster. The government taxes business profits and uses the proceeds to pay for free education, the National Health Service, unemployment pay, old age pensions and national defence among other things. So one of the reasons the business managers need to keep a record of their transactions is to allow the Inspector of Taxes to calculate how much tax is due. However, there are other reasons why the business managers want to keep financial records. They want to know whether the policies they are applying are proving to be successful or otherwise. They want to know whether modifications are called for. They also want to know who owes them money (debtors) and to whom they owe money (creditors). They want to make sure they collect all the monies which are due to them, and they also want to make sure they are not suddenly confronted by a creditor they had forgotten about.

Apart from retail business the majority of sales are for credit. When manufacturers sell goods to their retail customers, the retailers will not be expected to pay for them until they have had a chance to sell them to the public. That is the way business normally operates. By giving their customers, say, two months' credit, the manufacturers are giving them ample time to raise the funds from the proceeds of the sale.

The manufacturers' suppliers − the people who provide them with the raw materials − will in turn give the manufacturers time to raise the funds. A considerable degree of interdependency is thus developed. The cash flow − payments in and out − are vital to a business. An adequate supply of working capital is essential if insolvency is to be avoided. A firm is said to be insolvent when it is unable to meet its financial commitments.

Since almost all of the business conducted between firms is on a credit basis, credit control becomes significant. Specific credit limits will be allocated to each customer. Thus a new customer, John Turner, might be allowed to have an outstanding account of £5,000 for three months, while Evelyn Corbett, who has been a satisfactory customer for more than a year, has a limit of twice that amount.

Before any order is passed through to the Despatch Department in the factory, it will be checked against the customer and the credit rating. The salespeople are not allowed to give customers credit when these limits would be exceeded, unless there is a special clearance from the Sales Manager.

The drive for increased sales will make the large influential customer particularly attractive and for this reason they are likely to receive preferential treatment when credit ratings are determined.

Firms may attempt to reduce the risk of loss through bad debts by a variety of devices. They usually offer cash discounts for prompt payment and often operate a credit control department to monitor the granting of credit and the collection of debts. It is also possible to resort to a practice known as factoring (or invoice discounting) whereby specialist companies are approached with a view to their purchasing the book debts at a discount. They will collect the debts and keep any accounting records required.

Unit 9 Accounting Ethics

AICPA Code of Professional Conduct

51 Preamble

1. Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.

2. These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.

Section 54 - Article III: Integrity

To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

1. Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions.

2. Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.

3. Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: "Am I doing what a person of integrity would do? Have I retained my integrity?" Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment.

4. Integrity also requires a member to observe the principles of objectivity and independence and of due care.

Section 56 - Article V: Due Care

A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.

1. The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member's ability with concern for the best interest of those for whom the services are performed and consistent with the profession's responsibility to the public.

2. Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member's professional life. It is a member's individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member's services meets the high level of professionalism required by these Principles.

3. Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also establishes the limitations of a member's capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member's firm. Each member is responsible for assessing his or her own competence  of evaluating whether education, experience, and judgment are adequate for the responsibility to be assumed.

4. Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.

5. Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible.

Section 55 - Article IV: Objectivity and Independence

A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.

1. Objectivity is a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services.

2. Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare financial statements in the employment of others, perform internal auditing services, and serve in financial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment.

3. For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conflicts of interest.

4. Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice.

Enron auditor fined $500,000

Disgraced accountancy firm Arthur Andersen has been handed the maximum penalty allowed under US law for its role in the collapse of Enron. Arthur Andersen was fined $500,000 and sentenced to five years' probation.

Wednesday's sentencing was largely ceremonial as the firm has all but ceased to exist following its indictment on federal fraud charges in March. Since then, nearly all of Andersen's clients have fled and the auditor has sold off units and whittled down its workforce of 85,000 to fewer than 3,000.

In June, following a trial in a Houston court, a jury convicted Andersen of obstruction of justice after it found that an Andersen attorney altered documents related to its audit work for Enron.

End of audit practice

In a remarkable coincidence, Wednesday's sentencing took place exactly a year after Enron released its financial results that exposed some of the company's dire accounting woes, leading to its precipitous decline. Shortly thereafter, following the dismissal of chief financial officer Andrew Fastow, who now faces criminal fraud charges, Enron filed for bankruptcy and laid off thousands of workers. In issuing the sentence on Wednesday, District Court Judge Melinda Harmon said: "I believe a message must be sent to the auditing community that the destruction of documents will not be tolerated while an investigation is ongoing." In addition, Judge Harmon said Andersen must submit a plan to the court if it wishes to once again be an auditor of corporate books – something that does not appear likely.

Andersen effectively ended its audit practice 31 August following June's guilty verdict.

BBC News, 16 October, 2002