Auditing Regulations in the UK

Auditing Regulations in the UKIntroduction quest aftering(a) the fiscal disasters that led to the collapse of corporations such(prenominal) as Enron and WorldCom, inter depicted object and national regulators sought to strengthen legislation relating to the knowledgeable and external auditing of corporations. This resulted in the cornerstone of a number of international and national Acts and enforceable inscribes, commencing with the Sarbanes-Oxley Act 20021 in the US (www.sarbanes-Oxley .com). In the UK the government introduced the unite Code (FSA 2006) in 2003, which has after been revised and strengthened, and revised the Companies Act (2006). These became the foundation for embodied organization and get hold of auditing procedures. This paper seeks to evaluate the effectiveness of this regulatory framework in creating an auditing surroundings that will prevent a repeat of the disasters that led to their introduction. This will follow a brief overview of the auditing affe ctes is provided initially.The Audit ProcessThere have been several(prenominal)(prenominal) definitions of the term audit perhaps the most succinct of which is that based upon the American explanation Associations, which states that Auditing is a bodyatic carry out of intently multitude and evaluating evidence relating to assertions ab out(p) sparing actions and events in which the individual or institution making the assertion has been engaged, to ascertain the degree of correspondence between those assertions and open criteria, and communicating the results to users of the reports in which the assertions be made. Porter et al (2003, p.3).In separate words, the task of an auditor is, through the use of a structured programme, to fall in evidence relating to the financial statements made by a corporation, evaluate the accuracy of the statements made in the light of this evidence and to a fault to ensure that some(prenominal) opinions and reports handed atomic number 1 8 in accordance with the prevailing rules, regulations and criteria. They then have to present a certified unbiased view of their findings from the audit to external stakeholders, such as the shareholders and government authorities (See figure 1).There are several types of audits conducted throughout an organisation. However, this paper concentrates upon the external and inherent audit. A licensed and hooked firm of auditors, whose emancipation from the organisation must(prenominal) comply with the definitions set out the combined code and accompanying guidance notes, carries out an external audit.The congenital purpose of the internal audit is, in the words of the Institute of inborn Auditors (Spencer-Pickett 2003, p.2), intended to improve the effectiveness of risk management, control and corporate governance processes. Whilst the intention of this process, as with external auditing, is to provide and sovereign assurance on these processes and controls, the internal audit p ersonnel are employed directly by the corporation.Current regulationsThe auditing process relates to most corporations (Gray and Stuart (2004), but this paper concentrates upon the Public curb Company. In respect of financial inform within the UK, commercial organisations are governed by the rules of the Combined Code (2006) and the international reporting standards set by the IFA2, as explained within their handbook (2006).Combined CodeThe combined code concentrates upon five areas of the corporations activity and internal structure. These entangle Directors which include advice on suitability, proportion of executive to non-exec directors on the board and their roles and independence. It also defines a clear distinction of duties between CEO and Chairman.Remuneration This relates formula for the piece of music and levels of directors pay, together with the inclusion of an independent remuneration committee. accountability and audit Requires the board, through an independent audit committee, to maintain an adequate system of internal control that should be audited, the selection and independence of external auditors and outlines the process of accountability of the organisation to the various stakeholders.Relations with shareholders Outlines the responsibility of the board to its shareholders and the reverse. This incision of the code also sets out the requirements of the board to include the shareholders rights within their select and operating procedures.Institutional shareholders Section E of the code concentrates specifically upon the human relationship that exists between the board and its institutional shareholders and outlines the dialogue that should occur between the cardinal stakeholders of the art.IFRSPerhaps most important aspect of the financial reporting and auditing process is contained within the FRS3 and SSAP4 (ASB 2007) regulations, the former of which are based upon the international standards, which have been subjected to a s eries of amendments in recent years.Main ObjectiveThe Main IFRS objective is to promote a universal financial reporting standard, with the intention of providing an comparability of financial information that can improve comparison and reliability of cloy on a global basis. In addition, the standards set out to accession the trust and reliance on financial reporting system, and so trim back the likelihood and potential risk of financial disasters such as Enron. early(a) objectivesThe objective of IAS 17 is directly related to the provision of financial information to be used for investment or other economic sources, such as acquisitions. As such it concentrates upon the reliability of the news report and reporting standards for the Balance Sheet and Cash Flow statements. Therefore, it focuses on a uncontaminating representation, attracting significant importance to the handsome determine of assets, liabilities and equity, allowing interested parties to ascertain the occur rent real market value, thus making historical cost accounting redundant. Company officers have to prepare and sign residence statements in footing of the veracity of the information and internal controls operated by the corporation and thither must be a separate external audit certificate.The IFRS measures are utilise to each of the standards, although there is intent to introduce measurement as a separate application5. However, at present IFRS 2, relating to share based performance has specific measurement guidelines, as does the IFRS relating to the treatment of fixed assets, Here the initial measurement is the acquisition paid, but in later reports these values must theorise a fair current market value, unless there is a reason for this not being possible. In general, the measurements require a current fair value model to be usedThe presentation of financial statements and disclosures is also addressed For example, the Balance Sheet must contain at least(prenominal) sixteen lines (IAS1.68), which include tangible and intangible assets, current and future liabilities and a breakdown of the equity structure. IAS 1.81 provides the requirements for the income statement including revenue, costs, profit or loss and its distribution.As shown within the list of standards prepared by Deloitte (2005), in addition to the in a higher place there is a range of other requirements, including risk assessment corporate governance regulation compliance. If any disclosure cannot be made a certified statement has to be prepared by management and include within the financial reports giving the reasons for this omission.The major task for external auditors is to plunk for the accuracy and compliance of the statements, and the effectiveness of internal controls ensure efficient business management and a secure level of protection for investors and shareholders exists. Where risks exist, this must be identified with recommendation for actions.ConcernsIn spite of the regula tions and codes, there are so far concerns being expressed by investors and shareholders. These generally fall within lead categories.Auditor competence and independenceA recent survey shows shareholders are concerned about the external auditors. This focuses on their independence, experience and suitability and compliance with procedures.Independence of internal controlsSimilar concerns are being expressed regarding the internal controls and auditing process. Shareholders are not convinced that the level of effectiveness in identifying artifice and risk is effective or transparent enough and are thus seeking an expansion of financial reporting statements ( gutter Lorinc 2002).Shareholder concerns are support by research at the university of Auckland (Cheung and Hay 2004), which particularly showed auditor independence to be a major concern to investors.Fair valueThe belief of fair value is another issue causing disquiet. To date, the IFRS do not have a single definition for the term. Therefore it becomes subject to independent expertise and opinion. However, the fact that such opinions can vary significantly inwardness that the level of reliance on fair value is considerably reduced. windupAs can be seen from this evaluate, whilst the IFRSs go a keen-sighted way towards addressing the issues surrounding the accuracy, reliability and honesty of financial reporting, the issues of fair value and auditors independence are stable a major concern in the minds of investors. This is supported by events such as the near collapse of Yankee Rock PLC in the last quarter of 2007, which shows that that there are still inadequacies within the reporting standards that need to be addressed. In this case there are questions to be asked about the interpretation of fair value and the internal controls. By inference, this must also raise the issue of auditor suitability.ReferencesASB (2007). Accounting Standards and apply. Retrieved 30 November 2007 from http//www.frc.org .uk/asb/technical/standards/accounting.cfmCheung, Jeff and Hay, David. (2004) Auditor Independence The Voice of Shareholders. Business Review. intensiveness 6, issue 2. University of Aukland.Copnell, Timothy (Director) (2006). Shareholders Questions 2006. Audit Committee Institute KPMG LLP. UKDeloitte (2005). IFRS 7 A disclosure checklist. Retrieved 28 April 2007 from http//www.iasplus.com/fs/0510ifrs7checklist.pdfFRC (2005). Guidance on Audit Committees (The Smith Guidance). pecuniary Reporting Council. London, UK.Gray, Iain and Manson, Stuart (2004). The Audit Process Principles, Practice and Cases. Third edition. Thomson Learning.Handbook of international Auditing, Assurance, and Ethics Pronouncements. (2006). international Federation of Accountants. New York.KMPG (2005). KMPG International Survey of embodied Responsibility Reporting 2005. Retrieved 29 June 2007 from http//www.eldis.org/go/display/?id=19513type=DocumentLorinc. John (2002). After Enron. CA Magazine. Canada. De cember 2002.Porter, Brenda., Simon, Jon and Hatherly, David (2003). Principles of External Auditing. John Wiley and Sons Ltd. Chichester, UK.Sarbanes-Oxley (2002). Retrieved 29 November 2007 from www.sarbanes-Oxley.comSpencer-Pickett, K.H (2003). The familiar Auditing Handbook. John Wiley Sons Inc. New Jersey, US.The Committee on Corporate Governance (2006). The Combined Code on Corporate Governance. Financial Reporting Council. London.Footnotes1 Also cognise as the Public Accounting Reform and Investor Protection Act of 20022 International Federation of Accounts3 Financial Reporting Standards4 Statement of Standard Accounting Practice5 see http//www.iasb.org/Current+Projects/IASB+Projects/Fair+Value+Measurements/Fair+Value+Measurements.htm