Business Idea: Shamrock Audit Firms

No, it is not St. Patrick’s Day and we are not going to praise Guiness in this article J

I am currently studying different forms of business organisation and try to apply this knowledge in the field of audit. I was interested by Handy’s concept of shamrock organisation, which is defined in BPP P3 study text as follows:

     “The shamrock organisation, or flexible firm, has a core of permanent managers and specialist staff supplied by a contingent workforce of contractors and part-time and temporary workers.”

Thus, in this post I would like to discuss the concept of flexible firms, which might change not only the value chain and network of audit firms, but also the whole audit market.

Problems

Audit businesses face number of problems:

1.     Financial crisis – clients less keen on paying for audit and there is the necessity to cut costs;

2.    New Legislation – the split of audit and advisory services would lead to problems in staff utilization. Firms might face the issue of overstaffing or understaffing (before it was more leeway to balance advisory and audit projects).

3.   Employee expenses – as a result of the two issues above, fixed expenses related with employees become burdensome for audit firms. Fixed salaries, pension schemes and other elements of package expose pressure on profit.

4.      Efficiency – are resources invested in junior staff employees show real pay off?

5.   Focus – to pick up appropriate people for audit job accounting firms should  maintain comprehensive recruitment department, waste  time of managers involved in the process, which might seen as waste of resources and shift of focus from delivery of quality services.

I think that flexible firm structure might help to address these problems and change marker

Answer: Concept of Shamrock Organisation

The shamrock concept comprises four so called leaves or elements.

The first leaf is professional core, which consists of professionals defining organization’s core competence. In audit firms it could be employees above manager assistant level or even higher grade staff. They would elaborate methodology, business processes, communicate with clients on major negotiations, review audits and sign up audit reports, establish and implement strategy.

The second element is self-employed professionals and technicians. For audit firms it could be extremely relevant element. IT services might be outsourced and there no need to be reliant on huge army of salary-paid IT specialists; tax, legal, valuation personnel and audit seniors could be hired separately for each audit project. To satisfy demand for these services freelancers as well as specialised firms could be hired.

The third leaf is contingent work force. The hire of this type personnel would totally depend on the external demand for audit firm’s services. I always wandered why audit firms hire people with higher education to do stock counting or cash section audit? Give me a week or two and I will teach secondary school graduates how to audit not only above mentioned sections but also receivables, payables, and even deferred taxes provided that these guys would know that 2x2=4 and more or less have common sense.

Thus, the contingent work force would cover the work of junior level staff, second and third year associates; this might include also the work of senior auditors in some cases (small project; tightly controlled by manager).

The forth element is supposed to be the contribution of consumers. Indeed, unlike other industries there are whole bunch of opportunities for better interaction with client in audit, e.g. audit committee, internal audit departments. I am going to expand this idea further.

            

Practical Implications

The question is rather simple: how is this model going to work? I would outline following solutions:

·    Active markets of freelance professionals;

·    Human resources (staffing) firms specialising in recruiting and training staff in certain area. For example, such kind of company might develop diverse skills in secondary school graduates and utilize this employees’ hours efficiently by outsourcing them both to audit, advisory, financial and other firms (e.g. data input/processing centers; call centers). Thus, the contingent work force could be provided by special HR firms;

·    Overseas professionals. The new developments in IT and communication allow audit firms to transfer part of work to overseas professionals achieving economy in costs. Tax section and legal contact within audit project could be easily reviewed by specialist in China or India for less fee with the same quality.

·   Consumer intervention. The model might provide client with means to influence costs. For example, there are two HR firms (A and B) providing contingent work force for audit services: A has brand name, B is less known but charges lower fees. An audit firm might provide opportunity to client to chose the firm (A or B) to be included into audit budget.

The implementation of shamrock concept might lead to rise of staffing firms specialising on low skilled financial employees. Audit firms would be focused on recruitment experienced high skilled professionals. The necessity in audit seniors (also known as “audit executives” or “assistant managers”) could be liquidated: the managers should be able to undertake some tasks and delegate less complicated issues to temporary workers.

The exchanges (analogy to stock exchanges) of professional and semi-professional labor should become more developed, elaborated and structured. They should provide businesses/audit firms with access to information about freelancer’s previous works, rate per hour, references. There are professional and freelance internet projects (e.g. Odesk or LinkedIn), but they are patchy and not so developed as commodity or stock exchanges.

I would be glad if you share your thoughts on this subject. May be you have some reservations regarding this idea or you might offer the other ways to make audit business more profitable and professional

References

BPP. (2011). Paper P3. Business Analysis. Study Text. London: BPP Learning Media Ltd.

Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".

Audit Firm: Regulation of Audit Firms in UK

The Companies Act 2006 of United Kingdom provides powers to bodies known as Recognised Supervisory Bodies (RSBs) to register and supervise auditors. The RSBs are:

• The Institute of Chartered Accountants of Scotland
• Chartered Accountants Ireland
• The Institute of Chartered Accountants in England and Wales
• The Association of Chartered Certified Accountants
• The Association of Authorised Public Accountants

The regulatory system of RSBs involves the following:

• Registration processes
• Monitoring
• Investigation and discipline

The RSBs are also subject to independent oversight.  The Financial Reporting Council (FRC) has statutory powers delegated to it by Government for the recognition, supervision and de-recognition of the RSBs.  The FRC conducts regular inspection visits to the RSBs to ensure that their responsibilities are being discharged appropriately.  The FRC also has the power to sanction RSBs. In addition to the quality assurance and monitoring undertaken by the RSBs, the Audit Quality Review (AQR) team of the FRC has the responsibility for the monitoring of the audits of all listed and other major public entities. 

The FRC operates an independent disciplinary scheme for accountants and accountancy in the UK. The Accountancy Scheme operates independently of the professional bodies. The FRC deals with cases of potential misconduct which raise or appear to raise important issues affecting the public interest in the UK. All other cases of potential misconduct continue to be dealt with by the professional bodies above.  The FRC Conduct Committee has oversight over the operation of the disciplinary arrangements. The Conduct Committee’s responsibilities in this regard include:

• Operating independent disciplinary Schemes for the investigation of cases which raise or appear to raise important issues affecting the public interest in the UK; and
• Where appropriate, bringing disciplinary proceedings against those whose conduct appears to have fallen short of the standard reasonably to be expected of members or member firms of the relevant professional body.
• Keeping under review the working of the Schemes and the supporting Regulations to ensure that they are operating effectively; and
• Regular publicity for the FRC’s disciplinary activities and achievements as appropriate.

Additional Thoughts

Compliance with local laws and regulations is a matter of utmost care for the audit firms. The audit firms should abide by all the laws and regulations in order to gain the trust of the authorities and the general public.

Reference:      http://goo.gl/1XOfUS

http://goo.gl/7wWT0q

Audit Firm: ACCA exams

Audit firms are interested to hire and retain qualified accountants. For example, Big4 firms provide support to their employees during their study in college to obtain qualification.  ACCA (The Association of Chartered Certified Accountants) is one of the professional accounting bodies certifying accountants through exams and experience. ACCA exams test the students very rigorously and they are not easy to pass if you are not well prepared ahead of time for it. Here are few tips about approaching the ACCA exams that will prove to be helpful in your preparations and to get you pass these exams.

Familiarity with Syllabus

Get yourself familiar with the syllabus of ACCA certification. ACCA has two levels; one is the Fundamental level that includes 9 papers from F1 to F9. And the other Level is called Professional level that include a total of 7 papers from P1 to P7 but you will be given a choice to attempt any two papers among P4 to P7. Choose among the papers from P4 to P7 wisely as you may get stuck in one or two papers in the end and it can waste your exam attempts, time and money.

Learning material

Choosing your books from which to study for the exams is a very major step as it can determine your success or failure from the start. ACCA's new Approved Content Providers are:

• Becker Professional Education
• BPP Learning Media
• Kaplan Publishing

Exam Paper Analysis

After when you have finished your course well at least once you are ready to take a look at the exam papers. Analyzing exam papers for trends is very important as it can give you clues about which topics to give more weightage and which topics demand less preparation. Try to attempt the full paper in actual time bounded exam pressure simulated scenario. This will give you a very good idea of where you are lacking. Do you need to concentrate more on few topics or you need to grasp the important topics well so as to finish the paper in time.

On Exam day

Sleep well before exam day is a cliché we hear from our seniors and teachers. This is actually very important for your performance on exam day. If you will feel relax you will perform and deliver in a much better way. ACCA exams have 15 minutes reading time for reading the question paper. Use this time efficiently. Plan the first question you have to answer when the reading time is over. Also you can arrange the questions in the in the order of difficulty during that time. Attempt the easy questions first and then go for the difficult ones. When answering questions, understand the requirements of the question and write only to the point answers. Remember DO NOT leave any question unanswered of you have time remaining. There is no negative marking in these exams and writing one or two important concepts well, even if you don’t know the complete answer will secure you the minimum marks that will help you to cross the minimum passing threshold for the whole paper.

After the exam

Try avoid discussing the paper if you are going to attempt another paper in a day or two as all you have in your hands now is to get ready for the next paper and try not to repeat the mistakes which you have committed in today’s paper.

In the end I would share this beautiful quote with you.

The reason why most people face the future with apprehension instead of anticipation is because they don't have it well designed." -- Jim Rohn.

Sources:

• http://www.accaglobal.com/gb/en/discover/about.html
• http://www.accaglobal.com/ca/en/student/your-study-options/alp-content.html
• http://www.accaglobal.com/us/en/student/exam-support-resources.html

Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".

Audit Exam Ultimate Pass Key

Last summer I successfully passed ACCA exam, P7 “Advanced Audit & Assurance”. While preparing for the exam, I designed succinct and universal “question tackling plan”, which helped to structure my ideas on auditing. In this post I would like to share my knowledge just before coming ACCA examination session.  

I believe it would be useful for all exams related with financial audit. So the candidates for qualifications like CPA or ICAEW are welcomed to utilize it as well. J

The logic is simple: the plan consists of common subjects/questions and points suggested to be addressed.

Question Tackling Plan

1.      Ethics area question

1.1.   Technical competence;

1.2.Objectivity/Independence (possible threats: self-review, familiarity, intimidation, self-interest, advocacy)

1.3.   Professional behavior;

1.4.   Integrity;

1.5.   Confidentiality.

Mnemonic: TOPIC

2.      Professional (audit business) area question

2.1.   Competence;

2.2.   Resources/costs;

2.3.   Reputation;

2.4.   Staff quality;

2.5.   Quality control: Acceptance; Directorship; Supervision; Review; Consulting; Disputes.

3.      Audit Opinion related question

3.1.   Clarity;

3.2.   Details (standards, amounts, scope);

3.3.   Structure (is heading on the right place?) of opinion and its Consistency (starts like “except for” and finishes like adverse opinion);

3.4.   Types of appropriate opinions. This depends on evidences (sufficient, mistake material and pervasive?);

3.5.   Prior year opinion.

4.      Audit Matters (audit evidence/process) question

4.1.   Materiality;

4.2.   Standard breached (IFRS, recognition, valuation criteria etc.);

4.3.   Risks of misstatement;

4.4.   Impact on Audit Opinion;

4.5.   Reliability (source of evidence).

5.      Audit Evidence question

Mnemonics:

Sources of evidence -  DADA3: Document Asset Director (interview/representations) Accounting record 3rd Party

Procedures AE IOU: Analytical (plausibility/predictability)   Enquiry & Confirm (written/verbal)     Inspection (documents/assets)       Observation (assets, process) RecalcUlation (opening balance check)

Elements of evidence:

5.1.   General: budgets/plans, accounting policy;

5.2.   Calculations: rates, models, risks, probabilities, impairment reviews, useful lives, assumptions reasonableness explanation;

5.3.   Disclosure: draft notes;

5.4.   Documents types:

5.4.1.      Bank statements, invoice, bill, dispatch/delivery note;

5.4.2.      Contract, agreement, insurance policy, title deed;

5.4.3.      Claim litigation copy, insurance claim;

5.4.4.      Log books, time-sheets;

5.4.5.      Minutes, orders, policies;

5.4.6.      Correspondence, letters;

5.4.7.      Tax returns;

5.5.   Reconciliations (with tax authority, debtor), confirmations;

5.6.   Record of discussion, interview, talk with employees;

5.7.   Valuation reports, surveys;

5.8.   Breakdowns (check for misclassification), samples.

Golden Rule:

Your answer should be always close to the question scenario: (1) the answer should be relevant; (2) the question text contains hint for answer.

You are welcomed to share your tips for audit exams. Good Luck! J

          Disclaimer:
"This group is not associated with or approved by ACCA and the views expressed on this page do not necessarily reflect the views of ACCA".

Audit Procedures: Final Stage

The incentive for writing this post was recent article by Lisa Weaver, ACCA Advanced Audit examiner, on the topic of audit completion. Following essential subjects were covered there:

1)  Review of audit files and evaluation of misstatements (ISA 220, ISA 230, ISA 450);

2)      Final analytical procedures (ISA 520);

3)      Subsequent events and going concern procedures (ISA 560);

4)  Written representation and communication with those charged with governance (ISA 580, ISA 260);

5)      Audit clearance meeting.

The issue of subsequent events and going concern auditing I have already covered in one ofmy previous articles. In this post I would like to consider analytical procedures and meetings with client.

Being analyst

The task of performing analytical procedures in respect of financial statements usually called overall analytical review (OAR). It enables to examine client’s financials in terms of common sense and ensure that test of details were relevant. In addition, for audit senior or manager it is great opportunity to show broadness of mind and deepness of understanding of client. Of course, the quality of work done would influence his/her performance assessment.

Example of Gross Margin Analysis

The major problem, which auditors face in performing OAR is lack of time. This is because at the end of audit project everybody expects deliverables from you, there are lots of work need to be done. So it is necessary to organise audit process in a way that it would save time in future.

One possible solution is to delegate part of work to junior staff while they are doing audit of separate accounting sections. For example, after performing principal audit procedures junior auditor would be responsible to make reasonable analysis from the business point of view. Why inventory item in trial balance increased so dramatically this year? So by the time of doing OAR senior auditor will have preliminary analysis of item in balance sheet, which could be expanded or left as it is if explanation provided is comprehensive and sensible.

Inventory structure analysis

I would also like to emphasise necessity of using understanding of general business tendencies and economic factors while doing OAR. For example, I had following case. The inventory of client increased and accountant explained vaguely that it is due to prices leap. To address this explanation I have undertaken following steps:

1)    Found out what kind of inventory caused increase: it was special alloyed construction steel;

2)  Found out that sales and percentage of this kind of steel in total inventory also increased;

3)   Found out from external sources (steel producers magazines, special business overviews) and internal sources (invoices, contract specifications) that special alloyed construction steel is rather expensive type of metal;

4)   Found out that due to increase of demand on construction steel in China (it was before 2008) price on all types construction steel and its components (e.g., chemical additives) had increased.

So the shift to production of more expensive special alloy steel was driven by market and fit into general economic tendencies, i.e. there was nothing controversial in client’s explanations of increase in inventory value.

I like analytical procedures, because it is creative and intellectual task: it allows you to compare facts from different sources, and find out if client explanations are coherent and persuasive enough.

Being diplomat       

At the end of audit it is necessary to discuss major issues occurred during audit process and their implications. Generally, there are no problems in carrying out this meeting. However, there are some issues arising in case of multilocation audit. Management of subsidiary is usually rather nervous about audit outcomes and sometimes there is a substantial lag between the moment of fieldwork end and issuing of audit opinion. So to my opinion if auditors want to maintain good relations with local management it would be good to communicate some preliminary (flexible) deadlines of finalising work or find words which make client employees understand further steps and ensure your future effective cooperation.

If you have any interesting examples of your experience finalising audit please comment and give some tips.       

Audit Procedures: Subsequent Events

The subject of subsequent events is always relevant both for accounting students and professionals. The risk is quite high due to broad definition of “adjusting event” category in IAS 10:

     “An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.”

The assessor of ACCA F8 paper, Steve Collings, wrote good article on this issue and I am going to highlight some moments and give examples in this post

Going Concern – No Conditions

Insolvent?
Going Concern issue!

As could be noticed from definition IFRS requires that some conditions should preexist for event to be adjusting. For the purpose of provision accruals IAS 37 specifies those conditions:

• Reliable estimation of obligation;
•  Obligation (conditions) whether constructive or legal existed at year end;
• Transfers of money are expected with regards to this event.

For example, the CEO of well-known oil company gave a promise to clean any mess caused by his company on the 31^st of December. The oil spill happened on 5^th of January and as a result all expenditures required to clean the oil should be undertaken by company no matter if there is any special legislation.

Quite another situation with going concern issue. No special conditions required to acknowledge that company is not going concern anymore. The roots of this in concept of IFRS which assumes that observation of standards gives true and fair results only if company is going concern.

Examples

In my practice I had some issues related with subsequent events. For example, warehouse full of food (inventory) was burned. The issue was that it happened someday around the year end, it happened near the Siberian forest so it was difficult to access the warehouse. Finally, after thorough investigation it was found out that it happened after the year end, the matter was material so I had to disclose this issue in the notes to inventory section.

The other issue was as follows. My client has signed the management representation letter where he confirmed that he had disclosed all information, including environmental matters. Meanwhile, after a week the representation letter was signed but before the audit report signature it got known that local authorities started the investigation regarding recent air pollution committed by company. Eventually, the pollution had immaterial implications, but there are several lessons to be learned from that. First, the management representation letter should be signed the date closest to audit report, but bear in mind that this could become an issue incase of multilocation audit. It requires additional coordination efforts to make management of subsidiary sign the representation letter the date nearest to the date of audit report. Second, the procedures requiring review of outside information (newspapers, journals, databases) about the client should not be ignored, to be done thoroughly and client should be questioned in case of material issues. Third, even if the news/management answers evidently show that conditions did not exist at the year end, there is still necessity to check reason of pollution (in my example), whether there was a concealment with management involvement.

Timeline

I provide you with timeline of dates relevant for auditor in detection of events affecting audit procedures and actions to be undertaken in accordance with ISA 560. 

Audit Sample: Simulating Scientific Approach

The sampling approach in audit is practical embodiment of “reasonable assurance” concept. Steve Collings, the assessor of F8 ACCA paper, has written article, where briefly explained the main principles of sampling in audit context. In this post I would like to discuss some issues regarding sampling phenomena.

A Little Bit of Theory

Based on the distinctive characteristics of statistical sampling (random selection and use of probability theory) following classification of sampling methods can be inferred from the ISA 530:

1.      Statistical sampling:

1.1.   Random sampling;

1.2.   Systematic sampling;

1.3.   Monetary unit sampling.

2.      Non-statistical sampling:

2.1.   Haphazard sampling;

2.2.   Block selection.

Actually, there are two steps in sampling process: determining the number of items you need to select from general population, and, aftermath select those items appropriately to make sample representative. By “representative” I mean that sampled population has to possess all qualities pertained to general population. 

History

Power in his book “Audit Society: Rituals of Verification” provides some insights on the sampling application in early years of audit. Block-tests – the form of proto-sampling – was used in late XIX century to test relevant transactions within particular month. However, the scholar notes that such method “lacked statistically precise notions of representativeness”.

Normal probability distribution 

Power states that American audit was pioneer in application statistically reasoned sampling methods. The process of formalisation and development of statistical methodology in audit began in 1930s-1940s. The drivers of these methods application were pragmatism and economic focus of US firms.

So at the moment we (auditors) have to be grateful to mathematical statistics and more specifically to probability theory. Obviously, now unlike before our pursuit to be more efficient and profitable backed up scientific or semi-scientific methods and strengthened by audit standards and legislation.

Practical Perspectives

However, working in audit firm you do not have to be a mathematician to apply variety of samples. Nowadays in most cases audit firms use sampling software. To be successful in running sample process following items need to be entered into program:

·      Risk level, which is usually significant, moderate or low;

·      Number of items in general population;

·      Total value of general population;

·      Total value and number of key material items, which need to pre-selected for separate testing in addition to test of sampled items.

Risk level is essential for determining right number of items in sample, the mistake could result overaudit or wrong audit opinion.

We should not forget about the judgment in audit profession. Of course, the process of calculation the number of sampled items is rather formalised, but judgment could be used in setting up initial risk per flow of transactions, establishing key material items, utilising selection process (e.g. systematic vs. haphazard). If the judgment is used it would be necessary to document appropriately the reason and factors prompting it. This is especially relevant in cases when the judgmental approach substantially differs from what is reasonably expected in similar circumstances.

Some Colour to Fraud Investigation

Lisa Weaver, the examiner of P7, wrote the article about forensic auditing in Student Accountant in 2008. I can not say it is the most jolly reading in the world, but I still  recommend it to all accountancy students for effective preparation to exam or job interview in forensic department.

In fact the fraud is highly tested area in all accountancy certification exams, in  ACCA (F8, P1,P7) and US CPA. I would like to add some “colour” to the considerations about fraud investigation engagements.

Types of Fraud

Ms Weaver kindly mentioned for us that there are three types of fraud:

·        corruption,

·        asset misappropriation,

·        financial statements fraud.

According to PwC’s report “Global Economic Crime Survey” her statement is very close to reality. I highly recommend to read that report, because it is quite interesting and practical product. PwC gives a table of the most popular economic crimes, which is in line with Weaver’s article:

Lets dive in financial statement fraud.

Financial Statement Fraud

Elliot and Elliot in their book state that inventory valuation gives lots of opportunities for creative accounting. Inferring from Treadway Comission Report they consider that ‘fraud often involved overstatement of revenues and assets with inventory fraud’ featuring understating bad debt allowances, overstating value of inventory. There are several groups of inventory related fraud: year-end manipulations, purchases not recorded (cut-off issues), fictitious transfers of non-existent inventory, carrying obsolete inventory at a cost, reducing cost of goods sold by adjusting journal entries.

Fraud and Bankruptcies

Gaughan, referring to Dun & Bradstreet research, noted than in 2000s number of bankruptcies related with fraud significantly increased. WorldCom, Enron, Adelfia, Refco, Parmalat were ‘brought down by management fraud’. He also mentioned BancruptcyData.com table of the largest bankruptcies. I have found it’s updated version since he has written his book, here it is:

As we already know accounting fraud (so called, ‘Repo 105’) was also involved in Lehman’s case. Though it was not the primary reason for their collapse, but still conceal of fraud contributed to the overall situation. This is how Sikka describes this case in his article:

‘Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end”, but the bank received a clean bill of health from auditors Ernst & Young. The insolvency examiner was critical of auditors and protracted litigation will follow.’

By The Way

There is a special certification of specialists in fraud investigations which is carried out by Association of Certified Fraud Examiners. CFEs are the guys, just like us, accountants J However, additionally to common accountancy subjects they study things as criminology and have special training to present evidence in court.

By the way, have you ever been involved in fraud investigations or may be you performed fraud investigation procedures within audit engagements? Please share information. 

References

Elliot, B. and Elliot, J. (2007). Financial Accounting and Reporting. 11^th Edition. Pearson Education Ltd.

BankruptcyData.com (2010). Site Link:

 http://www.bankruptcydata.com/Research/Largest_Overall_All-Time.pdf

Gaughan, P.A. (2007). Mergers, Acquisitions and Corporate Restructurings. Forth Edition. John Wiley and Sons Inc.

PwC. (2009) Global Economic Crime Survey: Economic Crime in a Downturn. November 2009, PwC

Sikka, P. (2011).The EU man cometh. PQ Magazine. No. 1, p. 27.

Weaver, L. (2008). Forensic Auditing. Student Accountant. September 2008, p. 58-60.

Ethical Auditor: Being Holier than the Pope

     Ethics issues in business have been always matter of discussions. Audit profession is especially subject of this arguments. Probably only medical workers have as sound ethical principles as auditors do.

     In the beginning

     IFAC code of ethics explains this phenomena in following way: ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer’. European Commission acknowledges this fact by emphasizing that auditor has to fulfill societal mandate.

     Unfortunately these statements do not stick in the mind of young beginning auditors. It is very rare if anyone from accounting firm’s HR or management would ask candidates during interview: “Do you really aware that you are going to hold societal mandate and act in public interest?” It a fantasy, isn’t? Especially for accounting firms operating in emerging markets with low level of law enforcement and legal awareness of society.

     Men and women of principles

     At this point I think I must list fundamental principals auditor’s ethics:

• Integrity
• Objectivity
• Professional Competence and Due Care
• Confidentiality
• Professional Behavior

     The principles are really very bright and constitute best moral qualities of humanity. For example, integrity means that auditor being honest should never allow his/her name to be associated with something dishonest. Professional behavior means that auditor must comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. As my honorable lecturer, John Stead, says that ‘it is not just a coat you put on when you go to the work in the morning and leave the office in the evening, it is an attitude of mind’. May be it is not the newest thought in the world, but I like the reasonableness and fairness of these words.

     Of course! When students hear such things from their lecturers there are ironic smiles on their faces. They know that human beings tend to lie and act irresponsibly in their own interest, because human beings are not perfect from birth.

     Some illustrations. For example, I am shareholder and I do not want financials of my company to be audited by the guys who illegally download some software/music from internet. They commit crime and if this information becomes public this would negatively impact audit profession. Or, for example, audit partner is in cahoots with criminal authoritarian government members. Is it just a friendship or something related with corruption? We do not know, but reputation of audit partner willingly or not would be damaged at this case. There are no immaterial things here – even if you are stowaway in a bus, it still matters!

    Another good point is that ethics is not only, auditor knows if he is guilty (ethical) or not guilty (non-ethical). It is also about public perception of auditors’ actions.  If society believes that private relationships of audit partner and CFO matter even if auditor sure that it is 100% does not matter, the society is right.

     On the other hand, we are not saint. There is always compromise. The relevant rule here is: “Do not do silly things”. In my opinion, for different people different ethical issues matter. Moreover, I think that the most ethical values are grounded in childhood and youth. If future auditor failed to recognize an ethical issue at the age of 18 it most likely that he/she would struggle to recognize it in adult ages even after completing ethics courses.

     Ethics models

    David Campbell, the examiner of P1 in ACCA qualification, have several useful tips in his article in Student Accountant magazine. He briefly described features of two ethics models: American Accounting Association model with seven steps and Tucker’s 5-question model. I will place here just major points of model, the article is freely available and you can read details there.

       I think they are very clear and useful, even in daily live.

      

       

References:

Campbell, D. (2008). Work ethics. Student Accountant. March 2008, p. 56-59

IFAC (2006). Code of Ethics for Professional Accountants. IFAC, New York