In the UK, lawmakers and practitioners of auditing want to restructure the audit rules. The framework used for internal control functions is with a motto to reduce risk and improve income. The competition with private companies increases because of the transparency in the operations. The reporting format, auditing process, and governance will increase the competition and performance in private companies.
Stephen Griggs, managing partner of Deloitte said that changes in measures and timings increase the opportunities. KPMG, an audit firm, was charged with a 14 million dollar fine. The Carillion and Regenersis, data Services Company raised questions about the quality standards. Ernst and Young got problems from NMC health. Deloitte faced the issues and paid charges to Autonomy Corporation. The probe from Sanjeev Gupta’s wyelands bank and Greensill capital shook PWC. The failures seek change in the process. The blog is about the ongoing thought process of changes in the auditing process in the international market.
What is US-based federal law for auditing?
Sarbanes-Oxley Act is the act from the US for federal law. The law improves the quality and reduces scandals. The year 2000 was confronted with financial scandals. There was a need to introduce changes to protect the investor interest. Section 302 deals with the internal process and accuracy of the financial reports. CEOs and CFOs are highly responsible for the internal process, management actions and accuracy. Section 404 deals with the internal control process and financial reporting. The management needs to submit the internal structure and control points every year. A law review article from Columbia mentioned that SOX push the smaller companies to raise public funds to manage the internal control. This led to a decrease in the IPOs. The cost for compliance decreased, and accuracy increased due to the SOX model. The four types of audit opinions are as follows: unqualified opinion, qualified opinion, disclaimer opinion, and an adverse opinion. These four audit opinions guard the public and private sector auditing. An unqualified audit opinion has fewer details and is as per the GAAP. A qualified audit opinion gives respect to the financial position, cash flows and operations. Adverse opinion shows that the figures are not in conformity with GAAP. Disclaimer of opinion shows that the opinion in the financial statement is not from the auditor.
The private and public sector has different informational need and funding process differ for the private and public sectors. The private sector shows the information to the creditors, investors, employees and regulators. The information is about the profit and loss. In the case of the public sector, the information is about the tax revenue and beneficiaries’ details. Federal government reporting systems gauge the performance of standard auditing systems in international countries. Budget integrity, operating performance, and internal control are known through the auditing system. The stakeholders are interested in the budgetary resources, cost of operations, acquisition of resources, and uses of the resources. The operating performance brings out the cost of specific activities, effectiveness and efforts of federal programs. Internal control is possible only through financial laws, fraud detection, and performance measurement. The government issues the yellow book to guide the auditors about the government programs and material details. The red book is by the institute of internal auditors for international professional practices. The green book is by GAO and the association of inspectors general.
Why ‘Big Four Firms’ are targeted in the UK?
In the UK, PWC audited the documents of Galliford Try and Kier. The two companies are the biggest construction companies in the UK. As per the rule of audit firm rotation, the details are audited by BDO after PWC. Internationally, PWC is now facing seven regulatory issues. KPMG is facing an issue due to the outsourcer Carillion. Deloitte resigned from the auditor position in 2020 due to an issue with a car dealership. The following points elaborate on the tax implications and audit reform in the UK:
• In case of tax fraud, the authorities monitor the changes for the next 20 years. It is hard to assess revenues and costs associated with multi-year contracts.
• If the profit is over-stated, and more tax liability calculated, there is a demand to inflate the retained earnings and equity. This mistake will ultimately lead to insolvency.
• Inaccuracy in the audit statements is under check for a long period. There is a high level of complexity in preparing financial reports and documents.
• UK government allegedly implementing audit reforms. The challenger firms are performing better than the big four firms.
• The UK government want to reduce the auditing operations of Big Four firms. They dominate the auditing space.
• The audit regime introduced new reporting models to encourage the smaller challenger firms, and fulfil the obligations of directors.
• The government departments are also under the proposal to change the auditing regulations. The media report says that the change will take place after the queen’s speech. It is expected only after 2024.
• Business, energy and industrial strategy from the UK says that the 350 audits are a high number for the four audit firms. The Big four firms offer other business services and auditing services. So, there is a requirement to encourage small audit firms to bring accuracy.
• The shared audits concept shares audit with big four firms and challenger firms. The governance changes help the public interest entities to grow beside the competition.
• The big four firms have mentioned the reforms as increasing competitiveness and opportunities for the auditing ecosystem, reporting and corporate governance structure.
• The government said that in 2022 there will be changes in the EU law. And it helps for the prevention of future challenges with auditing.
The changes in the auditing are to encourage the competition, scrutinize the performance and improve trust and resilience. E-commerce, automation, block chain, cyber-attacks and money transfers contribute to financial operations. Technology and money circulation indirectly contribute to efficient financial operations. Because of negotiations recommended by economic cooperation and development, the corporate tax in the U.S was reduced. The international changes have an impact on the business. In the long run, the auditing changes satisfy the investors and improve the capital market performance. The fed rates have an impact on the US stock market. The market watchers predict that there will be an aggressive rise in the fed rates. The fed rates with moderate rise show that inflation is prevailing. Past performance and future performance have a difference in the stock markets. Accurate audit reports, vast investments and high performance improve the stock market performance.