The main and purpose of this research is to establish the basic differences existing at a global level between Australia’s and USA’s auditor requirements regarding auditor independence and financial expertise. In addition to this, this research also critically evaluates the Australian auditing standards pertaining to auditor independence and financial expertise and reviews the case study of corporate collapse of HIH Insurance. Moreover, this research aims to highlight the differences that exist between an un-qualified (unmodified) and qualified (modified) auditor opinion while analyzing various factors regarding two different firms after perusing their annual reports.
Auditing is a complex and a substantial part of any firm to ensure that all the data being entered in the balance sheet of a firm are reported in their true and fair form and that all the data has been entered. There are two aspects to auditing that are very significant when evaluating a firms auditing procedure, either internally or externally. Those two aspects are Independence and financial expertise. Basically all the countries all over the world conform to the basic accounting standards and are generally the same; however, there are minute differences that set each country’s accounting practices apart from each other.
Australia has a federal constitution, which then enables the government and the corporations to work together. The main regulator in Australia when regarding the auditing of firms is, ASIC which was established as a legal requirement by the government. Moreover, an important characteristic of the Australian auditing requirement when regarding independence requirements is that those requirements have been followed and implemented by the Federal Parliament in the Corporations Act.
However when analyzing the auditing standards of the United States of America in comparison with those of Australia, we observe that the basic characteristic of auditor independence is not as simple as the Australian auditing laws. The laws and the regulatory framework of the United States of America are complex and varied with intricate rules and regulations. The basic component between Australia and USA’s auditing Independence requirement are that both the requirements in these two countries are supported by the government or federal powers.
The main differences that are notably apparent between the two are as such:
The state presides over the internal affairs of the corporate world whereas the federal powers govern the external trading activities of a firm’s derivatives or securities. This is very different form the workings of the Australian government regarding the matter of auditor independence.
Hence, the main feature to be observed when observing the Australian auditor independence requirement is such that, these requirements are governed by the federal powers in the Corporations Act (Australian Auditor Independence Requirements , 2006).
While examining the role of financial expertise in both these two countries we can observe that while upholding the quality of auditor independence, in the USA it was made mandatory that all the companies have at least one member with financial expertise regarding the auditing standards and procedure and that all the members of the audit committee should be literate (Guner, Malmendier, & Tate, 2008)
In Australia, the same set of requirements were observed which required that all the audit committee members be literate and that at least one of them should have financial expertise (Krishnamoorthy, Wright, & Cohen, 2002).
Moreover, according to the Australian Shareholder Association, regarding the matter of audit independence, reported that the Australian Securities and Investment Commission (ASIC) was worried about the independence of the auditors and to ensure that a true and fair value of the accounts was being reported made constant amendments ensuring that the auditor would be restricted from forming any opinion that may be formed under pressure by the firm or to take up any other services for the firm. To ensure this the following statements were highlighted and stressed upon for the auditors and stakeholders alike:
- “The ASA will highlight the question of audit independence at every opportunity and will insist that auditors report to shareholders on a basis that is patently independent.
- Former partners of audit firms should not be appointed as directors of companies that are being audited by their former firm.”
Such acts ensured that the independence of the auditors was ensured and that no opportunity would arise for auditors to form an opinion that could be formed under any bias or prejudice whatsoever (Australian Shareholders Association , 2001).
In addition to this there were certain threats to independence that were identified and the means of protecting the auditors from those threats certain protectionist policies or measures were brought about which can be referred to in table 1 and 2 of the appendix by the author Ian Ramsay (2001). Those threats were of various natures, some of which could be attributed to the fact that an auditor had previous business dealings with the firms or was an employee of that firm. Moreover, these threats to independence could also stem for the auditor being involved in different services to the firm such as preparing their financial reports (Ramsay I. , 2001).
According to the Australian Securities and Investments Commission, the Australian audit committee, reviews all the registered companies in Australia. Such a review was deemed necessary as around the globe much concern is being given to the independence and financial expertise aspect of the auditing committee as globally corporate crises indicate an over-whelming increase.
Moreover, as the United States of America and Europe, both have progressed forwards in the development of their auditing standards and review procedures that Australia had to review its current auditing standards so as to keep it at par and at the same equal level as that of USA and Europe (Norman, Rose, & Suh, 2011).
Furthermore, it was also observed that it had been forty years or more since the Australian auditing rules and legislatures were updated pertaining to independence of auditors and the financial expertise of auditors. Therefore, this development and progress was much needed in this area of concern as it was also noticed that the increase in corporate crises had increased drastically over the last few years. According to the review of the stakeholders that was carried out by the authors which referred to the Ramsay report to support their arguments, it was stated that Australian requirements regarding the two factors of independence and financial expertise of auditors had greatly lagged behind as compared with the progress seen globally (Krishnamoorthy, Wright, & Cohen, 2002).
The case under consideration which highlights and supports the above mentioned fact, that due to lagging developments being made to the auditing standards, a corporate crisis had occurred in Australia. HIH Insurance Company was a very large firm based in Australia. HIH Insurance became insolvent and incurred a huge loss which was due to the mismanagement of funds and also because the information was falsely reported in the year 2001. It was also observe that it had been a few years since HIH had its activities audited.
The collapse of such a huge corporate was one of the biggest failures reported in Australia with HIH incurring an estimated loss of more than $5 billion. Many other aspects of HIHs fraudulent activities were made apparent which led to HIH facing criminal charges on various factors such as that of manipulating the stock market. These charges were reportedly dropped as HIH plead guilty to other criminal charges that took place.
ASIC was actively following the workings of HIH Insurance after the collapse and ASIC a regulatory company was analyzing the performances of the companies based on their capital management, liquidation and fraudulent activities.
In order to strengthen auditor independence certain measures were taken after the year 2001 to ensure that a true and fair picture of the businesses was reported. The two accounting bodies CPA Australia and the ICAA, termed as The Institute of Chartered Accountants in Australia worked together to improve the standards of auditor independence and to remain consistent with the accounting standards at a global level. Mr. Brian Blood, the president of CPA was stated to have said, “Our current status reflects the ongoing vigilance of Australia’s standard setters who ensure standards achieve the appropriate balance between operational effectiveness, international harmonization and community expectations. This new standard is an important step towards achieving this balance.”
Therefore in the year 2004 such changes were going to be incorporated to raise the performance bar for auditor independence and the need for financial expertise (New Australian standard for Audit Independence, 2002).
The companies that were taken to review and analyze the two different auditor opinions such as qualified (modified) and un-qualified (un-modified) audit opinion issued upon them were, Adamus Resources Ltd and Australian Worldwide Exploration Ltd, respectively. Both these companies were involved in the extraction of minerals and oil, respectively.
Both the companies met the independence requirements for the year 2008 as was noted in the reports to the financial statements of both the companies where they stated that they met the independence requirements of the Corporations Act, 2001, even though one of the firm that is, Adamus Resources Ltd, was issued a qualified (modified) audit opinion.
For Adamus the audit committee member in the year 2008 were a total of five directors, the majority of which were non-executive directors so as to meet the criteria for independence. Moreover, two directors retired as of that year and were replaced by other two directors. Therefore, according to the report there were three directors making up the audit committee. The list of the audit committee members were, John D. Hopkins, Peter Tredger and Antony Harwood. The ratio of independent audit members to the total members is 1, thereby indicating that all the directors had independence and that they complied with the Corporation Act 2001.
For Australian Worldwide Exploration Limited, there was one auditor mentioned in the report to this firm and it was also stated that the auditor independence was observed; hence the ratio would be 1, and thereby indicating that auditor independence was wholly observed. Moreover, no mention of the audit committee members was made in the financial report of Australian Worldwide Exploration ltd. for the year 2008.
Adamus Resources Limited stated that all the directors had financial expertise for the year 2008 and were literate in accordance with the compliance of the Corporation Act 2001. Moreover, all the audit committee members were experienced and had qualifications that were in accordance with the financial expertise requirements. Australian Worldwide Exploration Limited was also complying in accordance with the Corporation Act 2001 where financial expertise requirements were met.
When evaluating the performance and the accounting standards of both the companies, it was noted that both the companies met the independence and financial expertise standards. Therefore to further evaluate these two companies the following factors will be considered for further analysis of independence and financial expertise requirements.
The independence of the audit committee members can be ascertained by the fact that all the directs of Adamus Resources limited were non-executive which as stated in the report meant that these directors observed the independence requirements set by the Corporation Act of 2001 and thereby, the audit committee members were not in any way biased or prejudiced towards basing an opinion on the financial reports of the company. The independence of the audit committee members of the Australian Worldwide Limited was also ascertained to have been observed as was mentioned in the lead auditor’s independence declaration. Hence both the companies observed independence of audit committee members. Since, the independence of the audit committee was ensured the impact was such that it led to the fair and true values being portrayed in the financial statements to the stakeholders of both the companies.
Adamus Resources Limited reported the financial experiences and qualifications of the audit committee members which ascertained that all the directors of the audit committee members had financial expertise in compliance with the Corporation Act of 2001. In comparison with Australian Exploration Limited, the auditor also had financial expertise and qualifications in compliance with the same act. Since, the financial expertise of the audit committee was ensured the impact was such that it led to the fair, true and accurate values being portrayed in the financial statements to the stakeholders of both the companies.
When comparing he external auditors of both the companies, it was ascertained that both the companies had observed the requirements for independence of external auditors. Adamus Resources had Stantons International as their external auditor and Australian Exploration Limited had KPMG. Since, the independence of the external auditors was ensured the impact was such that it led to the fair and true values being portrayed in the financial statements to the stakeholders of both the companies.
The size of both the audit firms was reputed to be large. KPMG had overseas operations going on as well which indicated the size of the operating audit firm and Stantons International was also internationally based thereby indicating that the size of the audit and its operations was large. Since, the size of the audit firms was large for both the companies, the large audit companies worked diligently to uphold their standards; hence the impact on the companies was such that the quality of audit performed on both the companies was ensured.
In conclusion it can be stated that after reviewing the standards and accounting practices of Australia in comparison with the USA, Australia has progressed and has made many modifications and improvements to safeguard the independence of the auditors and to safeguard the rights of the stakeholders involved. Moreover, the financial expertise requirement has not been neglected and has been given due importance so as to maintain the quality of all accounting procedures. In addition to this when evaluating the two firms, Adamus resources Limited and Australian Worldwide Exploration Limited, with the former having an un-qualified audit opinion, it was observed that both the companies for the year 2008 observed Independence and financial expertise requirements satisfactorily.
Adamus Resources Limited . (2008).
Audit committee Insights. (n.d.).
Australian Auditor Independence Requirements . (2006).
Australian Shareholders Association . (2001).
Australian Worldwide Exploration . (2008).
Charter of the Audit Committee. (n.d.).
Craswell, A., Stokes, D. J., & Laughton, J. (2002). Auditor independence and fee dependence . Journal of Accounting and Economics
Ghosh, A. A., Kallapur, S., & Moon, D. (2009). Audit and non-audit fees and capital market perceptions of auditor independence. J. Account. Public Policy
Guner, B. A., Malmendier, U., & Tate, G. (2008). Financial Expertise of directors. Journal of Financial Economics
Krishnamoorthy, G., Wright, A., & Cohen, J. (2002). Audit Committe Effectivveness and Financial Reporting Quality: Implications For Auditor Independence. Australian Accounting Review
New Australian standard for Audit Independence. (2002). The Institute of Chartered Accountants inAustralia
Norman, C. S., Rose, J. M., & Suh, I. S. (2011). The effects of disclosure type and audit committee expertise on Chief Audit Executives' tolerance for financial misstatements. Accounting, Organizations and Society
Putting Australian audit committee practice in a global context. (2011).
Ramsay, I. (2001). Independence of Australian Company Auditors.
Windsor, C., & Warming-Rasmussen, B. (2009). The rise of regulatory capitalism and the decline of auditor independence: A critical and experimental examination of auditors' conflicts of interests. Critical perspectives on Accounting
Zhang, Y., Zhou, J., & Zhou, N. (2007). Audit committee quality, auditor independence and internal control weaknesses. Journal of Accounting and Public Policy
ADAMUS: AUDIT COMMITTEE, INDEPENDENCE and FINANCIAL EXPERTISE
The list of the audit committee members were, John D. Hopkins, Peter Tredger and Antony Harwood.
The external auditor as well as the audit committee members had full independence as declared in the declaration signed by the external auditor.
All the audit members had financial qualifications as stated in the report.