AUDITOR’S COMPLIANCE WITH ETHICAL REQUIREMENT OF INTERNATIONAL STANDARDS ON QUALITY CONTROL ELEMENT AND ITS RELATIONSHIP WITH AUDIT QUALITY: EVIDENCE FROM MALAYSIA
CHAPTER 1: INTRODUCTION
Background of the Study
Auditing is considered as the examination on the statement of the accounts and other documents by a person who has had no part in the preparation (Columbia Encyclopedia). Auditing is a process that is handled by the different private limited companies and public listed companies in Malaysia, which is with accordance to the Companies Act 1965. Failure to comply with this requirements will cause a company to not to have the license to be renewed.
It is considered as a vital factor in the world of business, particularly in the aspect of good governance. As a result, well performing audit function is considered as one of the best means in monitoring and promoting good governance system in any company (Belay 2007). Currently, due to the different case and events that are related with the different earnings restatements by openly traded joined with the allegations of fraud in financial statements and lack of corporate governance of some popular companies including Enron, Global Crossing, WorldCom as well as the Adelphia, the entire audit committee and the business community started to increase their attention and awareness on the corporate governance, where in audit plays a very important role (Rezaee & Olibe 2003). This high-profile corporate collapses have brought into question the position and credibility of the accounting profession, particularly the auditors, focusing on the allegation of violation of the accountants with the public trust (Chan & Leung 2006).
It is important to consider that the ethical standing of any profession is significant to its reception in the entire society (Mintz 1995). Armstrong (1993) stated that ethical conduct pertain at the center of each cause for the survival of work. This is vital because for the auditing profession where in ethical failures can have extensive economic impacts, which caused the wide-ranging financial agony. Ethical values are essential for the auditors due to the two vital reasons. Primarily, internal auditors are frequently encountering different ethical problems which can test their standards (Goodwin & Yeo 2003). Therefore, they may face cases that will engage and require them to speak out (Barrier 2003), and this scenario is not always simple because more often than not, when pressure is being exercised by the senior management to go with the flow and not to make waves (Thompson 2003). Secondly, with the current focus on the corporate governance, it is becoming more and more aware that in internal auditors can play a primary function in the increasing business ethics as well as corporate honestly (Moeller 2004).
According to Steve Samek, the country managing partner, USA for Arthur Andersen, focusing on the independence and ethical standards of the company, the day that Andersen loses the trust of the public is the day that the company have been out of the business. While all of the general accounting firms have been focused with the different corporate collapses and accounting scandals, it is Andersen which has since ceased to exist. The impact of these violations had helped to push the increase intervention from the government (Chan & Leung 2006).
As a result of this, different standards had been created and being implemented which include the different ethical requirements which help in order to ensure the quality of the auditing activities. These standards offer a minimum level of performance with which the auditors must follow, because it helps to ensure that all the work of the auditors complies with the minimum of the standard. If the audit firms did not comply with the standards in their audit work, then there would be a greater chance of the work falling below what the profession regards as acceptable. Therefore, one of the main purposes of issuing standards is to raise the general standard of the audit work (Gray & Manson 2007). In order to restore the confidence of the public, different regulators had embarked and focused on different number of measures including the introduction of the number of measures which include the introduction of new quality control standards which include International Standard on Quality Control 1 for the accounting firms, which recommend and advice both ethical and technical competency that was well illustrated by the role of the auditors in the different collapses of different high-profile companies (Gaa 1994).
Statement of the Problem
The International Auditing and Assurance Standards Board has recently introduced ISQCI1, which mainly focus on helping firms to build a system or quality control for audits and reviews of the different historical financial information, together with the other assurance and connected services engagements. The standard applies to all of the members of the International Federation of Accountants or IFC and requires all the companies to have policies and processes in practice in order to make sure that all of the human resources are both competent in technical and ethical manner. The main purpose of the standard is to enhance the performance of the auditor as well as the quality of audit by focusing on the improvement of the ethical environment (Pflugrath &Martinov-Bennie 2007).
ISQC is necessary for the effective audit task for auditors and audit firms in Malaysia to carry out and to attain the objectives of the audit in accordance to the International Audit Standard. This would mean that audit firms and auditors in Malaysia would have their own perceived auditing method in carrying out their audit task and while they carry out the task do they comply with ISQC .This study will basically focus on the impact of the ethical aspect of ISQCI on the audit performance and quality of the works of auditors in the country. By doing this, it will enables the field of auditing to focus on the different aspects of the standards that must be focused in order to maintain the quality and ethics of auditing activities.
Research Questions
This study attempts to answer the following questions:
Objectives of the Study
The specific objectives of the study are to:
- determine the different perceptions of auditors in Malaysia regarding the ISQC ethical standards;
- analyze the importance of ethical codes in auditing activities;
- evaluate how ethical environment can established the quality of decision-making of auditors; and
- assess the relationship between ISQCI and audit quality.
Significance of the Study
It is hoped that the findings may help MIA to formulate a comprehensive continuing professional development policy for audit firms and auditors in Malaysia to promote the compliance of International Standard Quality Control in handling the audit task.
Another important significance of the findings is that it helps to identify areas in the International Standards on Quality Control for audit firms and auditors to give more emphasize while handling the audit task. The findings could also be used to determine the relevant strategies for the Malaysian Institute of Accountants in order for the audit firms and auditors to comply with the International Standard of Quality Control. In addition, this research will enable to focus on the different factors that are related with the standards, together with its content that can help in order to improve the perceptions of the auditors towards quality of audit.
Assumptions
The following assumptions have been made in an attempt to identify the compliance of International Standards Quality Control among the audit firms and auditors in Malaysia in carrying out the audit task.
Limitations
Some of the limitations of this study are as follows:
a. The findings of this study are only relevant to audit firms and auditors in Malaysia and thus cannot be generalized to internal auditors’ and auditors from other nations;
b. There limited resources which pertains on the topic.
c. Another limitation of the study is that only one instrument i.e. a questionnaire has been relied upon for the collection of data. It is felt that more credibility could have been obtained if a triangulation procedure has been utilized such as structured interviews and observations.
References
Armstrong, M B 1993, Ethics and Professionalism for CPAs, South-Western Publishing Co, Mason, OH.
Belay, Z 2007, A Study On Effective Implementation of Internal Audit Function To Promote Good Governance in the Public Sector, http://www.scribd.com/doc/2194671/Internal-Audit-Corporate-Governance [Accessed December 18, 2009].
Goodwin, J 2004, ‘A Comparison of Internal Audit in the Private and Public Sectors’, Managerial Auditing Journal, vol. 19, no. 5, pp. 640 – 650.
Gray, I & Manson, S 2007, The Audit Process: Principles, Practice and Cases, Cengage Learning EMEA.
Mintz, S M 1995, ‘Virtue Ethics and Accounting Education’, Issues in Accounting, vol. 10, no. 2, pp. 247 – 267.
Moeller, R 2004, ‘Managing Internal Audit in a Post-SOA World’, The Journal of Corporate Accounting and Finance, vol. 15, no. 4, pp. 41 – 45.
Pflugrath,G, Martinov-Bennie,N & Chen, L 2007, ‘The Impact of Codes of Ethics and Experience on Auditor Judgments’, Managerial Auditing Journal, vol. 22, no. 6
Rezaee, Z, Olibe, K & Minmier, G 2003, ‘Improving Corporate Governance: The Role of Audit Committee Disclosures’, Managerial Auditing Journal, vol. 18, no. 6/7, pp. 530 – 537.
Thompson, C 2003, ‘Fraud Findings: Wilful Blindness’, Internal Auditor, vol. 60, no. 3, pp. 71 – 73.
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