Ethical Issues Faced by Auditors - Accounting Assessment Answers

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Students are required to select an ethical and/ or legal issue encountered by auditors, and collect a minimum of five relevant articles from media and or academic journals. You are then required to analyse the auditing issue from the perspective of agency theory and common good with particular reference to auditors’ role in the issue.

Your report should cover the following:

1. A brief overview of the topic as covered in the article including the nature of theauditing issue
2. Identification of ethical issues, stakeholders and their financial and non-financialconsequences on stakeholders
3. Analysis of the problem in the context of relevant ethical theories and agencytheory
4. Making recommendations so as to ensure a similar incidence does not recur andthus the accounting profession contributes to the common good.

Remember to attach to your report the copies of articles you have selected.Your report should consist of the following sections:

Introduction:

According to Campbell (2005), auditing and ethics are complex technical processes. Ethics as a part of it is a simple process. It is unknown what to do, but at the end, people tend to get themselves as well as surrounding people to do the right thing. It means doing the right thing is following of proper ethics. However, ignoring ethics can be harmful for organisations as in recent years, a number of companies due to fraudulent activities have collapsed. Loyalty, integrity, honesty and integrity are major elements that should be in auditing. However, auditors face the ethical issue of honesty and integrity at the time of auditing. According to Lu and Sapra (2009), due to the lack honesty and integrity, auditors are unable to comprehend their financial services for the clients properly. Lack of honesty and integrity means improper financial decision making.

Identification of ethical issues and stakeholders and its financial and non financial consequence:

The ethical issue of dishonesty and non-integrity among the auditors harm all the stakeholders engaged with an organisation. Dishonesty results into fraudulent activity in financial services of an organisation. Auditing is an important part for identifying the financial condition of an organisation. In this context, the employees and employers, the shareholders as well as the suppliers engaged with a company are harmed due to unethical practice of dishonesty and non-integrity among auditors. Bazerman et al. (2002) found out that auditors falsify numbers in auditing in order to protect unethical clients. When such unethical activities unearthed, it ends in huge fine for the firms which harms financially to the organisation as well as to the stakeholders engaged with the company. On the other hand, reputation of a company also goes down which though not directly linked to financial loss, but is indirectly related to the financial loss of an organisation.

Analysis of the issue in light of ethical theory and agency theory:

As per Agency theory, there might be conflicts between two the principle and the agent. There are certain reasons why the principle lacks trust in the agent regarding organisational activities. Among the reasons, the lack of integrity and honesty in the agent bounds the principle to lose the trust in the agent. Therefore, the principle seeks for resolving any organisational issue with outside concerns rather than going with the agent. Mustapha and Che Ahmad (2011) found that, agents have different motives that vary from one agent to another. These factors might be labour market situation or relationship with other parties that the agent has, but not the principle. In case of auditors, if they have relationship with other parties different than the organisation it works, it is quite evident that dishonesty and lack of integrity might take place within the auditors. Further, bias in information asymmetries and the information lack by the principles, there might be a conflict of interest between the principle and the agent. In real world, it is between the organisation and the auditors. For example, an organisation may want an auditor to fraudulent the financial information whereas the auditor for the sake of duty may conduct such unethical works. The vice versa can happen when an auditor either through internal or external pressure conducts dishonest and non-ethical works.

The current ethical issue that is faced by auditors influence not only the owners of a company, but also each & every member engaged with different activities of the organisation. As per the ethical theory of common good or in other words, the utilitarian theory, people needs to think of consequences before conducting an action. Wang and Fargher (2015) in this context identified that utilitarian theory asks for the greatest good for every people by conducting an action. Therefore, whenever someone tends to take an action or activity, it is important to assume the percentage of good and bad effects it may bring. In case of the auditors, Craft (2013) found out that if auditors show dishonesty, it is not going to bring the greatest good for all. Rather, it is about fulfilling own self interest. Deontological ethics asks for conducting own duty irrespective for unhappiness to others as it is not possible to make everyone happy. In this context, as well, it can be said that auditors needs to play their role of auditing the financial services with utmost responsibility, accountability as well as with honesty and integrity. However, in most of the cases, the auditors are unable to carry out these tasks properly due to external and internal pressures. Here, the application of the agency theory works as conflict of interest results into the wrong financial auditing by auditors which violates the ethics of duty as well as the ethics of common duty. In this situation there are certain steps that organisations are required to conduct.

Recommendations:

In order to solve this ethical issue, there are requirements for recruiting people who are honest and decent. However, it cannot be guarantee that decent and honest people will not repeat such activities in future in their respective organisations or with clients. Therefore, introducing training activities can be helpful in preventing the reoccurrence of dishonest activities in auditing. However, it must also be necessary for organisations to focus on not tempting the auditors that they will not be able to cope up with. Apart from that, there must be a code of professional ethics which every auditor needs to follow. Violating the ethics should result non apologising punishment or financial file for the auditors as well as for the external and internal forces that sometimes bound them to conduct the unethical activities.

Conclusion:

From the above analysis, it becomes clear that due to conflict of interest between the principles and agents, unethical activities are conducted by agents. On the other hand, it is also found out that as auditors tend to protect unethical clients by changing numbers of accounts, it ultimately violates the ethics of duty and common good for all. However, proper training and establishment of a strong code of ethics can be helpful in solving the problem to some extent.