Auditing Report

AUDITING 10

Tableof Contents

ExecutiveSummary………………………………………………………………………….3

Introduction…………………………………………………………………………………..4

CaseStudy: Olympus Corporation……………………………………………………………5

Outlineof the auditing issues that apply in the Olympus case………………………………..5

Discussionand analysis of auditing issues assessed from Olympus casestudy………………6

Auditingethics………………………………………………………………………7

Theauditor’s legal environment………………………………………………………7

Auditexpectation gap…………………………………………………………………8

Therole of internal auditing in external audits………………………………………8

Conclusion……………………………………………………………………………………..9

Reference……………………………………………………………………………………10

Executivesummary

Auditingprofession is pegged on objectivity and independence while conductingfinancial audit tasks. Independence is a fundamental aspect thatdefines auditing profession. Other professions have clear conflictsrelationship between conflict of interest and independence but thisis not the case with auditing. Auditors and in particular internalauditors are subject to internal influence and this leads to grossviolation of financial accounting standards.

Themanagement board of Olympus Corporation was for decades engaged inserious financial misappropriation that involved financing criminalactivities from the firm’s coffers. Investors and the generalpublic were denied right of objective audit financial reports fromOlympus’s internal auditors. Consequently the firm made billion ofloses leaving enormous loses to investors. Internal auditors colludedwith board members to conceal the financial misappropriation and thiswas against the ethical standard requirement for auditors.

AuditIssues involved in the Olympus case study that are discussed includefraud, unethical audit practices, lack of audit independent, legalliability for the internal auditors and creating audit expectationgap.

Thecase analysis was that Olympus internal auditors were guilty offinancial losses incurred by the firm and carried legal liable forthe Olympus investors. However, the analysis indicates that theinternal auditors could have been compelled against their intentionsto falsify financial audit reports from the benefits of the boardmembers.

Theconclusion made from this cases study is that auditors facesignificant conflict of interest between client’s interests andpublic interest.

Auditingis the systematic and independent examination of financial recordsfor the purpose of providing objective opinions on the financialstatus of a particular firm. Auditing is governed by legal andethical standards that require transparent and unbiasedresponsibility while analysing and reporting financial materials.Auditing is carried out by internal or external auditors. Whileinternal auditors are ‘not independent’ due to employmentrelation with organizations, external auditors are independent ofclient’s influence(Sawyer, 2003).However, auditing laws requires that all auditors remain objectiveand independent when conducting auditing tasks and when reporting forthe benefit of the general public members. This report criticallyanalysis the gross violation of auditing standards and ethics thatled to great investment losses from Olympus Corporation.

CaseStudy: Olympus Corporation

  1. Outline of the Olympus case study issues

  • Unethical audit and accounting practices

  • Fraud

  • Misleading or falsified financial reports

  • Lack of independency and objectivity by internal auditors

  • Auditing expectation gap

  1. Detailed outline of the Olympus case study issues

Olympusis a Japan based producer of optics and reprography products. OlympusCorporation was established in 1919 and initially specialized inthermometer ad microscope business. Olympus first gained global mediacoverage after firing a newly appointed British chief executiveofficer Michael Woodford who had requested to probe unexplainedfinancial irregularities and payments worth hundreds of milliondollars. Initially, the Olympus board dismissed Woodfordinquisitiveness via mass media address in which the board termedWoodford’s actions as ‘disruptive’ and his failure to ‘grasp’the local culture. However, the matter lead to more expose on largescale corporate corruption scandal in which a concealment of over 117billion Yen ($1.5 Billion) of loses and other false fees and paymentsdating back as late 1980s was unearthed(Tabuchi and Protess, 2011).

Itis suspected that the dubious payments and fees worth billions ofdollars that were concealed were payments to criminal organizations.The Olympus financial scandal is considered the biggest in thehistory and modern corporate Japan. The scandal led to anapproximately 80% loss in the company’s stock market valuation(Tabuchiand Protess, 2011).After the revelation of the scandal more board members resigned.

Amidthe scandalous claim the company reiterated that the ‘’majordifferences had arose between Woodford and the management regardingthe business conduct and direction of the company’ and that ‘nodishonesty or irregularity was found in the transactions.’ However,Olympus agreed that indeed there had been major inappropriateaccounting by the auditing staffs that were arrested and charged forviolating the financial instruments and exchange law. The auditingstaffs were Kikukawa, Hideo and Hisachi. Later, the accused staffspleaded guilty for colluding to falsify financial reports.

Outlineof the auditing issues that apply in the Olympus case

  • Auditing ethics

  • The auditor’s legal environment

  • audit expectation gap

  • The role of internal auditing in external audits

Discussionand analysis of auditing issues assessed from Olympus case study

Auditingethics

Theabove case involving great financial inappropriate accountingpractice was a serious gross violation of the ethics leading to auditexpectation gap based on the financial loses that the company wasmaking. Auditing is an ethical based profession just like others butabiding ethical requirements leaves many auditors in precariousdilemmas unlike other professions. Auditors face more complicatedprofessional issues due to conflicts of interest with ethicalrequirements. Auditors are paid by clients and thus more likely toconduct audits to the interests of the client(Gilbert and Terry, 2005).However, ethical auditing codes demands that auditors represent thepublic interests and not the client’s interest and this is whereconflict arises (CALCPA. 2010).

Ethicalconflicts exist when duties towards one group are inconsistent withthe responsibilities of others (Citron and Taffler, 2001). An auditorreceives client fees for audit and non-audit services and is expectedto provide impartial information regarding the state of financialstatements (Sawyer,2003).However, if an auditor withholds some information his or her actionsare considered breach of professional ethics(INTOSAI. 1998).This was the case at Olympus when the internal auditors decided tofalsify financial reports to reflect the boardroom interests.Olympus’s auditors disregarded the public interest and insteadserved the Firm’s interest according to the ‘local culture’which saw fabricated financial reports being presented tostakeholders. In the auditing profession, the public trusts thatauditors conduct their auditing proficiently and impartially(INTOSAI.1998).However, rather than conduct independent audit the internal auditorsconcealed evidence of dubious payments and this led to years offinancial loss.

Auditexpectation gap

Auditinggap refers to differences in what the public and other users offinancial statements expect from auditors work and what auditor’sstate is their work. Auditing gap arises in form of reporting,assurance, regulation and audit independence. Auditors should reporttruth and fair statements concerning organizations true financialstatus. The internal auditor at Olympus colluded with board membersand failed to report the true facts about Olympus financialstatements to the public and to the stakeholder. In addition, theinternal auditors failed in his responsibility to remain independentand objective despite being the employee of the firm (Gilbertand Terry, 2005).The results of poor and botched auditing reports led to great loss offinance which affected the investors. The public and investors werefed with fabricated reports to hide illegal activities and this wasgreat breach of professional conduct. In fact, after the revelationof gross financial inappropriate, many investors shied away as theOlympus Corporation could not be trusted for transparency infinancial reports (INTOSAI.1998).

Theauditor’s legal environment

Modernday auditors operate in strict legal environment that requiresobjectivity, transparency, independence and professional ethicalconduct. The law requires that auditors who fail to detect orconceals fraud cases should face extreme liabilities for biasedjuries. It is the legal liability of any auditor who presents falseaudit reports. Investors and creditors relies on auditors reportswhen making their decisions to conduct business with a particularfirm. As such, in the event that an auditor presents falsified auditreports, the financial lose should be paid by the auditor. The lawrecognizes audit legal liability as arising from breach of contract,negligence, fraud and statutory liability. In the context of theOlympus case study, the auditors were liable to all the financialloses made by investors and creditors (Sawyer,2003).Auditors should always act according to the public interest and notindividual or corporate interest (Moore, Tetlock, Tanlu and Bazerman,2006). The Olympus auditors knew that what they were doing was wrongbut referred to conceal audit evidence contrary to accounting law(Bazerman, Loewenstein and Moore, 2002).

Therole of internal auditing in external audits

Generally,all auditors’ responsibility is to conduct systemic and independentexamination of financial accounts, records and statements with anobjective of forming an opinion that is turn shared objectively withthe client. External auditors are independent firms hired bycorporations or business entities to conduct objective examination offinancial records in order to inform the client on possible areas offinancial misappropriation or fraud. To this end external auditorsalso audits internal auditors work to verify consistencies infinancial reports or asses if internal audits have concealed possiblefraud.

Internalauditors on the other hand, are employees of organizations to carryout internal audits on financial accounts (Sawyer,2003).Internal auditors are not independent and may be subjected toinfluence or tend to provide ‘positive’ audit results tosafeguard their employment and management interest (CALCPA. 2010).This is the case that befalls internal auditors at Olympus. Possibly,the internal auditors at Olympus had objected to misappropriation offunds but due to internal threats from board members, they decided tokeep silent and falsify financial reports. This is the precariousprofessional dilemma that faces internal auditors (Moore, Tetlock,Tanlu and Bazerman, 2006). In the event, an internal auditor unearthsa fraud or financial misappropriation is the management, the auditormay decide to conceal or ‘neglect’ the fraud so as to protectself individual interests (Gilbertand Terry, 2005).

Olympusinternal auditors could have faced similar predicament but opted toside with the board members rather than rebel as a Woodford had done.In this case, internal auditors are not as ‘objective’ or‘independent’ as presumed. However, while internal auditors arenot independent as it is supposed to be, objectivity and independenceare key aspects of auditing professional standards (Blay, 2005). Tothis end, even when the interests of the organization or individualscomes first, failing to abide by objective and independent auditingis a breach of auditing law liable to extreme legal punishment(INTOSAI.1998).

Conclusions

TheOlympus Corporation case involved gross violation of auditing ethicsand professional standard requirements. Internal auditors colludedwith board members to falsify financial records in order to concealdubious illegal payments to criminal activities. The auditing issuesin this case were perpetration of fraud, breach of auditing ethicsand misleading the public through false financial reports. As such,the internal auditors at Olympus were legally liable to pay investorsand creditors all the money lost by the firm. Auditing is aprofessional responsibility that is guided by objectivity andindependent, and auditors should represent the interest of the largerpublic than few individuals within an organization.

References

Arens, Elder, Beasley Auditing and Assurance Services 14th EditionPrentice Hall 2012

Bazerman, M. H., Loewenstein, G. and Moore D. A. (2002). ‘Why goodaccountants do bad audits’, Harvard Business Review, 80, pp.96-103.

Blay, A. D. (2005). ‘Independence Threats, Litigation Risk, and theAuditor’s Decision Process’, Contemporary Accounting Research,22(4), pp. 759-89.

CALCPA. (2010, November). Report: Auditing Missteps During theEconomic Crisis. News &amp Trends, p. 4.

Citron, D. B. and Taffler, R. J. (2001). ‘Ethical behavior in theU.K. audit profession: The case of the self-fulfilling prophecyundergoing-concern uncertainties’, Journal of BusinessEthics, 29, pp. 353-363.

Gilbert W. Joseph and Terry J. Engle (December 2005). &quotTheUse of Control Self-Assessment by Independent Auditors.&quotThe CPA Journal. Retrieved 10 March 2012.

INTOSAI. (1998). Codes of Ethics Issued by the Auditing StandardCommittee at the XVIth Congress of INTOSAI in 1998 inMontevideo, Uruguay

Moore, D. A., Tetlock, P. E., Tanlu, L. and Bazerman, M. H. (2006).‘Conflicts of interest and the case of auditor independence: moralseduction and strategic issue cycling’, Academy ofManagement Review, 31, pp. 10-29.

Sawyer, Lawrence (2003). Sawyer`s Internal Auditing 5th Edition.Institute of Internal Auditors.

Tabuchi, Hiroko Protess, Ben (17 November2011). &quotBillionsLost by Olympus May Be Tied to Criminals&quot pg1p2.The New York Times Archived from theoriginal on 24 November 2011.