1. 1
Business
Environment
Individual
Essay
Topic:
After discussing briefly the primary role of a company auditor,
consider why ethics is important to auditors. Evaluate how significant
the contribution of auditors is to the effective corporate governance of
large UK companies.
Name:
Akta
Gupta
GDGWI
ID:
100100
Course:
BBA
Business
Studies
Module:
Business
Environment
Module
Code:
ACF100BE
Module
Leader:
Mr.
Kushal
Kataria
Cohort:
2010-­2013
Word
Count:
1351
Words
Word
count:

2. ACF100BE
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GDGWI
ID
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"We
do
not
act
rightly
because
we
have
virtue
or
excellence,
but
we
rather
have
those
because
we
have
acted
rightly."
~
Aristotle
384
B.C.
-­
322
B.C.
Every
individual
or
body
has
a
code
of
conduct
to
abide
by.
This
code
of
conduct
and
acceptable
behaviors
are
known
as
ethics.
The
American
Heritage
Dictionary
defines
ethics
as
“The
study
of
general
nature
of
morals
and
of
specific
moral
choices:
moral
philosophy:
and
the
rules
or
standards
governing
the
conduct
of
the
members
of
a
profession.”
These
ethics
not
only
are
to
be
abided
by
individuals,
but
also
by
organizations,
companies
and
people
who
deal
with
them.
This
is
known
as
Business
ethics.
Business
ethics
are
to
be
conducted
in
all
business
divisions
of
any
organization,
like
the
human
resource
department,
production
department,
technical
department
and
the
finance
department.
Of
the
various
departments,
the
finance
department
is
of
core
value
to
any
business
without
which
a
business
cannot
function
for
long.
Also,
any
errors
in
the
records
of
this
department
can
result
in
huge
penalties
to
the
business,
loss
to
shareholders,
reduction
in
market
share,
and
could
even
result
in
bankruptcy.
If
there
were
no
reliable
accounts,
then
the
shareholders
would
not
be
able
to
supervise
the
work
and
accounts
of
the
company
invested
in.
Thus,
to
prevent
such
cases,
a
company
appoints
an
external
official
that
is
an
authorized
body,
a
Certified
Public
Accountant
(CPA),
to
officially
check
the
financial
records
of
a
company,
ethically.
He
ensures
that
the
organization’s
financial
records
and
statements
represent
an
honest
and
accurate
position
of
the
company.
They
are
to
provide
reasonable
assurance
that
the
financial
statements
of
the
business
are
free
of
large
misstatements,
whether
errors
or
frauds.
This
assurance
is
however
not
guaranteed,
as
it
is
just
an
expert
opinion
and
at
times
may
be
incorrect.
Also,
the
auditor
could
provide
recommendations
to
the
company
about,
how
the
books
of
accounts
are
to
be
maintained,
so
that
it
would
prevent
any
loss
of
information
and
any
future
problems
to
the
company.
An

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important
task
to
be
performed
by
the
auditor
is
to
report
to
the
shareholders
of
the
company
of
any
matters
that
arise
during
the
audit.
Since
the
opinion
of
an
auditor
is
given
utmost
importance
at
the
times
of
issuing
annual
reports
and
at
taxation
for
any
company,
it
is
very
important
for
the
auditor
to
conduct
an
ethical
code.
Having
accounting
standards
and
an
ethical
code
to
follow
helps
auditors
act
more
professionally
and
give
a
more
dependent
opinion,
which
would
not
have
been
the
case
if
they
were
not
independent
in
their
task
and
would
be
influenced
by
the
external
environment.
Here,
the
independence
of
an
auditor
is
of
utmost
importance,
i.e.,
no
person,
situation
or
factor
should
influence
the
opinion
of
an
auditor
during
the
evaluation
of
the
accounts
as
this
would
result
in
a
wrong
opinion.
He,
under
any
situation
must
reveal
all
sides
of
the
accounts
and
must
not
misguide
the
investors.
Example:
A
CPA
must
not
represent
wrong
information
of
a
company,
only
because
his
son
is
the
senior
manager
in
the
same
company,
and
any
loss
to
the
company
would
result
in
his
son’s
loss.
The
auditors
are
highly
accountable
to
the
shareholders
because
the
shareholders
nominate
them
and
would
thus
want
to
see
a
transparent
and
clear
picture
of
the
company
.The
financial
reports
would
also
serve
an
important
need
for
internal
control
on
finance
and
growth.
In
the
short
run,
acting
unethically,
would
result
in
more
business,
more
non-­‐audit
services,
money,
gifts,
more
clients,
etc,
for
the
auditors
but
if
exposed
could
result
in
a
huge
failure,
more
than
expected.
This
was
the
case
with
Arthur
Anderson,
the
audit
firm
for
Enron.
It
helped
Enron
hide
its
losses
in
the
financial
reports
and
artificially
inflated
the
prices
of
its
shares
in
the
stock
market.
After
the
huge
financial
fraud
was
discovered,
Anderson
lost
most
of
its
clients;
also,
they
had
to
sell
most
of
its
business.
Enron
had
to
pay
huge
penalties
to
the
shareholders
who
lost
their
money
and
had
ultimately
filed
for
bankruptcy
in
December
2001.
Considering
the
high-­‐profile
business
scandals
in
the
world
of
today,
corporate
governance
has
received
high
attention.
In
2006,
Agarwal
stated
that
in
today’s
world,
an
auditor
forms
the
fulcrum
of
a
company
and
helps
in
implementing
and
monitoring
good
corporate
governance
practices
which
benefit
all
business

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stakeholders.
The
Australian
Stock
Exchange’s
Corporate
Governance
council
defines
corporate
governance
as
“…the
system
by
which
companies
are
directed
and
managed.
It
influences
how
the
objectives
of
the
company
are
set
and
achieved,
how
risk
is
monitored
and
assessed,
and
how
performance
is
optimized”
Hypothetically,
the
concept
of
corporate
governance
works
beneficially
for
all
stakeholders
of
a
business
as
the
business
works
on
ethical
grounds.
The
board
of
directors,
internal
auditors,
the
management
and
external
auditors
are
known
to
form
the
pillars
of
corporate
governance.
The
shareholders
and
the
stakeholders
of
any
company
would
primarily
be
interested
in
the
financial
position
of
the
company
invested
in
or
dealing
with.
There
is
a
level
of
trust,
which
is
to
be
built
between
the
company
and
its
stakeholders,
which
increases
corporate
governance
levels.
This
trust
is
built
by
giving
an
appropriate
picture
of
the
company’s
financial
resources,
i.e.,
having
high
levels
of
transparency,
which
would
not
mislead
them.
Thus,
an
auditor’s
role
towards
corporate
governance
is
to
monitor
and
help
in
building
a
relationship
between
the
management
and
its
stakeholders.
His
work
of
providing
a
financial
expert
opinion
with
high
levels
of
company
transparency
reduces
the
information
asymmetries
between
shareholders
and
management,
which
cannot
be
directly
controlled
by
either.
Toyota
Motor
Corporation,
a
Japanese
automobile
manufacturing
company
is
highly
considered
due
to
its
steady
increase
in
corporate
governance
over
the
years.
One
of
the
activities
by
Toyota
to
increase
its
corporate
governance
is,
four
of
its
seven
auditors
are
external.
This
ensures
shareholder
satisfaction
and
a
more
dependant
company
report,
which
would
result
in
better
relations
for
the
company
with
its
investors
and
dealers.
Various
other
companies
like
Sony
Corporation,
Toshiba
Corporation
and
Aeon
Corporations
strive
to
increase
their
corporate
governance
levels
by
instilling
high
degree
of
transparency
amongst
the
members
of
the
corporations.
Contrastingly,
there
are
many
companies
who
have
become
famous
due
to
the
auditing
frauds
that
took
place
in
their
organization.
A
famous
example
of
this
is
the
WorldCom
Telecommunications
accounting
fraud.
Unethical
auditing
by
the

5. ACF100BE
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ID
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audit
firm
Arthur
Anderson
and
the
misinterpretation
of
the
financial
resources
resulting
in
an
overstatement
of
the
value
owned
by
the
company.
Company
resulted
in
having
only
figure
values
in
their
balance
sheets
but
no
money
in
reality.
This
resulted
in
an
acute
financial
crisis
for
the
company,
which
ultimately
resulted
in
bankruptcy.
The
lack
of
transparency,
accountability,
communication
between
the
management
and
shareholders,
i.e.,
an
overall
lack
of
corporate
governance
in
the
company
resulted
in
its
ultimate
failure.
Many
other
companies
had
similar
activities
like
the
Parmalat,
Waste
Management
Inc,
American
International
Group
(AIG),
etc.
After
the
major
accounting
and
financial
scandals
were
discovered,
mainly
the
Enron,
WorldCom
Telecommunications
and
Tyco
scandals,
the
Sarbanes-­‐Oxley
act
was
passed
by
the
federal
legislation
in
2002,
which
paid
further
stress
on
the
external
auditor
pillar
of
corporate
governance.
This
act
further
connected
the
audit
firm
to
the
corporate
governance
structure.
Also,
this
act
resulted
in
the
formation
of
a
board,
the
Public
Company
Accounting
Oversight
Board
(PCAOB)
who
would
monitor
the
activity
of
the
auditors,
due
to
which
the
reports
by
the
auditors
would
be
more
reliable.
This
increase
in
reliability
would
result
in
the
improvement
of
the
relations
between
the
management
and
stakeholders,
which
would
effectively
improve
the
corporate
governance
levels.
Also,
the
auditing
company
is
now
limited
to
provide
non-­‐audit
services
to
any
corporate
house
due
to
which
the
independency
of
the
auditor
increases.
Such
rules
and
regulation
would
help
the
complex
structure
of
today’s
business
world
act
more
ethically
and
work
for
the
progress
for
all
stakeholders,
mainly
shareholders,
which
would
directly
increase
the
levels
of
corporate
governance
and
in
the
long
run
provide
huge
profits
and
consumer
confidence.

6. ACF100BE
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8. ACF100BE
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ID
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