Attributes of a Qualified Auditor: Case of Harris Scarfe
The study and learning through the course makes me aware of some of the characteristics of a good auditor that includes the need of required knowledge and experience, ability to make independent decisions, ability to understand different needs of the business, and being dependable. It is the duty of auditors to remain honest and trustworthy while focusing on proper explanation of accounting and financial statements presented by the company.
Considering the case of publicly listed discount department store chain Harris Scarfe where the company directors were charged for some serious accounting and financial reporting irregularities arising over a period of six years, the specific qualities of a good auditor can be presented (Tilmaz and Kavrar, 2017).
A major audit issue arising in this case was related to the lack of independence of auditors. The auditing committee of the company comprised of a majority of senior management of the company making the committee incapable of taking independent decisions. The composition of the audit committee at Harris Scarfe was made up of a majority of non-independent directors (Mak and Cooper, 2005). This clarifies that the committee failed in meeting the guidelines of best practice because of non-dependence. It is necessary that the auditing committee hold independence both in fact and appearance to ensure an open discussion with the external and internal auditors where the management or the non-independent directors are not available for a discussion of various matters (Tilmaz and Kavrar, 2017). Here, it becomes important that internal and external auditors are not constrained by the presence of management in the audit committee. However, in the case of Harris Scarfe there is clear breach of such independence with presence of senior management on the audit committee.
The auditors should be dependable and capable of presenting appropriate information through financial statements of the company. However, in the case of Harris Scarfe, the records were presented in a fraudulent manner to create a wrong expression to all stakeholders. The information given was false and misleading acting as an offence under Sec 1309 of the Corporation Act. (Mirshekary and Yaftian, 2003) Also, according to ASIC, there was a continuous disclosure obligation as the false entries made and approved by the auditors’ results in lifting the apparent level of profits in the consolidated accounts of the company thereby affecting the figures of profits in the monthly financial reports presented to the board (KPMG, 2005 and Mak et al., 2005). The auditors failed to meet the responsibility of being fair and presented the information about company’s accounts and profitability that was false and inducing for people to buy the shares of Harris Scarfe.
The auditors also failed to prepare strategic plans and signed and approved the reports lacking appropriate analysis thereby allowing the company to expand too quickly. The company presented a positive outlook in front of stakeholders and misled them while holding insufficient working capital to fund its expansion plans. A collaborative activity of company’s management and directors resulted in the fraud that was overlooked by the auditing committee, as it comprise of a majority of senior management members of the company (Parson and Seamer, 2001 and Gluyas, 2006). This situation hampered the independent decision making of the auditors, once again clarifying the need of auditors to be capable of taking independent decisions and remaining knowledgeable of their role, duties, and legal responsibilities.
The third major issue is the failure of auditors to meet their legal liability of controlling the audit to avoid any misstated financial statements being approved and signed by the auditors. The auditors in the Harris Scarfe case failed to identify and report the financial irregularities, which is a clear breach of the Corporations Law (James, 2006). The auditors failed to meet the ethical liability of providing an unbiased view and report about the financial statements presented to the board and other stakeholders of the company. In the year 1998, PricewaterhouseCoopers tool the position and replaced Ernst & Young as the auditors of Harris Scarfe. Later in the year 2000, it was reported that PricewaterCoopers received $120,000 for the audit activities at the company and $211,284 for the non-audit work (Mirshekary and Yaftian, 2003). These amounts remained unexplained in the financial statements and considered under “other services” raising questions about the ethical duty of auditors in providing only auditing services that are in best interest of shareholders. They should not perform any kind of non-audit services for the client as according to ICAA and CPA Australia they owe a duty to care towards general public in specific situations (Mirshekary and Yaftian).
The negligence played by the auditors resulted in huge damages for shareholders of the company. The auditors failed to meet the quality of being dependable and uncover the widespread and systematic fraud and irregular accounting in the statements of the company (James, 2006). Had the auditors performance in a responsible manner while being careful in displaying only ordinary competence, there were high possibility that the fraud would have been timely identified and disclosed to the board of directors of the Company thereby avoiding the damages faced by stakeholders due to inflation of the asset value and showing a reducing in expenses thereby lifting up the profits of the group by millions of dollars every year (Arens et al., 2005).
The implications of the case resulted in some serious additions and changes to the regulatory standards so that the regulatory reforms like Corporation Acts can be made capable of addressing the deficiencies and improve accountability of auditors. The Harris Scarfe case lead to addition of CLERP 9 to the legislation with 41 clauses mentioning about independence of auditors, rotation of auditors, quality of audit, auditors’ liabilities and requirements of financial disclosures (Mirshekary and Cooper, 2005 and KPMG, 2005). The reform was added to improve the transparency accountability and rights of the shareholders.
The reasons of failure under the above case and the failure of auditors to meet their responsibilities clarifies that successful auditors need to be independent, capable of understanding business needs, safeguarding stakeholders’ rights and interest and remain dependable by presenting true and clear information to the board of the company through financial statements.