The topic argument will pursue is the similarity between the Companies Act of India and the Corporations Act of Australia. The acts address to the situation in India and Australia relating to business entities, activities and certain other associations.
The report will also address the equivalence of the auditing standards and relationship to International Standards. Auditing Standards are based on the ISAs issued by the IAASB of the IFAC, in line with strategic direction from the Financial Reporting Council.
The report will similarly address whether India has equivalence of APES 110 Code of Ethics for Professional Accountants. The application and enforcement of such code of India will be examined and compared to Australia.
Finally, the report will address the quality of auditing and experiences in India and Australia in their corporate history. The report will also pursue how they have performed.
2.0 Comparison of the Regulatory Environment
Audit activity and auditors are subjected to many statutory aspects including the requirements of professional bodies, stock exchanges, regulation, government regulatory agencies and State or Federal legislation. (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007). India and Australia have acts for the smooth functioning of corporate bodies and related activities in the country with underlined several provisions and laws.
2.1 Companies and Corporation Act
The constitution of India has stated several laws and regulations to regulate and safeguard the companies operating in India. While incorporating a company in India one must follow prescribed laws and regulations stated under the Companies Act 1956 and other related amendments. There are other related Indian acts which support the Companies Act 1956 regarding to securities (SEBI Act), financial reporting practices of insurance companies (IRDA Act) and annual tax audit (Income Tax Act). (http://support.exportersindia.com/legal-aspects/companies.htm)
Australia has a federal constitutional system. "the Corporations Act" is a Commonwealth of Australia which is the principal legislation regulating companies in Australia. This act deals with business entities in Australia at federal and interstate level. The Trade Practices Act 1974 and the State and Territory Fair Trading Acts also establish liability for false and misleading statements, Crimes Act 1914 imposes an obligation to report crimes. The Australian Securities and Investments Commissions Act 2001 provide Australian Securities and Investments Commission (ASIC) and associated boards with significant regulatory powers to enforce the requirements of the Corporations Act and to prescribe additional regulations." (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007, p75)
2.2 Supporting Companies Acts in Quality Auditing
The act clearly states on the preparation, presentation, publication and disclosure of financial statements and an audit of all companies by a member-in-practice certified by the Institute of Chartered Accountants of India (ICAI). (India - Accounting and Auditing ROSC, 2004)
In the matter of Australia, the Corporations Act prescribes the auditor's function, and regulates auditor's activities. Companies must appoint an auditor to audit the company's financial reports. These financial reports have to be audited by auditor under s 307 of the Corporations Act to form an opinion whether the reports are in accordance with the Corporation Act with accounting standards (Fogarty M & Lansley A, 2010)
2.3 Securities Exchange Listing Rules and Supporting in Quality Auditing
SEBI is the regulator for the securities market in India. Securities and Exchange Board of India (SEBI) Act of 1992 is to prevent undesirable transactions in securities and protects investors and develops and regulates the Indian securities markets. The Stock Exchange Listing Agreement (Clause 41) requires all listed companies to publish unaudited quarterly financial results according to the prescribed format. The company shall be responsible to follow all the requirements specified in the Companies Act, the listing norms issued by SEBI from time to time and such other conditions, requirements and norms that may be in force from time to time. (www.sebi.gov.in/bylaws/ch4.pdf)
Australian Securities Exchange (ASX) is a license holder of an Australian Market under the Corporations Act. ASX supervises the market for securities issued by listed entities. It has stated the behavior of listed entities through its listing rules. The Listing Rules create obligations that are additional, and complementary, to common law obligations and statutory obligations. The listed companies require to lodge the annual and half-year report and the auditor's report with ASIC and the ASX. (Fogarty M & Lansley A, 2010)
3.0 Comparison on the use and regulation of Auditing Standards
The principle and purpose of Auditing Standards is to establish mandatory requirements and guidelines to auditors in fulfilling their professional liabilities and responsibilities in auditing the financial reports of companies. (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007, p75)
3.1 Auditing Standards in India and Australia
ICAI has established AASB to issue auditing standards in India. Accordingly, the Board issues Statements on Standard Auditing Practices and Auditing and Assurance Standards under the authority of the council. Till date, ICAI has issued thirty five auditing standards and three are under consideration of the Council. Chartered Accountant Act (1949) regulates the accounting profession in India and accordingly mandates the ICAI to issue Accounting Standards and Auditing and Assurance Standards. ICAI issues guidance notes on accounting and auditing practices in areas where standards do not exist. (India - Accounting and Auditing ROSC, 2004). It is the duty of the members of the Institute to ensure that the auditing standards are followed in the audit in their reports. If member is unable to perform an audit in accordance with the generally accepted auditing standards, he would be held guilty of professional misconduct under clause 9 of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949. (http://www.icai.org/resource_file/7750dept_aasb_indian_scenario.pdf)
Comparatively, on the other hand, the AUASB issues auditing standards (ASAs) in Australia. There are seven categories of auditing standards which are as follows:
ASA 100 - 199 Introductory matters
ASA 200 - 299 General principles and responsibilities
ASA 300 - 499 Risk assessment and response to assessed risks
ASA 500 - 599 Auditing evidence
ASA 600 - 699 Using the work of others
ASA 700 - 799 Audit conclusions and reporting
ASA 800 - 899 Specialised areas
Each ASA contains an authority statement that links to the mandating the legislation. "The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9) came into effect in 1 July 2004 and led to amendments to the Corporations Act 2001 which gave AUASB the force of law under the Act. Section 307A of the Act requires auditors to conduct audits and review of financial prepared under Part 2M.3 of the Act, in accordance with auditing standards." (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007, p75)
3.2 Auditing Standards - Setting
ICAI is supported by the Accounting Standard Board (ASB) the Auditing and Assurance Standard Board (AASB) by preparing the draft regulations and ICAI approves and prescribes a deadline for adoption. AASB identifies the area where auditing standards are needed. Board is normally assisted by study groups comprising the members of ICAI. (India - Accounting and Auditing ROSC, 2004)
The Auditing and Assurance Standards Board (AUASB) is the statutory body of Australia which issues auditing standards (ASAs), and standards on review engagements, assurance engagement and related services. AUASB staff and board members identify a technical issue and then refer to the IAASB. The AUASB will discuss and research. Finally, the outcome is submitted to the IAASB for comments. (http://www.auasb.gov.au/About-the-AUASB/The-standard-setting-process.aspx)
3.3 International Harmonization of Auditing Standards
International Standards on Auditing (ISAs) are issued by International Auditing and Assurance Standards Board (IAASB). Due to the globalization of business and capital markets, uniform accounting and auditing standards are developed.
ICIA is a member of the International Federation of Accountants. Therefore, auditing standards issued by the ICAI are in harmony with the International Standards on Auditing. It has issued thirty five auditing standards corresponding to the Engagement Standards issued by the IAASB of the IFAC and three auditing standards are in the pipeline. A list of the Engagement Standards issued by the IAASB and the auditing standards issued by the ICAI there against is given as Annexure I. A reconciliation of the Engagement Standards with the auditing standards issued by the ICAI is given as Annexure II." (http://www.icai.org/resource_file/7750dept_aasb_indian_scenario.pdf)
Since April 2006, the AUASB has released Australian Auditing Standards (ASAs) based on the ISAs issued by the IAASB, in line with strategic direction from the Financial Reporting Council. Therefore, issues on the IAASB work program are also included on the AUASB work program, although the degree of involvement by the AUASB varies issue-by-issue and may be substantive or non-substantive. (http://www.auasb.gov.au/About-the-AUASB/The-standard-setting-process.aspx)
3.0 Comparison of the ethical and quality environment
A code of ethics consists of general statement of ideal conduct, or specific rules that define unacceptable behavior. The code provides authoritative guidance on minimum acceptable standards of professional conduct." (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007, p118). India has code of ethics which is equivalence to Australia. Both follow the same fundamental principles, similar conceptual framework.
3.1 APES 110 Code of Ethics for Professional Accountants
Accounting Professional and Ethical Standards Board (APESB) is responsible for setting the joint ethics code, miscellaneous professional standards (APES) and guidance notes (AGS). APES 110 is based on the Code of Ethics for Professional Accountants issued by Internal Ethics Standards board, which is a committee of the International Federation of Accountants. Code deals with issues relating to independence and professional appointment. (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007).
3.2 Code of Ethics in India
India in a very similar, the Chartered Accountants Act, 1949 along with its schedules sets out different forms of behavior, which recognizes the objectives of the accountancy profession are to work at the highest standards of professionalism and performance to meet the public interest requirement. An essential requirement of such group is the acceptance and observance of professional ethical standards regulating their relationship with clients, employers, employees, fellow members of the group and the public generally. (http://www.cvc.nic.in/codeethics.pdf)
3.3 Fundamental Principles
In accountancy profession, auditors have to observe five ethical principles of the code which are as follows: (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007)
Integrity - Auditors must be straight forward and honest in performing the professional services
Objectivity - Auditors should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity.
Professional competence and due care - Auditors should perform with due care and competence and has to maintain professional knowledge and skill at a high level based on up-to-date developments in practice, legislation and techniques.
Confidentiality - Auditors should respect the confidentiality of information and should not use or disclose any such information without specific authority or unless there is a legal duty or professional right to disclose.
Professional behavior - Auditors should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.
3.5 Application of Code of Ethics
The Code is divided into three parts plus also includes a definitions section:
Part A applies to all professional accountants.
Part B applies to professional accountants in public practice.
Part C applies to professional accountants in business.
The professional accountants in public practice need to be familiar with Parts A and B, and professional accountants in business need to be familiar with Parts A and C. (SAFA Ethics and Independence Committee, 2004). "Part A of the code establishes the fundamental principles of professional ethics for members and provides a conceptual framework for applying those principles. While, Part B and C illustrate how the conceptual framework is to be applied to identify and address threats in specific situations." Part B of the code contains nine main sections which are relevant to auditors and most have implications for or directly pertain to independence. (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007, p119)
3.6 Enforcement of Code of Ethics
The Chartered Accountants Act, 1949 and Schedules to the Act set out the acceptable forms of behavior of the members of the profession. It is framed for the regulation Chartered Accountants. Section 22 of the Chartered Accountants Act defines and describes what constitutes 'professional misconduct' and the expression 'professional misconduct' shall be deemed to include any act or omission specified in any of the schedules. (http://www.icai.org/post.html?post_id=735)
Comparatively, the Institute and CPA Australia jointly fund the Accounting Professional and Ethical Standards Board (APESB) who is responsible for setting the joint ethics code, miscellaneous professional standards (APES) and guidance notes (AGS). Section 290 of the code deals with issues relating to professional independence for assurance engagements, where an existing client of a member engages them to provide assurance services and where the member's ability to provide these services could potentially be compromised by existing engagements.
(http://www.cpaaustralia.com.au/cps/rde/xchg/cpa-site/hs.xsl/knowledge-auditing-toolkit-guides-code-ethics.html)
5.0 Comparison of the Audit Quality Experiences
Meanwhile, the technical company Satyam Computer Services Ltd. is one of the biggest collapses in Indian corporate history. In the matter of Australia, it has experienced the corporate disaster of several high profile companies like HIH on One. Tel, Pasminco, Ansett Australia, Impulse Airline, Harris Scarfe Holdings. The reasons are due to weak regulatory system, enforcement of laws, weak accounting and auditing standards. (Fogarty M & Lansley A, 2010)
5.1 Audit Quality
Audit quality means how well an audit detects and reports material misstatements in financial statements. Audit quality involves a wide range of inter-related factors of legal framework relating to audit regulation, the company auditor registration system, the auditor independence and the accounting and auditing standards. It is a reflection of auditor performance, competence, integrity and independence. (Arens A, Beasley M, Best P, Elder R, Fiedler B & Shailer G, 2007)
'The UKFRC and the Treasury' have considered some factors as key drivers of audit quality which are as follows:
The culture within an audit firm
The skills and personal qualities of audit partners and staff
The effectiveness of audit process
The reliability and usefulness of audit reporting
Factors outside the control of auditors affecting audit quality
Audit regulation framework
The audit review process
Corporate governance describes the control and direction of corporations. Generally the concept and principles addresses the safeguarding of integrity in financial reporting. It recommends that companies should have a structure to independently verify and safeguard the integrity of their financial report. (The Treasury, 2010)
5.2 Experiences in India and Australia
India has managed its transition into a global economy well, and although it suffers accounting and corporate governance scandals. Satyam Computer Systems Ltd. India's fourth largest software services company collapsed due to false accounting and weak corporate governance. Indian Authorities charged Chairman other subsidiary players such as CFO, managing director, the company's global head of internal audit with responsibility for the fraud and files charged against them. Satyam's auditors, board of directors bear some responsibility for the fraud because of their failure to detect it. Global auditing firm Price Waterhouse Coopers (PWC) audited Satyam's books from June 2000 until the discovery of the fraud. Several commentators criticized PWC harshly for failing to detect the fraud. Due to weak regulatory system, the enforcement of the laws and the audit standards the company failed in Indian corporate history. (Winkler D, 2010)
On the other hand, HIH insurance company of Australia collapsed due to some accounting and corporate governance reasons. Poor corporate governance, ineffective audit committee, compromised auditor independence, mismanagement, poor business decision making and execution, are some of the reasons. The audit committee was entirely concerned with the matters directly concerned with the accounts and figures. There was no concern with risk management and internal control. Arthur Andersen was providing non audit service. The chairman of company was ineffective and was failed to carry out his roles. Board did not properly carry out its role. As a result, the company failed in the corporate history. (Lipton P, 2003)
6.0 Conclusion
An audit is an independent assessment of a company's financial statements presented by company's management. The Auditing Standards are issued as legislative instruments and are legally enforceable for audits during financial reporting periods. The Companies Act in India and the Corporation Act 2001 of Australia provide the guidelines for the auditor for performing audit in any business, company or entity. Therefore it is very important to have knowledge to such acts and guidance before auditing. Auditing Standards are established as guidelines to auditors in fulfilling their professional liabilities and responsibilities in auditing the financial reports of companies. Code of ethics is mandatory for all members. APES110 provide the code of ethics for professional accountant and the compliance is mandatory. Principle of APES110 applies to this audit are integrity, honesty, objectivity, professional competence and due care, professional behavior, confidentiality. Audit quality involves a wide range of inter-related factors of legal framework relating to audit regulation, the auditor independence and the accounting and auditing standards.
