Auditing Theory And Practice: Business Negotiation Essay

Question:

Describe about the Auditing Theory and Practice for Business Negotiation.

Answer:

1. Whigarian View on development of accounting and auditing

The Whigarian perspective of history is relevant in the explanation of the development of both accounting and auditing. The view rightly put it that development progressive and takes onward and upward framework or process of ongoing progress. It is true that the earlier understandings of accounting and auditing was shallow and this has continually improved over time through the encapsulation of an inevitable onward and upward process as outlined in the Whigarian view.

The current accounting and auditing profession has developed compared to the earlier ones based on the principles and standard that must be met. For example, various accounting and auditing theories have developed which have made the understanding and the practice more comprehensive (Ahlstr?m & Brandin, 2014). It is true without any doubt that the current accounting and auditing practice is better compared to the former. For instance, the auditor’s liability has received great attention and are currently being limited by developing better strategies including clear separation of responsibilities between the manager and auditor.

The management is currently required to furnish the auditors with detailed information so as to effectively do their work and even detect fraud and errors without being held liable even if they fail to identity such requirements which may be due to hoarded information by the managers to benefit at the expense of the shareholders. On the other hand, accounting standards have also developed particularly with respect to financial reporting. Various disclosures are currently a mandatory requirement to be shown in the financial report thereby increasing transparency for all the stakeholders hence barring the incompetent and opportunistic managers who are the preparers of these reports from benefiting at the expense of their principals.

The enhancement in both practice and understanding of these two professions have truly been accompanied by Panglossian optimism in the belief of human reason to forge a better society where things get better and better through the course of time. Professionals and academicians in these fields have embraced this Whigarian view by engaging in continuous research and development to make things better with the course of time. For example, in auditing, auditors were previously liable and vulnerable. They were could be easily sued in the jointly mistakes where one auditor with the ability to pay for the damages caused in a group could be isolated to make the entire compensation leaving the rest free.

Through the urge of making things better and better, there has been various lobbying from the profession and other academicians leading to change of various legislation that limit the auditors liability. Another example, of the Panglossian optimism in practice in respect of accounting is that accountant have made it easier during the presentation or financial reporting to simplify terms and hence many stakeholders be it potential investors, shareholders, customers and even other interested stakeholders can easily follow through the financial reports.

Communicating these reports based on the performance of the firm was previously a challenge to accountants but due the Panglossian optimism accompaniment, things have been made easier for every stakeholders. Through research and development, the use of technology has been adopted in both accounting and auditing leading to the introduction of various software are helpful in these two professions. From example, in accounting, unlike previously, accounting software or application software are currently available to record and process accounting transactions under function modules including account payable, payroll, account receivables as well as trial balance. Examples of such accounting software that has increasingly made life better and better is Zoho Book and QuickBooks. The Zoho Book software can easily be accessed online and permits the management of cash inflows and outflows.

Customer invoices can be easily managed while concurrently keeping the expenses in check. People can easily record, monitor as well as reconcile their bank accounts as well as transaction while collaborating with accountants in real-time. Zoho Book has helped accountants or management to make informed decisions thereby creative immense competitive edge. Audit software is also being utilized currently by auditors in facilitating their audit work as well as making their daily operations easier. Some of the main types of audit software that are currently changing the auditing filed include engagement management software as well as Generalized Audit Software.

The engagement management software deals with such products as work paper management, electronic working papers as well as documents storage. Some of the benefits currently witnessed include easy information sharing among the team thereby faster reviewing and quality control. Another benefit of this software is work flow standardization as well as paperless nature leading to data backing up hence eliminating the risk of losing audit files, and lower storage needs. Generalized Audit Software undertakes the analysis of data since it is being used in the mining and analysis of data to help in the identification of anomalies, omissions as well as errors. It has also been used in audit evidence rather than documenting and has various benefits.

It has enhanced efficiencies by automating manual procedures, decreased the risk by running various test on the entire population thus a reduction of dependence on a sample. It has ensured value addition through the provision of more comprehensive insight into the records in question and it has also raised the range of testing available to auditors. Throughout the discussion, the background to support the view that Whig historiography presents the past as an inevitable progression towards ever more enlightenment has been laid.

The current auditing and accounting practice has gone through enlightenment and hence supports the view that this phrase focuses on the successful chain of theories and experiments that culminate current science, as it disregard unsuccessful theories alongside dead ends. It is true that both accounting and auditing have gone through immense development process that appreciate the best successful theories to make the current practices in these two profession better based on the Panglossian optimism.

2. Main Issues Concerning Moral Seduction and Strategic Issue Cycling

The moral seduction theory is useful in explicating why professionals have become unware of how they have become morally compromised by the conflict of interest. The issue cycling theory can be used at an advanced macro tier to help explicate why conflicts of interest that compromise large companies are pervasive. Experts have always been relied on by many people for advice. Surprisingly, these professionals are subject to conflict of interest between their professional obligation and individual self-interest to deliver good advice. In the corporate scandals which shook America, the role of conflicts manifested immensely.

The conflict of interest lies at the root of mismanagement and failure of monitoring system that has led to scrutiny of companies for potentially corrupt management as well as lack of independent financial reporting (Prentice, 2000). The stock options remuneration mechanism has seen the executives becoming opportunistic to increase short-term share prices at the expense of long-term viability of the company. Moreover, auditors mandated to review the financial reports have remained complicit with the management of the firm.

Accounting firms have as been had the incentives of avoiding the provision of negative audit opinions to the management who employ them and remunerate their audit fees. The financial markets cannot, therefore, benefit from increased conflicts of interest. Some obstacles like structural features of relationship between auditor and client have created conflicts of interest. Cognitive process of have enabled these structures to exert own impacts on the professional judgment of auditors.

Managers hire and fire auditors, auditors also take jobs with clients and even provide non-audit services which compromise their work. Intentional corruption is likely the exception while the unconscious bias remains pervasive (Bakar & Ahmad, 2009). Professionals are, therefore, are not best at ignoring individual self-interest and examining information impartially despite attempts to do so. Plausible deniability see people more ready to endorse biased proposal triggered by another person rather than making their own. Escalation of commitment is a bias that trigger self-interest in which individuals escalate commitment to past curse of action.

The conflicts of interest pervasiveness has led to issue cycling where special interest groups remain effective at accomplishing their members’ interest where the motives for the need of added advantage for their people remains efficiently veiled behind explications which invoke virtuous motives (Guiral et al., 2010). The self-interest has, therefore, hindered issues from being dispensed since experts only serve self-needs rather than do what is required of them since they are confident that people rely on their opinion.

3. How unconscious biases impact on auditor Independence

Under the present system, companies hire and fire auditors. The hiring and firing is responsible for the incentives for biases in favour of the audited firms. The judgements of auditors have, therefore, shown the existence of unconscious biases which cannot be easily rectified since auditor do not completely aware these biases (Guiral et al., 2015). Research has shown that auditor’s judgments have tended to be in favour of their clients and this questions the independent of auditors.

It has been shown that psychological process account for these biases. The closeness of the relationship between client and auditor has a unique firm biasing influence on the private judgments of auditors (Moore et al., 2006). The auditors owe eventual allegiance to the creditors and shareholders of the company and the public and are required to remain independent in their work. Independence of auditors is, thus, critical to the function they serve. Independent audit report should hence offer credible, and unbiased appraisal of the financial status of the firm.

Since auditors feel that they are accountable the client company, their self-interest will prevail and hence generate a clean and not qualified audit report. Auditors do not always set out to commit fraud but it is challenging for auditors to be purely independent in systems in which livelihood of auditor rely on building relationship with his client for soliciting business as well as in which auditors who provide critical public audit report intensely raises the likelihood that a client will change auditors (Boweman & West, 2013). Auditors will, hence engage in actions that solely serve their rational self-interest and do not care about their independent.

Context surrounding the ‘ironic rebound effect’

Ironic rebound effects tends to explicate the rationale for failure of suppressing thoughts. It applies where good intentions collapse and fail to meet the expected results or objectives. The ironic rebound comes in where the underlying thing we attempt to think about rebounds back into people thoughts without fail. It explicates the reason food denial has ability to leave customers tempted to indulge (Beck et al., 2006).

It also justifies the reason why an individual nervous of a large speech ends with the worst imagination. The ironic rebound, therefore, occurs where one tells himself he will not undertake something. The things we swore not to do rebounds back and we immediately find ourselves doing them. It explains why auditors find themselves having committed fraud by serving self-interest even though they are not set out to do so.

References

Boweman, J., & West. J., (2013), Ethics in Public Management, Fredrickson, H & Ghere, K. editors, 2ed, Routledge:London, p.166.

Beck, J. G., Gudmundsdottir, B., Palyo, S. A., Miller, L. M., & Grant, D. M. (2006). Rebound effects following deliberate thought suppression: Does PTSD make a difference?. Behavior therapy, 37(2), 170-180.

Moore, D. A., Tetlock, P. E., Tanlu, L., & Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), 10-29.

Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo, J. A. (2010). Ethical dilemmas in auditing: Dishonesty or unintentional bias?. Journal of business ethics, 91(1), 151-166.

Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo-Angulo, J. A. (2015). Can expertise mitigate auditors’ unintentional biases?. Journal of International Accounting, Auditing and Taxation, 24, 105-117.

Guiral-Contreras, A., Rodgers, W., Ruiz-Barbadillo, E., & Gonzalo, J. A. Conflicts Of Interests In Auditors’going Concern Evaluations: Unintentional Bias?.

Ahlstr?m, M., & Brandin, M. (2014). Auditor independence: Auditor independence in Malaysia after the convergence to IFRS.

Bakar, N. B. A., & Ahmad, M. (2009). Auditor Independence: Malaysian Accountant's Perception. International Journal of Business and Management, 4(12), 129.

Harvard, N. O. M. (2003). Negotiation, Organizations and Markets.

Moore, D. A., Tanlu, L., & Bazerman, M. H. (2010). Conflict of interest and the intrusion of bias. Judgment and Decision Making, 5(1), 37.

Issacharoff, S. (2005). Legal responses to conflicts of interest. Conflicts of interest: Challenges and solutions in business, law, medicine, and public policy, 189-201.

Prentice, R. A. (2000). SEC and MDP: Implications of the Self-Serving Bias for Independent Auditing, The. Ohio St. LJ, 61, 1597.

McLucas, W. R., & Eckert, P. R. (2001). The Securities and Exchange Commission's revised auditor independence rules. The Business Lawyer, 877-918.

Prentice, R. A. (2000). Case of the Irrational Auditor: A Behavioral Insight into Securities Fraud Litigation, The. Nw. UL Rev., 95, 133.

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