Research Paper on "Audit Reports Involve Increased Communication. The System"

Research Paper 4 pages (1610 words) Sources: 3

[EXCERPT] . . . .

audit reports involve increased communication. The system at which it offers information is too condensed and does not provide new insight into anything. In fact, their pass/fail system lacks adequate financial statement detail. Accountants, managers, their disagreements or discussions, they're all omitted from the final report.

This needs to change. Audits have long remained an impenetrable mystery as to the happenings behind doors. The concern is, that without adequate supervision and communication within the system that creates the audit, embarrassing instances such as a KPMG audit partner passing stock tips to a friend, reveal the possible kinks in the machine. The recent financial crisis add fuel to the fire for the need to change the obviously flawed system.

The article states: "Pension fund Calpers, in postcrisis discussions with the U.S. Public Company Accounting Oversight Board, pointed to a bank that received government bailout funds, noting that -- while audit fees increased by 60% -- the missive to investors from 2008 to 2010 remained identical." (Thomas 1) Inquiries as to where the fees are applied and where the money goes must be made in order to discover where the source of the issues lie. KPMG, from the U.K. has to undergo an investigation on their egregious underprovisioning for loan losses ranging before the bank's collapse. The financial regulator for the U.K this past year implied the firm was taking steps towards prudence and adopting a cautious approach to investor capital. This however, was never communicated to the investors.

Changes in Europe to proposals took a bad direction and were formatted to decrease word or character count, but have all the names of the whole audit team, never addressing the real problems. The PCAOB two years ago mentioned alternatives such as: "including an Auditor's Discussion and Analysis of significant issues." The U.K. has however permitted or encouraged further disclosure and is in the process of considering introducing a discussion of risks into the report itself as well as informing shareholders of audit issues and incorporate more expansive audit reports. Auditors fear with a more detailed report comes possible lawsuits. There must a compromise because less information will certainly not solve the dilemma.

2.

The auditors concerns with having full or increased disclosure in audit reports is accountability. People don't want to get sued for revealing information not released yet to the public. They're afraid or worried that if the information leaks to investors, the company might suffer a potential setback. In fact as the article states, litigation is one concern, especially in the U.S.

Accountants anticipate lawsuits and fear that a more discursive style will allow firms to adopt less legal ways of doing business. Since auditors provide confidence to investors and outside interests, if full disclosure is given, the confidence might minimize or expose others to private information that they could use for insider trading, etc. It is very risky to provide information to people who are not by law, required to keep the information secret. The issue is however, auditors are paid by boards acting on investors. Regardless of whether or not disclosure helps them or not, they need to provide some information to accurately determine if they are doing their jobs or not.

Companies/firms/banks don't like to show their mistakes. If auditors give more disclosure over what the company is going through financially, the investors or who ever is seeing the financial institution from the outside will either realize something is wrong and act, or find potential weaknesses. As is seen currently in the economic climate, a lot of companies are mishandling the money they earn or borrow. If the information the auditors reveal turns out incorrect or inaccurate, then the company receiving the audit would have to be investigated to determine if they are mishandling capital.

3.

Financial crises throughout the globe exist and continue to exist. A sound audit indicates if there is any progress or if changes must be implemented. If the audit report on this bank's financial statements remained the same from 2008 to 2010, expect to see another financial crisis. Finances run under a tiered and structured system. Auditors are the ones that provide confidence to investors and create trust within companies and firms that the finances are sound, the finances are controlled.

If no changes or improvements are communicated through the audit report, the macroeconomic problems, as well as failures in financial markets and shortcomings in the implementation of policy will go unnoticed. The financial sector is a complex and difficult system to navigate, riddled with inflated or false statements and figures. There is a need, more than ever for there to be effective regulation and supervision. Without the auditor citing and stating any issues, no one will perceive a problem. Nothing gets fixed. Even the internal control of the financial institution will fail and it has in several cases due to lack of insight and updates. System-wide risks therefore became larger leading to bigger crashes and company or bank failure. Auditors have the responsibility of upholding financial stability through proper communication and disclosure.

Confidence and trust are essential for proper investment. Lack of updates, lack of communication will lead to loss of confidence and trust. There have been many examples throughout the last five years where lack of proper supervision and regulation led to catastrophic results. People spent too much, they borrowed too much, thinking the company or firm or bank had unlimited resources. If someone would have pull the rug from under them, they would have seen what was below.

"Although the Big Four accounting firm was not criticised by the Parliamentary Commission on Banking Standards, the damning report revealed HBOS was carrying £47bn of losses when rescued by the taxpayer despite getting a clean bill of health from KPMG." (Aldrick, and Kirkup 1)

Generally, banks conduct their business through the admittance of deposits and administering loans with the money received from those deposits. It is the duty of the bank to balance their loan receivables. Receivables would be principal and interest repayments from borrowers and requests from depositors for all or a part of their deposits. No matter the circumstance, banks expect a small portion of the loans administered to be delinquent on their repayments, generating a loss for the bank on possible income.

This in turn makes banks set aside a part of the expected loan repayments from all loans in its portfolio to cover any loss from these delinquent repayments. Most of the time the loan loss reserve has enough capital to cover losses brought on by these kinds of situations. The loan loss reserve is a kindof insurance fund in case of emergencies.To keep track and establish the loan loss provision amounts, bank regulators need constant screening of bank loan portfolios. They would rank each asset based on market conditions, collateral condition, among other factors. The commonly used amount set aside for loan losses is about 2%-2.5% of the outstanding loan receivables, depending on the quality of the loans in the portfolio.

The problem with KPMG is their choice to clear HBO's management's decision to set aside £370m when in actuality it needed £25bn to handle the losses. They set aside around .2% of the needed 2%. For KPMG to not accurately assess, nor HBO to accurately assess the amount needed to set aside for provisions begs to ask the questions as to whether or not there was any communication amongst the auditors and the company. Could KPMG have estimated that amount was correct based on the data or limited disclosure given to them by HBO?

The article concerning KPMG and HBO states HBO's management was reckless and paid their executives such as Sir James Crosby too much with his £570,000 annual pension. A lot of instances in companies demonstrate the lack of management that… READ MORE

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