- August 19, 2012
- Posted by: essay
- Category: Free essays
The development of the contemporary business environment stimulates the introduction of new, more effective approaches to audit and accounting compared to approaches used in the past. At the same time, today, companies working in the field of audit and assurance need to expand their services to attract new customers, to gain a larger market share and to increase their market value. Traditionally, audit and assurance services play a very important role in the normal functioning of many companies and nowadays these services are considered to be an essential part of the contemporary business. At the same time, it is necessary to underline that audit and assurance services should be very reliable and objective. Otherwise, the outcomes of auditing could be misleading and lead to the creation of the wrong market image of a company, as a rule, better than it actually is. In this respect, it should be said that self-auditing, the involvement of auditors that are not objective or are engaged by a company which is audited as well as the fee for auditing are very sensitive problems because all these issues may lead to fraud and, therefore, misleading outcomes of auditing and assurance services.
The development of modern accounting system and accounting theories is accompanied by substantial changes in economic relations and society at large that naturally results in the necessity to implement changes in accounting systems and adapt them to the new challenges and current situation in business relations. At the same time, it should be said that innovations are implemented relatively slowly in accounting compared to other fields of economy. Nevertheless, nowadays it is obvious that changes are inevitable and, in such a situation, it is quite natural that such specialists as Henderson estimate that accounting is not just a process of passive score-keeping, the results of which are announced, dealt with and forgotten.
In fact, such an approach is the characteristic of the traditional accounting systems and theories because traditionally, accounting is considered to be a very conservative field and, as a rule, specialists prefer to implement traditional approaches to accounting. In this respect, it should be said that one of the most widely spread accounting theories, which is based on traditional and conservative approaches to accounting, is normative accounting. Basically, normative accounting implies the pure score-keeping with the analysis of data and development optimal accounting standards to enhance the performance of a company.
On analyzing nominative accounting, it should be said that this approach can hardly be named effective, especially nowadays, because it does not really deals with the current trends, analysis of perspectives of a company in the context of the development of the particular industry. Instead, nominative accounting is very conservative and based on principles of traditional counting. However, it does not necessarily mean that this approach is absolutely unacceptable because it is a bit out of date. In fact, this system may be quite reliable and provide positive results but, nevertheless, such an approach does not fully reflect the current economic trends and it does not match new demands these trends imposes on accounting. This means that, in actuality, accounting system should be more flexible and open to changes and implementation of innovations which could potentially enlarge the capabilities and functionality of accounting system distancing from traditional book-keeping and involving new spheres where accounting has never played significant role in the past.
In this respect, it is possible to refer to positive accounting as a new, more contemporary and more advanced approach to accounting. It should be said that this approach is absolutely different and even contrast to normative accounting. In fact, this approach attempts to overcome the conventional frontiers of accounting and look further in the future of accounting practices. Unlike, normative accounting, positive accounting tends to the prediction of the future development of accounting and company at large that makes this approach very useful for the company because it increases the forecasting potential of the analytical unit of the company.
Basically, positive accounting is associated with the contractual view of firms. In such a context, a firm is viewed as a nexus of contracts and accounting one tool to facilitate the formation and performance of contracts. According to this approach, accounting practices evolve to mitigate contracting costs establishing an agreement among varying parties. It is worthy of mention that positive accounting postulates that conservatism in accounting, i.e. in the sense defined conventionally as requiring lower or higher standards of verifiability to recognize losses or gains, has origin in contract markets, including managerial compensation contracts and lender debt contracts. For instance, absent conservatism, managerial compensation agreements may reward managers based on current reports that later evidence indicate were unwarranted.
However, it is worthy of mention that the contractual view of positive accounting puts it in tension with value relevance studies in accounting. The latter contend that accounting’s primary value is to value the firm and, therefore, practices like conservatism or normative accounting are sub-optimal. In such a way, positive accounting is considered to be more perspective compared to traditional forms and approaches to accounting. As the matter of fact, positive accounting is more focused on the forecasting and evaluation of the value of the firm that is nowadays extremely important since it contributes substantially to the improvement of the analytical power of accounting. In such a situation, accounting may be used to improve the current strategy used by a company and adapt it to the actual needs of the company. What is even more important is the fact that positive accounting overcomes the conventional frontiers of accounting and makes it very helpful for the general development of the company. In fact, positive accounting may be viewed as a perfect alternative to conservative traditional accounting-book-keeping, which has been criticized by Henderson because it meets the modern demands to accounting.
In such a situation, it is quite logical that professional accountants agree to develop their Code of Ethics, which could regulate effectively audit and assurance services and which could minimize the risk of frauds. On analyzing the current suggestions concerning the possible improvement of the Code in relation to internal audit, it is necessary to underline that basically the trend of the creators of the code to limit the internal audit consistently is basically correct because it is the internal audit that is accompanied by the large amount of frauds or, in a better case, errors.
It is not a secret that many companies, in an attempt to gain a better market position or to create a better public image attempt to present the financial situation in the company as highly stable and demonstrate positive trends in the development of the company. To put it in simple words, companies attempt to demonstrate that they are in a better position than they actually are by means of internal audit.
However, there are even more serious cases when there are frauds within the organization or company, when in the result of some machinations some employees use their position in the organization or company in their own interests and with the help of influence on internal audit they attempt to hide the actual situation in the company. In such a situation, it is apparently necessary to limit internal audit and, in such a situation the suggestion the suggestion that it is not appropriate to have more restrictive requirements for audit clients that are entities of significant public interest seems to be unreasonable because it provokes certain problems. For instance, it is necessary to clearly define what significant public interest is and the level of its significance and, anyway, it still leaves room for frauds because of the lack of restrictions.
Another suggestion concerns the fee size for an audit client which is suggested to be respective to significant public interest of the client. In fact, this suggestion has similar problem to the previous one since significant public interest may be not defined properly that will lead to errors or frauds. But, in general, it is necessary agree that the objective audit opinion of an independent professional accountant is needed before and after the review.
Finally, the suggestion concerning contingent fees seems to be reasonable and logical because it prevents assurance companies to get involved in frauds as well as minimize frauds from the part of audit clients because the suggestion implies that fee should not be dependent on the result of the audit. Consequently, auditors will not be interested in a particular, subjective result of the audit.
Thus, taking into account all above mentioned, it is possible to conclude that the suggestions discussed above are really important and should be implemented, though certain improvements should be made, such as more restrictions on internal audit, in order to make them even more effective. At the same time, the development of modern audit and assurance is closely intertwined with the development of the contemporary business environment. The increased responsibility of business toughens requirements audit and assurance companies have to meet. On the other hand, the threat of frauds persists and audit and assurance companies should come prepared to new challenges to succeed and make their service reliable and effective.