Ethics and Auditing Ethics and Auditing Tom Campbell and Keith Houghton (Editors) Acknowledgements The editors gratefully acknowledge the support of the Academy of The Social Sciences in Australia (ASSA), the Centre for Applied Philosophy and Public Ethics (CAPPE) and the Australian National Centre for Audit Assurance and Research (ANCAAR). Published by ANU E Press The Australian National University Canberra ACT 0200, Australia Email: anuepress@anu.edu.au Web: http://epress.anu.edu.au National Library of Australia Cataloguing-in-Publication entry Ethics and auditing. Bibliography Index ISBN 1 920942 25 4 ISBN 1 920942 26 2 (online) 1. Auditing. 2. Auditing - Moral and ethical aspects. 3. Auditors - Professional ethics. I. Campbell, Tom, 1938- . II. Houghton, Keith A. 657.45 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of the publisher. Edited by Ewen Miller Cover design and photograph by Brendon McKinley Printed by Digital Print Australia, Adelaide This edition © 2005 ANU E Press Contents List of contributors: ix Foreword: Restoring public trust: Bill Edge xiii Introduction: The ethics of auditing: Tom Campbell xxi I. Approaches to the critique of auditing 1 1. Governance and accountability: a legal approach to auditing: Stephen Bottomley 3 2. ‘Perfectly legal’: a sociological approach to auditing: Doreen McBarnet 25 3. Public oversight: an international approach to auditing: Roger Simnett and Alana Smith 45 4. The role of markets: an economic approach to auditing: Jane Hamilton and Donald Stokes 63 5. True and fair to whom?: a philosophical approach to auditing: Tom Campbell 85 II. Auditor independence 109 6. Conflicts of interest in auditing: are they conducive to corruption?: Edward Spence 111 7. Attachments between directors and auditors: do they affect engage- ment tenure?: Nicholas P Courtney and Christine A Jubb 129 8. Where were the gatekeepers? Corporate collapses and the role of accountants: Barry J Cooper 159 9. Management economic bargaining power and auditors’ objectivity: Carolyn A Windsor 177 10. Criticisms of auditors and earnings management during the Asian economic crisis: Shireenjit Kaur Johl, Christine A Jubb and Keith A Houghton 193 III. Beyond the auditor: the search for solutions 219 11. Auditor independence: regulation, oversight and inspection: Keith A Houghton and Christine A Jubb 221 12. Improving ethical judgment through deep learning: Kay Plummer 239 13. Can we teach auditors and accountants to be more ethically com- petent and publicly accountable?: Bryan Howieson 265 14. Do auditor provided non-audit services (APNAS) fees impair auditor independence?: Christopher Ikin 289 Conclusion: Restorative strategies: Keith A Houghton and Colin Dolley 331 Index 337 iii List of figures 9.1. Individual complex decision-making model of auditor independ- ence 185 10.1. Histogram of change in earnings per share since prior year – prior year earnings performance threshold 209 10.2. Histogram of change in earnings per share – loss avoidance threshold 211 v List of tables 1. Sample topics to be covered in a code of conduct xvii 2. Elements of a code of conduct framework xvii 7.1. Example of measurement of ALOCKYRS 136 7.2. Summary of auditor tenure and auditor change models used in prior literature 137 7.3. Variable measures 142 7.4. Sample criteria 143 7.5. Descriptive statistics 145 7.6. Pearson correlation coefficient matrix (N = 200) 147 7.7. Hypothesis 1 – Auditor tenure as a continuous measure Tobit regression (dependent variable = AUDTEN) 148 7.8. Hypothesis 2 – Logistic regression (dependent variable = CATTEN) (N = 200) 151 10.1. Sample selection criteria 202 10.2. Descriptive statistics and univariate tests 204 10.3. Pearson’s correlation N = 600 206 10.4. OLS regression 207 10.5. Descriptive statistics by period and year for change in earnings per share ( EPS) and earnings (EPS) 209 12.1. A comparison of Rest’s (1999) schema with Kohlberg’s (1976) six-stage model of moral development 242 12.2. Ways of teaching ethics 247 12.3. Mean SPQ scores of Australian accounting students 249 12.4. Mean scores of each class 254 12.5. Correlations of variables using the combined classes 255 12.6. Mean scores of males and females 255 12.7. DIT P Score means of college/university students from a range of disciplines and countries 255 13.1. The principle of beneficence 280 13.2. The principle of justice 280 13.3. The principle of respect for persons 280 13.4. Nature of ethics 285 vii △ Acr92F.pdf 22/07/2005 4:07:01 PMAcr92F.pdf 22/07/2005 4:07:01 PM [...]... involved to auditing and accounting rules, legal and otherwise, and the ways in which they are interpreted and applied It requires reference to the systems for decision-making and control within auditing firms, and the openness and honesty of the corporations under audit All this goes far beyond seeking conformity with obvious and agreed standards and conduct Beyond these matters, the ethics of auditing. .. be tempted to adopt or recommend rules and standards that benefit the auditing profession at the expense of the xxix Ethics and Auditing public interest (see Simnett & Smith, Chapter 3) Perhaps on account of this ‘moral hazard’, accounting and auditing standards and the regulation of the auditing process have increasingly been shared between professional bodies and governments intent on shoring up the... them Stock exchanges, global and local accounting and auditing standard-setters, institutional investors and other stakeholders have called for transparency and accountability in corporate governance, business ethics and corporate reporting New laws and best practice guidance require strict monitoring of auditor independence, codes of ethical conduct, more disclosures, and CEO/CFO certification of... what rules and principles they ought to adopt and follow, and how to promote a culture in which we can expect compliance with these norms, it is helpful to classify the ethical issues that arise in relation to auditing by distinguishing three spheres of activity; (1) the practice of auditor(s), (2) the managexxii ment and culture of auditing firms, and (3) the setting of auditing standards and laws Ethically,... individual auditors engaged in the practice of auditing Auditors ought to carry out their standard procedures carefully, diligently and punctually in accordance with their instructions and the appropriate auditing standards and procedures The virtues of integrity, objectivity, independence, confidentiality, upholding technical and professional standards, competence and due care, which are all highlighted... itself If there have to be unexpected major corporate insolvencies before serious auditing irregularities come to light, what trust can we have in the reliability of the accounting and auditing standards xxi Ethics and Auditing and procedures generally? And, more specifically, if we cannot trust an audit, has it any value? Gross auditing failures can always be dismissed as atypical lapses deriving from the... Introduction: The ethics of auditing Tom Campbell Accountancy and auditing are complex and technical processes Ethics, in contrast, might be considered relatively simple The difficult part of ethics, it may be argued, is not knowing what we ought to do, but getting ourselves, and others, to do the right thing Truthfulness, honesty, care, loyalty, integrity: we know what they require, but we do not know if and how... Australian Auditing and Assurance Standards Board (2002-04) Chairman Enron, Parmalat, WorldCom, HIH – these corporate failures and accounting scandals have shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets There has also been public disquiet about the role professional auditors and audit firms have played in these corporate scandals... although ethics in auditing does involve the conduct of auditors, any serious attempt to assess that conduct must take account of the nature and purpose of auditing and the economic and social functions it is intended to serve Evaluating auditor performance requires, for instance, raising questions as to what constitutes conformity with official guidelines and the standard of professional practice, and. .. Co-operative Research Centre for Technology Enabled Capital Marks and the School of Accounting at UTS Keith A Houghton is the Professor of Business Administration and Dean of the Faculty of Economics and Commerce at the Australian National University Keith is a member of the Australian Audit and Assurance Standards Board, and ix Ethics and Auditing is one of the two independent reviewers of the Australian . Ethics and Auditing Ethics and Auditing Tom Campbell and Keith Houghton (Editors) Acknowledgements The. market and reforms to corporate reporting and accounting /auditing that may rectify them. Stock exchanges, global and local accounting and auditing standard-setters,