AUDITING

Auditing the Going Concern Assertion

Auditing the Going Concern Assertion

Introduction

In market societies, people routinely have to transact with faceless corporations about whom they have little personal knowledge. In such societies, external auditing is promoted as a trust engendering technology with a capacity to promote a particular kind of social order (Power, 1999). It is actively promoted by the state and not only corporations, but significant non-corporate entities are also required by law (e.g. UK Companies Acts) to embrace such technologies. However, confidence in corporate auditing and auditor claims of being able to construct an objective state of the financial affairs of business enterprises are routinely undermined by unexpected corporate collapses, frauds, financial scandals and general crisis of capitalism.

At such times, the state, accountancy trade associations and significant others seek to reconstruct confidence in auditing by tweaking institutional structures, regulatory apparatuses, codes of ethics and disciplinary arrangements for errant auditors (Sikka and Willmott, 1995).

Following revelations of frauds and collapse of US giants Enron and WorldCom, the usual flurry of political activity enacted the Sarbanes-Oxley Act 2002 (for a critique see Burrowes et al., 2004), which sought to strengthen auditor independence by introducing some restraints on the auditor's ability to sell consultancy services to audit clients. It also created the Public Company Accounting Oversight Board (PCAOB); an organisation specifically charged with oversight of the auditors auditing US public companies.

Discussion

In UK, to shore up public confidence in auditor independence, the Auditing Practices Board issued revised ethical standards (Auditing Practices Board, 2004a). The role of the Financial Reporting Council (FRC), the main regulators responsible for accounting and auditing regulation, and its various arms, was strengthened. In particular, an Audit Inspection Unit was formed for monitoring of the audits of all listed and other major public companies.

The Companies Act 2006 beefed up auditor rights and powers in relation to information from employees, officers, directors and subsidiaries. At the same time, issues about the efficacy of the basic auditing model, accountability and governance of auditing firms, the auditability of global businesses and some emerging assets (e.g. complex financial instruments) received scant attention (Sikka, 2004).

Since late 2007, major western economies have experienced a deepening banking and financial crisis arising from subprime lending practices by banks, which in turn has restricted the availability of credit and has led to what has come to be described as a “credit crunch”. The full extent of the crisis is still unfolding, but regulators have stated that off balance sheet accounting practices have been rife (Daily Telegraph, 20 December 2007; International Herald Tribune, 28 February 2008).

Experts believe that many banks have been showing bad debts and investments as good and as a result may have to write-off some US $1.2 trillion. Some banks and financial institutions have collapsed within a short period of receiving unqualified audit opinions (UK House of Commons Treasury Committee, 2008; United States Bankruptcy Court for the District Delaware, 2008). Central banks have been pumped vast amounts of money to bailout distressed banks and provide much needed ...