Analyze the need for unbiased financial reporting. Based on your analysis, determine at least two (2) drivers that may cause financial reporting to be biased. Provide a rationale to support your response.
According to Bhattacharyya, financial statements of a business that have been prepared and presented using generally accepted accounting principles or IFRS help analysts to value the business accurately. There is also a need for unbiased and transparent financial reporting. Ultimately, a company’s financial statements are a reflection of the company’s management and the company as a whole. Bhattacharyya also stated that two advantages of having transparent financial reporting was to improve corporate governance and enforce accountability. The audit team of an organization are the ones who provide reasonable assurance to the intended users that the financial statements provide a fair and true view of both the operating performance and financial position of the organization. Financial statement users rely on the audit team’s assertion because the audit profession establishes the code of ethics that protects the independence of auditors to enable them to formulate unbiased opinions and disciplines members who are found guilty of misconduct (Bhattacharyya, 2007).
Some of the drivers that might cause financial reporting to be biased are, availability, overconfidence and rush to solve. The availability bias happens when decisions of accountants or auditors are heavily influenced by information that is most memorable (Fay, 2015). The overconfidence bias happens when these professionals overestimate their abilities to make accurate decisions or perform tasks (Fay, 2015). When accountants or auditors make judgments without fully considering all of the available data, the rush-to-solve bias happens (Fay, 2015).
Analyze the audit opinion formulation process and suggest at least one (1) improvement to the process to strengthen audit opinions. Provide a rationale to support your suggestion.
According to Rittenberg, the audit opinion formulation process consists of the following five phases 1.) Assessing client acceptance and retention decisions. 2.) Understanding the client. 3.) Obtaining evidence about controls and determining the impact on the financial statement audit. 4.) Obtaining substantive evidence about account assertions and 5.) Wrapping up the audit and making reporting decisions. One improvement to the audit opinion formulation process which will strengthen audit opinions is professional skepticism. According to Fay, professional skepticism includes a critical assessment of audit evidence and a questioning mind. Often an auditor’s decisions can be improved by explaining why his or her initial assessment could be incorrect. By doing this, it pushes the auditor to take the time to thoroughly consider the limitations of their chosen solution (Fay, 2015).
References: Bhattacharyya, A. K. (2007, June 1). Independence key to unbiased audit. Retrieved from Business Standard: http://www.business-standard.com/article/economy-policy/independence-key-to-unbiased-audit-107060101081_1.html
Fay, R. C. (2015, February 1). I’m not biased, am I? Retrieved from Journal of Accountancy: http://www.journalofaccountancy.com/issues/2015/feb/auditing-judgment-bias.html
Rittenberg, L. E. (2012). Auditing: A Business Risk Approach with Cases, 8th Edition. Mason, Ohio, USA: Cengage Learning.
Great post! Since 2003, the independent oversight of the external audit profession has been conducted by the Public Company Accounting Oversight Board (PCAOB), the audit regulator that was created by the passage of the Sarbanes–Oxley Act of 2002. This Act expanded oversight of auditors by audit committees, called for stricter rules regarding auditor independence, more frequent partner rotation, and required registration, inspections and enforcement by the PCAOB. Clearly Deloitte & Touch LLP failed to conduct proper independence procedures according to this act.