Auditing and Accountability (ACCT40115)
Q.1
In Tesco’s case, the auditors’ lack of independence very probably aided in the revelation of the aggressive profit manipulations that were taking place. As the firm said in its fiscal year 2014/15 annual report, the “forwarding” of commercial income from suppliers that should have been assigned to future periods was clearly the result of a management failure inside the company’s UK operations. Except if Tesco can demonstrate that a specific member of the board of directors committed major misconduct, payments were legally necessary and due under the applicable service contracts. Following learning of the exaggeration, the company’s board of directors commissioned Deloitte to conduct an independent investigation into the incident. A conclusion was reached after an extensive investigation that certain amounts had been improperly accelerated (for income) or deferred (for costs) in violation of Tesco Group accounting policies; that similar practices had occurred in prior reporting periods; and, finally, that the current and prior practices appeared to be connected because the amount of income accelerated increased from one period to another. Specifically, the leaving external auditors, PwC, said in their report that they paid close attention to areas where the directors made subjective decisions. The possibility of management overcoming internal controls was determined when an incident of fraud occurred, including examining if there was evidence of director bias that may result in major financial statement fabrication.
The purpose of auditing is to provide credibility to the financial statements that are included in the report. While management is responsible for the preparation of financial statements, it is the auditor’s obligation to guarantee that they are reliable (Tepalagul & Lin, 2015). The same was expected of the auditing team at Tesco. As a result of the auditor’s work, the trustworthiness of management’s non-audited information is enhanced significantly. According to Daniels and Booker (2011), an audit must be done by an impartial individual who is not influenced by their position or authority, since if the audit is not handled appropriately, it will have an adverse effect on the result of the audit. When evaluating work, auditors are supposed to provide an impartial and competent review of the job. Because of an auditor’s lack of independence, the auditor report that is provided to those who rely on it is virtually worthless to them (Suseno, N2013). It is possible for self-interest to manifest itself when an auditor has a direct or indirect financial stake in the functioning of a company, or when an auditor owes a large fee to a client, for example. In order to get a loan from the bank to cover the company’s outstanding expenses, the audit team may be tempted to provide a favourable report. The management at Tesco pushed for such audit actions. When an auditor reviews both his or her own work and the work of others in the same business, he or she is said to be doing self-review. The auditor is required to assess his or her own work, thus expecting the auditor to provide a fair review of the financial statements would be subjective (Hossain, 2013). In auditing situations, there is a danger of advocacy when the auditor aggressively promotes the client to the degree that their neutrality is jeopardized, which is widespread. Employees, officials, and directors of the client business may get familiar with the auditor if he or she becomes too close to or acquainted with them. familiarity It is conceivable that the auditor developed an unhealthy relationship with the client and, as a result, lost his or her professional neutrality. Management or its directors may have been intimidated by the auditor to the point of paralysis, creating an intimidation danger to the organization.
As a result of an audit, business shareholders get a professional, independent judgment on whether the company’s annual financial statements provide an accurate and fair picture of the company’s financial condition and can be relied upon. In order for auditors to show their ability to do their jobs objectively, the most often employed way is to establish independence from management (Rahmina & Agoes, 2014). The independence of the auditor from the client company is essential in order to ensure that the audit opinion is not impacted by the auditor’s connection with the client business. The auditors’ role is to provide shareholders with a professional evaluation of the financial statements and accounts that is objective, accurate, and independent. Some people are worried about the independence of external auditors, which is understandable. If a client’s business does not have appropriate corporate governance mechanisms in place, the necessity for an audit firm to maintain strong relationships with the company may have a substantial impact on the audit findings and conclusions of the audit firm. Consequently, the independence of the auditing company has been compromised, and shareholders can no longer place their trust in the firm’s recommendations (Priyanti & Dewi, 2019). The cost of audit services may be lower than the market rate, and accounting firms may be able to make up the difference with non-audit services such as management consulting and tax preparation. A consequence of this is that some auditing companies place their own business interests ahead of the interests of their customers. This creates the possibility that the auditor’s incentive to safeguard the interests of the shareholders and his personal financial interests may be at odds with one another.
Tesco exaggerated their financial accounts rather than confronting the underlying weaknesses that were at the heart of the aggressive accounting irregularities that engulfed the company. Following the realization that these sales quotas would not be met, a small group of employees collaborated with suppliers to ensure that these payments were made by offering incentives during the following fiscal month. Routine inspections also discovered convoluted links between suppliers and customers, raising questions about financial reporting and auditing procedures. This information would be kept secret, with the worst-case scenario being that Tesco would reimburse the supplier the following quarter, according to the agreement. Tesco’s crisis has once again brought to light the risks and responsibilities that come with being a publicly traded company with a short-term outlook. Investors are interested in greater performance regardless of the short-term cost to long-term corporate, innovation, or customer relationships that may result (Mohapatra, 2021). A negative reaction may occur when profits are substantial but less than anticipated. Due to the resulting pressure, many senior executives are now so concerned with avoiding this that they are focusing their efforts toward investors and analysts rather than toward customers or long-term organizational goals and orientations. Tesco may have difficulties as a consequence of this.
Public firms like Tesco must have a strong corporate governance culture as well as competent internal processes in place in order to avoid accounting and other challenges. Commentators have long suggested that the management from the top management is crucial to the integrity of the financial reporting process, and that firms would be well served to conduct regular reviews of the effectiveness of their internal control systems. In the case of Tesco, the tone from the top management was clearly lacking. It is also suggested that the firm interfered with auditing processes. Always choose for proactive risk management and minimization over reactive crisis management wherever possible. However, no institution, regardless of the quality of its management, is immune to the implications of a financial or economic downturn in the short or long term.
Q. 2
My knowledge of the company’s operation and industry as a Tesco auditor influenced my risk assessment for the audit, which was guided in part by these indications that were observable before the incident. Throughout the auditing process, key risk indicators (KRIs) are metrics or markers that are utilized to examine and quantify a possible risk that has been identified (Davies et al., 2006). They are just a set of risk measuring tools that are used to keep tabs on the overall level of risk. Prior to the scandal’s public exposure, I’ll focus on the financial, human resource, and operational indicators that should have been clear. Financial indicators, among other things, are elements that assist in assessing market risk, regulatory changes, and competitive risk, to name a few examples. Those who measure people indicators measure employee happiness as well as turnover and retention of customers and other data relating to people and their behavior. Last but not least, operational indicators allow you to keep track of the myriad risks that might arise during normal business operations, such as technology failures or data breaches.
As a Tesco auditor, I understand that the risk indicators available are numerous, and organizations can select the ones that are the most important to them and use them as key indicators in their operations. Instead of evaluating hundreds of indicators, managers may choose to concentrate on those that provide the information essential to make executive decisions. This aids in the differentiation of signal from noise. The most successful method of ensuring that KRI insights are integrated into executive decision-making is to make KRIs accessible to stakeholders via executive dashboards, which is the most efficient method (Epetimehin & Obafemi, 2015). According to the supermarket business, the three risk indicator categories (people, financial, and operational) depict the supermarket company’s key areas of concern at the time of the assessment. These are the important indications that other companies in Tesco’s sector must be aware of in order to compete successfully against the company’s performance. However, credit-related data were the most important indicators, and as a result, they were the ones that were emphasized by Tesco when it came to assessing critical operational risk indicators.
Among the most crucial financial key performance indicators (KPIs) that I would deploy at Tesco are those that are credit-related key performance indicators (KRIs). Credit-related indicators were my initial pick since, in their normal condition, they are highly predictive of future behavior. This metric, rather than total assets, evaluates the company’s ability to repay current commitments by drawing on readily available assets rather than cash. Metrics with low values, particularly those with values less than one, indicate that the organization has taken on a considerable amount of responsibility that it is unable to support with its current assets, and as a result, the organization has declared bankruptcy. By doing so, the business risks the danger of not being able to meet its obligations, with all of the resulting reputational and financial consequences that follow (Immaneni, Mastro, & Haubenstock, 2004). A country’s long-term survival has constantly been determined by the amount and quality of defective loans and payment defaults that it has experienced. Examples include financial institutions assessing the percentage of loan defaults by businesses and individuals across different sectors to determine which industries are especially hard hit and which industries will recover more rapidly from a financial crisis. Delinquent loan and credit repayments, as well as non-performing loans and debts, are all indicators that Tesco’s firm, as well as the suppliers in its industry or geographic region, are in financial trouble. Credit-related key performance indicators (KRIs) would have aided me and my role as a Tesco auditor in gaining a more detailed understanding of how the firm’s engagement with suppliers impacted the business community in the first place, which included the firm, suppliers, distributors, employees, management, and financial institutions, among other stakeholders, as well as the firm’s engagement with suppliers in the first place. Because Tesco’s top executives will have access to the data and will most likely be the first people to understand the company’s financial situation and future prospects, it is critical to get this information for them.
As the head of Tesco’s auditing team, I would have considered operational key performance indicators (KRIs) to be the second most important group of KRIs to be investigated. Authorities in charge of financial reporting were on the lookout for evidence of fraud and kept a close eye on the situation at Tesco. From my point of view, Tesco may have utilized compliance critical risk indicators to uncover faults in their compliance frameworks, which would then be addressed. A compliance department’s overall effectiveness as well as the efficiency of individual compliance tasks may be assessed. In certain cases, Mouatassim and Ibenrissoul (2015) found that better visibility will allow companies to identify and alter unproductive procedures. Additionally, by allowing firms to compare their own performance to that of their rivals, compliance key performance indicators (KRIs) aid them in contextualizing their own performance. Management reaps significant advantages from the information obtained as a consequence of compliance violations and corrective actions. This information may be used to aid the company in estimating the level of risk it is exposed to. There are many other types of operational risks that may arise in every firm, and noncompliance with legal or regulatory requirements or standards is merely one kind of operational risk. Individuals who purposefully or accidentally break their commitments under relevant laws, rules, regulations, agreements, established processes, and ethical standards are all considered to be infringing the law, regardless of whether they did so knowingly or unknowingly (Peček & Kovačić, 2019). Tesco’s employees made illegal deals with suppliers regarding forwarding of payments and misrepresenting the same in their records. Because of this, you may be subject to a regulatory penalty or punishment. Among other things, a bank’s board of directors and senior management are responsible for overseeing its business practices in terms of operational risk, and the bank’s operations should be safe and sound, conducted with integrity, and in conformity with all applicable laws and regulations.
Finally, as an auditor, I would utilize Tesco’s human resources as a critical indicator of the company’s health in order to forecast the company’s future performance in relation to auditing risks. Employee and customer satisfaction, as well as the retention of top-tier talent inside a company, are all assessed via the use of human capital indicators. In order to better understand the Tesco situation, it would have been beneficial to keep track of employee work habits and triumphs on a continual basis in order to predict what would happen next. One or more employees were less productive than normal, or the attitude and performance of an entire department altered, this should have served as a warning sign that something was wrong with the company’s internal operations. When workers fail to meet the expectations that have been established for them, the whole organization suffers (Derzhevetska et al., 2021). Consider the following scenario: an employee’s productivity may have declined in direct proportion to the number of customers served, and the customers may have voiced unhappiness with the employee’s performance. It’s also possible that Tesco’s salespeople’s attitudes and behaviors changed as a consequence of the company’s high expectations, which would indicate that they were experiencing motivational difficulties. A formerly well-adjusted employee who started demonstrating mood fluctuations, such as being impatient or becoming angry rapidly, may have been identified as potentially hazardous to the company.
References
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