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Theoretical – Definition and Explanation
According to the International Integrated Reporting Committee, (2011, p. 6) INT (IIRC), integrated reporting is the corporate reporting that combines material information relating to an organisation’s governance, strategy, performance and prospects in a manner that echoes the commercial, social, and environmental context upon which the organisation operates in so as to deliver a clear and concise representation of how the entity exhibits management and ways of creates and preserves value. According to Faria (2016, p. 52), integrated reporting is meant to ultimately deliver an integrated report which is positioned to be a sole report that is an organisation’s primary report as a substitute for the traditional reporting requirements.
Integrated reporting was developed primarily to address the serious gaps in traditional reporting, the increasing complexities of business, to meet new reporting requirements stipulated under new laws, codes, standards, guidance, and stock exchange listing requirements(Faria, 2016, p. 54). Integrated reporting has longer and more complex financial reports and management commentaries, standalone sustainability reporting, and increased reporting on governance and remuneration(Adams &Simnett, 2011, p. 295). Traditional reporting no longer offers investors with a clear depiction of the value of their investment given that the balance sheet only represents less than 20 percent of the assets an organisation employs to earn income and create value(Adams &Simnett, 2011, p. 297).
Explain The: Structure of Either the NAB and Woodside’s Integrated Report
The structure of National Australia Bank Limited (NAB) Integrated Report covers two parts. In Part One of the report, integrated reporting is introduced, an expression of NAB’s commitment to integrated reporting, scope and content of the report in respect to the key themes emerging from the assessment carried out in the current financial year. In Part Two of NAB’s Integrated Report, there is a brief summary on the management and achievements in the year 2016, chairman’s message, CEO’s message, an overview of the organisation and its business model, operating environment such as economic conditions, business opportunities and challenges, stakeholder engagement and analysis, organisation’s strategy and foundations, people in management, governance, organisation performance both financial and non-financial, shareholder information, assurance report, and additional information(National Australia Bank, 2016, p. 4).
The structure of Woodside Integrated Report covers two parts. In the first part, the report is introduced followed by a list of the objectives of its objectives. In the second part, the report covers an overview of Woodside (its establishment, areas of activity, performance, chairman’s report, CEO’s report and organizational structure), operating and financial review (exploration, projects and developments, operations, marketing and shipping, and corporate), governance, financial statements, and shareholder information(Woodside Petroleum Ltd, 2017, p. iii).
What are the Similarities and Differences Between the Structure of the Two Reports and to the IR Framework
The integrated reports for both entities are similar in that they are divided into two parts as stipulated under the IR Framework. The two reports first introduce the IR, state their commitment to IR and the objectives of IR which is also in line with the IR Framework. In the second part, both reports provide an overview of the organisation, business model, strategies and objectives, operating context, connectivity of information, stakeholder inclusiveness, sustainability, and future orientation which are all stipulated under the IR Framework. The two reports differ in their structure since the Woodside report has a more vast coverage on operating review as a result of its global operations in different parts of the world. The Woodside report covers the business model, capital, external factors and reporting boundaries in the second part of the report instead of covering them in the first part like in the NAB report and as stipulated under the IR Framework.
Other Type of Reports the Entities Produce
Other types of reports the entities prepare apart from IR include routine report such as the Report of Directors to the Annual General Meeting, Sales Report, Auditor’s report to the Annual General Meeting, and Production report, and special reports such as introduction of a new product or service, improvements to the size, shape or quality of a product, and opening of a new branch. These reports differ from the IR in that they are more specific to an organisation’s compared to the more detailed and comprehensive IR.
Type of Assurance Provided By the Auditor
Ernst & Young provided Woodside Petroleum Ltd with the following assurances:
- Financial statement assurance that the financial report is to a reasonable degree free from material misstatements although there is no guarantee that the audit performed based on the Australian Auditing Standards will at all times detect all instances of financial misstatements that may exist.
- To use all relevant legislation and standards to assess the appropriateness of the company’s accounting policies and reasonableness of disclosures offered by the directors.
- To assess the going-concern of the company based on the evidence from the current audit.
- To assess the fairness and completeness of the financial report in accordance with the agreed upon subject matter of the audit.
- To use appropriate framework in conducting the audit in accordance with the relevant legislations and standards.
- To submit a written report on the key audit findings which includes an independent opinion on the financial report based on sufficient evidence obtained from financial information or business activities.
- The responsibilities of each party that is the independence auditors, the management, and users of the financial report.
Ernst & Young provided NAB with the following assurances:
- Financial statement assurance that there is reasonable grounds to believe that the financial report is free from material misstatements
- To deliver a limited assurance finding in line with the sustainability assurance engagement entered into with NAB and in line with the ISAE 3000.
- Express a limited assurance finding in line with the auditor’s financial metric assurance engagement as stipulated under the Auditing Standard on Review Engagement ASRE 2405 Review of Historical Financial Information Other than a Financial Report.
- Compliance with the independence requirements of the APES 110 Code of Ethics for Professional Accountants.
- To submit a written audit report detailing all major audit findings to the management.
- To implement an appropriate audit framework and apply the relevant legislation and financial reporting standards
Similarities and Differences
The assurances provided by Ernst & Young to both entities is similar in that the auditor assures that the audit will cover the agreed upon subject matter of the audit, will obtain sufficient appropriate evidence necessary for the audit, use an appropriate criteria in the audit, the assurance of the responsibilities of all relevant parties, and to submit a written report on the audit findings to the management of the entities.
The assurances provided by the auditor to the two entities differ in relation to the standards and legislations relevant to the industry in which each entity operates in. The two entities audited fall in completely different industries and are therefore subject to industry-specific financial reporting standards. The assurances of the auditor also differ in relation to the subject matter of the audit agreed upon with each entity.
Standards Used By the Auditor
Ernst& Young used the following standards when auditing the financial statements of Woodside Petroleum Ltd:
- The Australian Accounting Standards
- The Corporations Act 2001
- The Australian Auditing Standards
- Section 300A of the Corporations Act 2001
Ernst & Young used various standards when auditing the financial statements of NAB which included:
- The Global Reporting Initiative G4 Sustainability Reporting Guidelines principles of materiality and completeness.
- NAB’s accounting policies as stipulated under the bank’s AFR and financial reporting policies and principles.
- NAB’s stated criteria pertaining to major non-financial metrics.
- The International Federation of Accountants’ International Standard for Assurance Engagements Other Than Audits or Reviews of Historical Financial Information (‘ISAE 3000’).
- Auditing Standard on Review Engagements ASRE 2405 Review of Historical Financial Information Other than a Financial Report.
- The independence requirements of the APES 110 Code of Ethics forProfessional Accountants.
AUDITOR INDEPENDENCE AND ETHICS
Auditor independence is a critical element in financial reporting across the globe. An auditor or audit firm must be independent of the entity it audits(Carey, Monroe & Shailer, 2014, p. 371). Auditor independence is a legal requirement in Australia and as well as in other jurisdictions across the world. In Australia, the independence requirements stipulated in various professional standards and legislations are binding to all auditors and are legally enforceable. The relevantlegislations and professional standards include:
- The Corporations Act – Part 2M.4 and s307C, Divisions 3,4, and 5.
- APES 110 Code of Ethics for Professional Accountants.
- Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information.
- Auditing standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements.
An auditor must always put into consideration various aspects of independence at all times during the auditor/client relationship(Carey, Monroe & Shailer, 2014, p. 375). The auditor must endeavour to keenly monitor and professionally respond to issues pertaining to:
- risk or incidence of conflict of interest
- general demands such as the requirement to deliver certain non-audit services
- certain forms of relationships between the audited firm and the auditor or members of the audit team
- the legal requirements for auditor rotation in the case of listed companies unless the ASIC grants auditor rotation relief under certain limited conditions
- the auditor must exercise thoroughness to ensure early detection and assessment of threats to independence and putting in place the necessary safeguards to guarantee the preservation of independence. When the conflict of interest cannot be resolved completely within a period of seven days, the auditor is expected to submit a written report to ASIC detailing the circumstances for conflict of interest or that the appropriate professional relationship remains intact. This is arequirement for auditors to report to ASIC breaches and suspected breaches of the Corporations Act 2001 in the course of performing an audit.
When undertaking a review or audit of a client’s financial report, the auditor is expected to provide a written declaration clarifying that there have been no breaches of the requirements for auditor independence or relevant code of professional conduct.
Identify and Explain Independence Threats in the Case Study
The integrity and objectivity of the auditor can be under threat under different circumstances. According toAccounting Professional and Ethical Standards Board(2013) AU (APESB), theAPES 110 Code of Ethics for Professional Accountantsprovides a theoretical basis upon which threats to adherence to fundamental principles can be identified and assessed. These threats can be reduced to tolerable levels or removed completely using safeguards failure to which the engagement must either be rejected, or the member must pull out of the engagement. Based on the Code, situations and relationships that put a member’s independence at risk in the case study will include:
- Self-interest threat – The risk of a member’s judgement or conduct being wrongly influenced by personal interests such as financial interests.
- Self-review threat – The risk of the outcome of an earlier judgement or service delivered by a membernot being properly assessed by the member before being applied when making a judgement during the current engagement.
- Advocacy threat – The risk of a member endorsing a client’s position to such an extent that the objectivity of the member is under interference.
- Familiarity threat – The risk of a member being too sensitive to a client’s interest or accommodating of the client’s work as a result of a prolonged or close relationship with the client.
- Intimidation threat – The risk that a member will be discouraged from conducting themselves objectively due to perceived or actual pressure from parties associated with the entity being audited.
Apply the AAA Ethical Model to Assess Ethical Dilemma
According to Malsch&Salterio, (2015, p. 5) the American Accounting Association (AAA) model lays down a model for evaluating ethical dilemma when making ethical decisions. This model is useful to auditors in cases whereby they have to make ethical decisions. For instance, when an auditor detects irregular transactions and gets inadequate explanations from relevant officials. The auditor suspects that there was a misappropriation of funds but lacks sufficient evidence to prove the case. The officials then try to bribe the auditor with a huge sum of money sufficient to transform the financial status of the auditor. Should the auditor accept the bribe?
This ethical dilemma can be assessed using the AAA ethical model as follows:
- Determine the facts of this scenario.
At this stage, the auditor has discovered the misappropriation of funds. The officials linked to this misappropriation have offered the auditor a bribe in return for silence or burying the misappropriation completely.
- Determine the ethical issues in this scenario.
After assessing the facts of the case, it is clear that the ethical issue, in this case, is whether or not an auditor ought to take a bribe. Taking a bribe amounts to professional negligence of the auditor’s duties and is also a criminal act.
- Establish the norms, principles, and values linked to the scenario.
In the social, ethical, and professional conduct context, the auditors are believed by the government, stakeholders, and shareholders to maintain a high degree of integrity and to guarantee that the audited firm gives a ‘true and fair view’ of its financial standings at the instance of the audit (Malsch&Salterio, 2015, p. 10). Auditors are tasked with appraising a company’s financial accounts and taking a bribe will prevent and compromise the objectivity of the auditor which means the auditor fails in respect to their duty to the shareholders. This will also be a contravention of the auditor’s expected professional code of ethics and what is socially expected of a member of this profession.
- Acknowledge everypossible course of action.
The first choice is for the auditor to take the bribe and maintain silence or help hide the misappropriation of funds. The second choice is for the auditor to reject the bribe and implement the appropriate measures as required by the various legislations and professional standards.
- What is the best choice the auditor can make that is in line with the norms, principles, and values from the two choices listed in step 3?
When the auditor adheres to the norms, principles, and values that are expected of a member of the profession, the best choice is to reject the bribe. In this case, the auditor is also going to report the misappropriation of funds and also report the officials for offering to bribe so that the misappropriation is not reported. Taking a bribe would mean that the auditor does not observe the norms, principles, and values expected of an audit professional or firm.
- What are the consequences of each possible choice?
In the first choice, the auditor would take the bribe and help hide the misappropriation of funds by the officials. This would improve the financial status of the auditor and expectedly also improve the lifestyle of the auditor. However, this would mean that the auditor is at risk of getting into professional trouble and also being criminally charged for taking the bribe if this is later discovered. The auditor will be troubled by his or her conscience for knowingly accepting a bribe and being in debt to the client for he or she might be exposed at any moment.
In the second choice, the auditor would reject the bribe and report the misappropriation of funds as well as the intended bribery. This option would mean that the client’s officials suffer a number of consequences. The auditors will protect and improve their reputation and social status, uphold public confidence in the profession, and protect the interests of the shareholders.
- Making a decision.
The appropriate ethical decision that the auditor can take is the second choice whereby the auditor rejects the bribe and reports the misappropriation of funds as well as the bribery intentions. An auditor is expected to uphold the highest levels of integrity and professionalism as well as report any situations that may interfere with the independence of the audit.