Whistle-blowing by external auditors: seeking legitimacy for the South African audit profession?

Auditing is often cited as playing an important role in managing agency-related costs and, accordingly, being integral to the sound functioning of capital markets. There may, however, be more to the attest function than a technical rational practice. By virtue of relying heavily on claims to technical expertise, professionalism, prudential judgement and public confidence, auditing is both a source of legitimacy for organisations and, paradoxically, dependent on claims to legitimacy for its continued existence. From this perspective, recent regulatory developments, purportedly enacted to increase arms-length control over the profession, may not only be about improving perceived audit quality and practice but also about ensuring continued faith in the well-established ‘rituals’ of the assurance function. A reporting duty imposed on South African external auditors, akin to whistle-blowing, is used as a case study to explore this perspective. In doing so, this paper contributes to the scant body of interpretive research on auditing, simultaneously offering one of the first insights into auditing regulation from an African perspective.

The adoption of the materiality concept in social and environmental reporting assurance: a field study approach

This study investigates the logics or values that shape the social and environmental reporting (SER) and SER assurance (SERA) process. The influence of logics is observed through a study of the conceptualisation and operationalisation of the materiality concept by accounting and non-accounting assurors and their assurance statements. We gathered qualitative data from interviews with both accounting and non-accounting assurors. We analysed the interplay between old and new logics that are shaping materiality as a reporting concept in SER. SER is a rich field in which to study the dynamics of change because it is a voluntary, unregulated, qualitative reporting arena. It has a broad, stakeholder audience, where accounting and non-accounting organisations are in competition. There are three key findings. First, the introduction of a new, stakeholder logic has significantly changed the meaning and role of materiality. Second, a more versatile, performative, social understanding of materiality was portrayed by assurors, with a forward-looking rather than a historic focus. Third, competing logics have encouraged different beliefs about materiality, and practices, to develop. This influenced the way assurors theorised the concept and interpreted outcomes. A patchwork of localised understandings of materiality is developing. Policy implications both in SERA and also in financial audit are explored.

An investigation of the shortcomings of the CONSORT 2010 statement for the reporting of group sequential randomised controlled trials: a methodological systematic review

Background It can be argued that adaptive designs are underused in clinical research. We have explored concerns related to inadequate reporting of such trials, which may influence their uptake. Through a careful examination of the literature, we evaluated the standards of reporting of group sequential (GS) randomised controlled trials, one form of a confirmatory adaptive design. Methods We undertook a systematic review, by searching Ovid MEDLINE from the 1st January 2001 to 23rd September 2014, supplemented with trials from an audit study. We included parallel group, confirmatory, GS trials that were prospectively designed using a Frequentist approach. Eligible trials were examined for compliance in their reporting against the CONSORT 2010 checklist. In addition, as part of our evaluation, we developed a supplementary checklist to explicitly capture group sequential specific reporting aspects, and investigated how these are currently being reported. Results Of the 284 screened trials, 68(24%) were eligible. Most trials were published in “high impact” peer-reviewed journals. Examination of trials established that 46(68%) were stopped early, predominantly either for futility or efficacy. Suboptimal reporting compliance was found in general items relating to: access to full trials protocols; methods to generate randomisation list(s); details of randomisation concealment, and its implementation. Benchmarking against the supplementary checklist, GS aspects were largely inadequately reported. Only 3(7%) trials which stopped early reported use of statistical bias correction. Moreover, 52(76%) trials failed to disclose methods used to minimise the risk of operational bias, due to the knowledge or leakage of interim results. Occurrence of changes to trial methods and outcomes could not be determined in most trials, due to inaccessible protocols and amendments. Discussion and Conclusions There are issues with the reporting of GS trials, particularly those specific to the conduct of interim analyses. Suboptimal reporting of bias correction methods could potentially imply most GS trials stopping early are giving biased results of treatment effects. As a result, research consumers may question credibility of findings to change practice when trials are stopped early. These issues could be alleviated through a CONSORT extension. Assurance of scientific rigour through transparent adequate reporting is paramount to the credibility of findings from adaptive trials. Our systematic literature search was restricted to one database due to resource constraints.

Environmental initiatives: towards triple-bottom line reporting

The objective of this study was to investigate the quantity and quality of voluntary environmental disclosures in the annual reports of firms listed by market capitalisation on the Australian Stock Exchange. The periods examined were those immediately prior and subsequent to the release of the Exposure Draft Coalition for Environmentally Responsible Economics (CERES) Global Reporting Initiatives (GRI) issued in March 1999. Using content analysis to focus on the environmental aspects, the study compared 425 annual reports over a two-year period and 60 environmental reports, in order to explore reporting practices in the periods surrounding this intervention. The results suggest a trend to triple-bottom reporting, and a significant change in the quality and quantity of environmental information, albeit in specific categories.

Accountability, completeness, credibility and the audit expectations gap

This article deals with two concerns in achieving greater accountability in social reports: the lack of completeness of reporting, and the lack of credibility of reports. The article focuses, in particular, on the role of social audits in improving the completeness and credibility of reporting, thereby reducing the audit expectations gap. We suggest that this gap arises due to an over-emphasis on the validity of performance data at the expense of addressing completeness and credibility, both of which, we argue, require stakeholder involvement. The article reviews recent guidelines aimed at ensuring that companies produce reports that are complete in all material respects including those produced by the Global Reporting Initiative and the Federation des Experts Comptables Europeens, focusing particularly on AccountAbility's AA1000 Standard and AA1000S Assurance Standard. Finally, the article considers the development of a practical approach to social audit following principles increasingly being incorporated into developing assurance guidelines aimed at reducing the audit expectations gap.

The ethical, social and environmental reporting-performance portrayal gap

The purpose of this article is twofold. First, it assesses in detail the extent to which corporate reporting on ethical, social and environmental issues reflects corporate performance in case study company Alpha. This “reporting-performance” portrayal gap is a key measure of the extent to which an organisation is accountable to its stakeholders. Alpha's disclosures concerning its ethical, social and environmental performance for the years 1993 and 1999 were compared with information obtained on Alpha's performance from other sources. Two different pictures of performance emerged leading to the conclusion that, in the case of Alpha, reports do not demonstrate a high level of accountability to key stakeholder groups on ethical, social and environmental issues. Of particular concern is the lack of “completeness” of reporting. Second, the article assesses the potential of recent standards or guidelines developed by the Global Reporting Initiative (GRI) and the Institute of Social and Ethical AccountAbility (AccountAbility) as well as the industry's own “responsible care” initiative to reduce this “reporting-performance” portrayal gap and improve corporate accountability. The conclusions point to the need for other measures to improve accountability including mandatory reporting guidelines, better developed audit guidelines, a mandatory audit requirement for MNCs and a radical overhaul of corporate governance systems.

Internal auditor perceptions on audit committee interactions : a qualitative study in Malaysian public corporations

Audit committees (AC) and the internal audit function (IAF) are two key corporate governance mechanisms. The primary objective of this study is to provide insights into internal auditors' perceptions of their interactions with AC members in Malaysia. The paper thus contributes to the extant literature by providing additional evidence from a South-east Asian country which is recognised as being characterised with a high power distance culture and a developing capital market. The findings are based on in-depth interviews of the heads of the internal audit function (HIAFs) from 11 publicly listed companies. The results indicate infrequent informal communications and limited private meetings between the HIAFs and ACs, and a need for clear reporting lines. Further, ACs are seen to be held in high esteem for their authority and are expected to take on greater leadership in the inquiry of management's decision-making. These findings highlight the importance of the leadership role of ACs in supporting the IAF.

A critical analysis of the independence of the internal audit function : evidence from Australia

Purpose – This study aims to critically analyse the independence of the internal audit function through its relationship with management and the audit committee.

Design/methodology/approach – Results are based on a critical comparison of responses from questionnaires sent out to Australian chief audit executives (CAEs) versus existing literature and best practice guidelines.

Findings – With respect to the internal audit function's relationship with management, threats identified include: using the internal audit function as a stepping stone to other positions; having the chief executive officer (CEO) or chief finance officer (CFO) approve the internal audit function's budget and provide input for the internal audit plan; and considering the internal auditor to be a “partner”, especially when combined with other indirect threats. With respect to the relationship with the audit committee, significant threats identified include CAEs not reporting functionally to the audit committee; the audit committee not having sole responsibility for appointing, dismissing and evaluating the CAE; and not having all audit committee members or at least one member qualified in accounting.

Originality/value – This study introduces independence threat scores, thereby generating analysis of the internal audit function's independence taking into account a combination of threats.

Accountability structures and management relationships of internal audit : an Australian study

Purpose – The purpose of this study is to examine the accountability structures and the management relationships of internal audit. In particular, related issues such as the predominant internal audit objectives and the related functions, the extent to which internal audit addresses any financial reporting risks and the manner in which internal auditors in Australia perform their tasks, are identified. The study also looks at the extent of compliance with the Institute of Internal Auditors (IIA) Standards.
Design/methodology/approach – Based on a survey of the chief audit executives in Australia, the study identifies the reporting mechanisms, functions and relationships of internal audit, including the contributions made towards good corporate governance. There is, however, some misalignment between the aspirations of internal auditors and their relationships with management.
Findings – While internal audit objectives have been established with a focus on controls, risks and governance, the study has highlighted the fact that there is a lack of correlation between the tasks performed by internal auditors and the important internal audit objectives, with the exception of internal control and risks. The results also suggest that internal auditors have been providing an internal consulting and advisory role in matters concerning IT systems, strategic risks and financial issues. If internal auditors are to proactively contribute to good corporate governance, they need to define how, and in what way, this can be done. In regard to corporate governance processes, the results of the research indicate that issues surrounding internal control, risk assessment and management processes are regarded as the key factors for internal audit to contribute to good corporate governance.
Originality/value – This study complements and contributes to the existing literature in providing insights into the evolving role of the internal audit function in terms of accountabilities and relationships with management. It also provides a valuable insight into how the internal audit profession can build upon its inherent strengths and address any apparent areas of concern. This will assist both the profession and policy makers alike, in better understanding and improving the role of the internal audit process.

Auditor independence : shared meaning between the demand and supply sides of the audit services market?

Purpose – The purpose of the paper is to examine the extent to which there is shared meaning of the concept of auditor independence between the three major groups of parties on the demand and supply sides of the audit services market – auditors, financial report preparers and financial report users.

Design/methodology/approach – The paper utilises the measurement of meaning framework (semantic differential analysis) originally proposed by Osgood et al. in 1957. The framework is used to investigate the extent to which there is shared meaning (agreement in interpretations) of the independence concept, in response to alternative audit engagement case contexts, between key parties to the financial reporting communication process. The study's research data was collected in the period March 2004-May 2005.

Findings – Findings indicate a robust and stable single-factor cognitive structure within which the research participants interpret the connotative meaning of the auditor independence concept. An analysis of the experimental cases finds similarities in connotations (interpretations) of an audit firm's independence for the participant groups for most cases, with the exception of cases involving the joint provision of audit and non-audit (taxation) services.

Research limitations/implications – The usual external validity threat that applies to experimental research generally applies to the study. That is, the results may not be generalisable to settings beyond those examined in the study. An important implication of the study is that it emphasises the continuing problematic nature of the joint provision of audit and non-audit services, even in situations where the non-audit services comprise only traditional taxation services.

Originality/value – The study is the first to examine the concept of auditor independence by means of the Osgood et al. measurement of meaning research framework using, as research participants, the three major groups on the demand and supply sides of the audit services market.

Auditors' going-concern-modified opinions after 2011 : measuring reporting accuracy

An important change in auditors’ reporting behaviour in the period after the high-profile corporate collapses in 2001 is that auditors were more likely to issue going-concern (GC)-modified audit opinions. Comparing company failure rates subsequent to receiving a first-time going-concern (FTGC)-modified audit opinion in the pre- and post-2001 periods, we find a consistent type 1 error (misclassification) rate (the rate of survival among companies issued an FTGC opinion). Results are indicative of auditors maintaining GC reporting accuracy when comparing the 1995–1996 and 2004–2005 periods. This conclusion is supported after considering the impact of mitigating circumstances surrounding companies that received an FTGC-modified audit report and survived.

The evolution of clinical audit as a tool for quality improvement.

Clinical auditing practices are recognized universally as a useful tool in evaluating and improving the quality of care provided by a health service. External auditing is a regular activity for mental health services in Australia but internal auditing activities are conducted at the discretion of each service. This paper evaluates the effectiveness of 6 years of internal auditing activities in a mental health service. A review of the scope, audit tools, purpose, sampling and design of the internal audits and identification of the recommendations from six consecutive annual audit reports was completed. Audit recommendations were examined, as well as levels of implementation and reasons for success or failure. Fifty-seven recommendations were identified, with 35% without action, 28% implemented and 33.3% still pending or in progress. The recommendations were more likely to be implemented if they relied on activity, planning and action across a selection of service areas rather than being restricted to individual departments within a service, if they did not involve non-mental health service departments and if they were not reliant on attitudinal change. Tools used, scope and reporting formats have become more sophisticated as part of the evolutionary nature of the auditing process. Internal auditing in the Barwon Health Mental Health Service has been effective in producing change in the quality of care across the organization. A number of evolutionary changes in the audit process have improved the efficiency and effectiveness of the audit.

The association between audit committee effectiveness and audit risk

Audit committees (ACs) are expected to play a key role in improving financial statement integrity and as a consequence reduce audit risk. Companies reporting conformity with regulations can have an AC that appears effective but is not actually effective in substance. We surveyed audit partners and managers to identify their indicators of actual AC effectiveness (auditor-chosen list). We hypothesize a negative association between AC effectiveness and audit risk, only when an auditor-chosen list, rather than extent of conformity with regulations, is used to measure effectiveness. Results support our expectations.

Compliance com os requisitos de divulgação do IFRS - International Financial Reporting Standards e sua relação com o erro de previsão dos analistas de mercado

O objetivo deste estudo é fazer uma análise da relação entre o erro de previsão dos analistas de mercado quanto à rentabilidade das empresas listadas na BM&FBOVESPA S.A. (Bovespa) e os requerimentos de divulgação do International Financial Reporting Standards (IFRS). Isto foi feito através da regressão do erro de previsão dos analistas, utilizando a metodologia de dados em painel no ano de implantação do IFRS no Brasil, 2010, e, complementarmente em 2012, para referenciamento desses dados. Partindo desse pressuposto, foi determinado o erro de previsão das empresas listadas na Bovespa através de dados de rentabilidade (índice de lucro por ação/earnings per share) previstos e realizados, disponíveis nas bases de dados I/B/E/S Earnings Consensus Information, providos pela plataforma Thomson ONE Investment Banking e Economática Pro®, respectivamente. Os resultados obtidos indicam uma relação negativa entre o erro de previsão e o cumprimento dos requisitos de divulgação do IFRS, ou seja, quanto maior a qualidade nas informações divulgadas, menor o erro de previsão dos analistas. Portanto, esses resultados sustentam a perspectiva de que o grau de cumprimento das normas contábeis é tão ou mais importante do que as próprias normas. Adicionalmente, foi verificado que quando a empresa listada na BM&FBOVESPA é vinculada a Agência Reguladora, seu erro de previsão não é alterado. Por fim, esses resultados sugerem que é importante que haja o aprimoramento dos mecanismos de auditoria das firmas quanto ao cumprimento dos requerimentos normativos de divulgação, tais como: penalidades pela não observância da norma (enforcement), estruturas de governança corporativa e auditorias interna e externa.

Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations

This study examines the effects of the source of whistle-blowing allegations and potential for allegations to trigger concerns about reputation threats on Chief Audit Executives’ handling of whistle-blowing allegations. The participants for this study, 79 Chief Audit Executives (CAEs) and deputy CAEs, evaluated whistle-blowing reports related to financial reporting malfeasance that were received from either an anonymous or a non-anonymous source. The whistle-blowing reports alleged that the wrongdoing resulted from either the exploitation of substantial weaknesses in internal controls (suggesting higher responsibility of the CAE and internal audit) or the circumvention of internal controls (suggesting lower responsibility of the CAE or internal audit). Findings indicate that CAEs believe anonymous whistle-blowing reports to be significantly less credible than non-anonymous reports. Although CAEs assessed lower credibility ratings for the reports alleging wrongdoing by the exploitation of substantial weaknesses in internal controls, they allocated more resources to investigating these allegations.