Scope limitation

Abstract: Auditors face the challenging tasks of attesting that the financial statements are free from material misstatement while simultaneously fostering a functional working relationship with the client. As the financial statements may be considered, in part, a product of negotiations between the auditor and client management (Antle and Nalebuff 1991), the negotiation strategy employed by the auditor may be useful in effectively fulfilling both tasks. To investigate the effect of auditor strategy on the resolution of proposed audit adjustments in a post Sarbanes-Oxley environment, we conduct two experiments that examine both the client and auditor sides of the negotiation. We investigate a strategy of "concession" that draws upon the societal rule of reciprocation, which makes the waiving of inconsequential audit differences transparent. Specifically, with a concession approach, the auditor brings to the attention of the client all the audit differences (both significant and inconsequential) discovered during the audit and, subsequently, waives the inconsequential items. In contrast, a strategy of "no-concession" of inconsequential items (in which the auditor discloses to the client only the significant audit differences which must be booked) renders the client unaware of the waived inconsequential differences. Results from the first experiment indicate that, relative to a no-concession approach, participants representing client management (controllers/CFOs) are more willing to post significant income-decreasing adjustments when exposed to a concession approach in the course of negotiating the final contents of the audited financial statements. A concession approach also results in greater client satisfaction and retention. Consistent with these findings, results from the second experiment suggest that auditors also perceive that altering their approach toward greater disclosure of waived inconsequential audit differences can improve client satisfaction and retention.

Abstract: Despite their increasing popularity in recently concluded investment treaties, the structural status of exception clauses is not well understood. The inconsistent interpretations of these provisions by investment tribunals and by annulment committees has created uncertainty about the nature of states’ treaty commitments to foreign investors and the way exceptions should be dealt with in arbitration. Several claims remain outstanding against Argentina in relation to emergency measures adopted in response to its economic crisis of 2001-2002, in which the application of a treaty exception is likely to be a significant issue for determination. This paper addresses two related questions: (1) whether an exception is a limitation on the scope of the substantive investment obligations such that those obligations do not apply to measures that come within the exception, or whether an exception is an affirmative defence that operates to justify a prima facie breach of the obligations; and (2) the relationship between security and public order exceptions and the defence of necessity at customary international law — in particular, the question whether such clauses are lex specialis manifestations of the defence between the treaty parties. Examining the decided cases and considering the implications of these interpretations of the structural status of exception clauses permits two conclusions, subject always to the text of the provision at issue: that exceptions limit the scope of the treaty obligations, and are not affirmative defences; and that security exceptions are conceptually distinct from the customary defence of necessity. These conclusions have practical implications for the allocation of the burden of proof, but raise questions about the coherence between international investment law and WTO law.

Abstract: This paper examines whether an appropriate legal system, which is a combination of a legal regime and a damage apportionment rule, effectively enhances auditor independence. Economic and psychological hypotheses derived from a one-period game model in which the auditor may commit either a technical audit failure (resulting from the auditor’s inability to detect true output given a lack of audit effort) or an independence audit failure (resulting from the auditor’s intentional misreporting on false output) are tested. Three major findings are documented. First, auditor independence affects firm investment, which in turn affects audit effort. Under this strategic dependence, no single legal system can provoke audit effort, improve auditor independence, and encourage firm investment simultaneously. To enhance auditor independence and motivate investment, a legal system consisting of both a strict regime and a proportionate rule is preferred. Second, the strict regime induces more auditor independence than the negligence regime, while the proportionate rule induces higher audit effort than the joint-and-several rule. Finally, auditors’ moral reasoning and penalty for misreporting are both positively associated with their independence. In addition, the effect of moral reasoning on auditor independence diminishes as the level of penalty increases. These two results hold only when the legal systems that auditors face are considered.

Abstract: The role of the external auditor in the supervisory process requires standards such as independence, objectivity and integrity to be achieved. Even though the regulator and external auditor perform similar functions, namely the verification of financial statements, they serve particular interests. The regulator works towards safeguarding financial stability and investor interests. On the other hand, the external auditor serves the private interests of the shareholders of a company. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The debate surrounding the role of external auditors focusses in particular on auditor independence. A survey by the magazine “Financial Director” shows that the fees derived from audit clients in terms of non-audit services are significant in comparison with fees generated through auditing. Accounting firms sometimes engage in a practice called “low balling” whereby they set audit fees at less than the market rate and make up for the deficit by providing non audit services. As a result, some audit firms have commercial interests to protect too. There is concern that the auditor's interests to protect shareholders of a company and his commercial interests do not conflict with each other. Sufficient measures need to be in place to ensure that the external auditor's independence is not affected. As well as considering threats to auditor independence and safeguards to protect against such threats, this paper focuses on how the external auditor can assist the FSA through two of its principal regulatory tools in the FSA's response to risk, namely supervision and enforcement. A lot of work and improvements on audit independence have been carried out over the years and there should be an ongoing process of review and further efforts aimed at improvement. Key words: Supervision, Enforcement, Independence