ANALYSIS OF HOW NON-AUDIT SERVICES PROVIDED TO AUDIT CLIENT HAS CHANGED SINCE ENRON IN THE UK.
Chapter 1
Introduction
The Enron scandal will forever remain one of the biggest scandals in the history of corporate bodies. As a result of this, this paper will focus on the changes that emerged in the accounting and audit sectors. Enron was an energy company in the US and one of the big four companies amongst others. In late 2001, following a wave of accounting malpractices such as the use of off-balance sheet financing and irregular accounting methods which the firm had engaged in during the 90s , Enron filed for bankruptcy. As a result, Enron between 1997 and 2001, the company had to restate its profits in order to reflect these irregularities thus its book value declined by $1.25billion, (McCarthy et al, 2005). It also had a number of discrepancies as regards its share price, sales, earnings, cash flows and balance sheet disclosures. For example, in 2000 its revenues increased by 151% while cost of sales increased by 172% but the share price increased only by 100% (McCarthy et al, 2005). All these led to the fall of Enron and a re-birth of structural changes to the nature of audit and non- audit services which audit firms provide, the relationship between audit and non-audit fees and the effect it has on the auditor’s independence and the scope of work available for auditors. This paper seeks to examine the effect of these structural reforms following the Enron case in the UK industry.
Aims and Objectives of the Study
Following a wave of accounting scandals at Enron, WorldCom, Tyco, just to name a few in the last several years, this study is aimed at looking at how effective the responses to these scandals have been in reducing the scandals in future. Amongst other objectives, the main objective of the paper will be to investigate the ethical regulations passed after the Enron scandal, how the Sarbanese Oxley Act passed by congress on the 25th of July 2002 and promulgated by president George W, Bush into law on July 25th 2002 has been effective in mitigating these standards at a UK-based energy corporation with listing in the U.S. other objectives include:
- Analyzing the impact of the Enron scandal by reviewing relevant literature on the field;
- Determine what has been done to minimise this risk (regulations, discussions, separation of powers etc);
- Examine the regulation if any that were introduced since the Enron Ethical Standards and
- To determine whether auditors should be restricted from any other services apart from non-audit services which they engage with.
Outline of the Study
The rest of the paper is organized as follows: chapter 2 is a presentation of a theoretical framework and a literature review. Chapter 3 provides the research methodology implemented to achieve the objectives of the study. This chapter will utilize the case study approach to research and examine its merits and demerits. It will provide a presentation of information about the case study BP, such as the constituents of BPs board of directors, the independence of the board from executive management and how BP complies with the requirements of applicable sections of the Sarbanes Oxley Act, (SOX) of 2002; Chapter 4 presents a summary of the key findings, analysis and discussion of the findings as well as conclusions that can be drawn from the findings. This chapter also presents possible areas for further research.
- Literature Review
2.1 Theoretical Framework
Auditing is a process whereby financial statements of a company are being examined by qualified persons in order to establish and form an opinion whether the financial statements show a true and fair view and are free from material misstatements. It is also relevant to affirm if the financial statements are prepared in accordance to relevant accounting standards. An audit is carried out by a qualified person known as an auditor whose responsibility is to carry out the auditing process and form an opinion on the relevance of the financial statements and if they comply with accounting standards, the Generally Accepted Auditing Standards, (GAAP). Auditors are regulated by government bodies and other professional organizations such as the Securities and Exchange Commission, (SEC). According to Companies Act, 1985, not all companies should be audited. Small companies are generally exempt from being audited. The criteria below explain the requirements attained in order for a business to be liable for audit.
- i) Companies whose turnover is less than 5.6 million and whose statement of financial position holds a total of less than £2.8 million may be exempt from statutory audit, (Smullen et al, 2008)
- ii) Companies whose turnover is £1 million and whose statement of financial position total is less than £1.4 million do not require to be audited. (Smullen et al, 2008)
iii) Companies whose turnover is £1 million and whose statement of financial position total is £5.6 million are to be presented with an audit exemption report by their accountant. (Smullen et al, 2008)
In performing his duties an auditor’s independence is of prime importance. An auditor is required to uphold his independence in fact and judgment. An auditor’s independence is often defined as the situation where in carrying out his duties, an auditor must act with a free mind at all times and must not have any link or ties with the company. (Watts and Zimmerman; 1983, 1986).
An auditor performs a wide range of duties known as audit services. Audit services include examining internal controls, conducting substantive and analytical tests. Non- audit services generally refer to all other services which an auditor provides beyond their related audit services such as tax advisory, management consultancy amongst others to its clients other than the traditional audit framework. There is no certain classification structure in which non-audit services are classified; as such most researchers have utilized diverse classification of non-audit services while trying to evaluate the concept of non-audit services. Non audit services have been defined from many angles by various boards and institutions. The Auditing Practices Boards (APB) Ethical Standards defines non-audit services as any professional services which an audit firm provides to its clients apart from or in addition to the audit of its financial statements. (Auditing Practice Board, 2004). Purcell and Lifison (2003) defined non-audit services as traditional CPA works which includes assurance, investment assurance, commerce registration and accounting affairs. (Lifison et al,2003).
2.2 EMPIRICAL LITERATURE REVIEW
A number of studies have been made regarding the provision of non-audit services by auditors, the range of non-audit services they can provide, the fee they are entitled to receive for these services and how they manage to keep their independence when carrying out these services alongside their traditional audit services of their client. These studies were propagated as a result of the collapse of Enron in December 2001. Despite the evidence provided against the provision of non-audit services, cases like the Enron debacle which happened in 2001 are still evident. For example the global financial crisis serve as a test of the regulations and procedures put in place following the Enron debacle and other accounting scandals. The big question still remains as to whether auditors can remain independent while providing both audit and non-audit services. This section reviews theories which have been suggested by researchers since the collapse of Enron in 2001, how non-audit services have changed since then, how much non-audit fee measures up to audit fee and what regulations have been set up by the Board of Ethical Standard. Interesting studies emphasizing reforms to non-audit services after the Enron collapse can be examined thus.
According to Rezaee, academicians, regulators and the accounting profession in particular have in recent time paid attention to financial statements fraud (Rezaee, 2005: p277). In 2005, Carcello noted that there have been significant changes to the internal auditing following the accounting scandals at Enron and WorldCom, (Carcello et al., 2005). In a study by Carcello et al. (2005) using data from 271 mid-sized US publicly traded companies, their findings suggest that internal audit budgets and staffing levels increased significantly during this time. Using regression analysis, Carcello et al. (2005). provide further evidence of: (1) larger budget increases among smaller firms; (2) larger budget and staff increases in companies with greater financial resources (i.e., stronger operating cash flows) or with greater liquidity risk (i.e., lower current ratios); and (3) industry differences in the change in internal auditing, (Carcello et al, 2005: p.117).
With respect to the relationship between the fee for audit and non-audit services, valuable studies pertaining to non-audit services and its relationship with the audit fee have been widely researched. Simunic (1984) suggests that the clientele demand of audit services affects the provision of non-audit services by accounting firms on audit fee. Similarly, Abdel-khalik ( 1990) suggested that audit and non-audit fee are positively related. Barkess & Simnett (1994), and Firth (1997a) also indicate the significant direct relationship between audit fee and non-audit service fee.
In 2002, in response to the corporate scandals, the US congress headed by President George W. Bush passed the Sarbanes Oxley (SOX) Act, (Carcello et al, 2005). The SOX has brought significant changes in the corporate governance and financial reporting for public companies. The Sabarnese Oxley Act has also significantly improved internal controls of a company. (Carcello, 2005).
In addition, audit committees are now expected to be more independent and audit firms are expected to keep the provision of non-audit services to audit clients at a minimum level to ensure that they do not form strong bonds with the client that may in turn influence the auditor’s independence, (Chadha et al, 2005; Grant et al, 2007). As a result of the SOX implementation, an audit firm is not allowed to provide certain consulting services such as internal audit outsourcing and all other activities they provided in the past as they are perceived as illegal, (Chadha et al, 2005; Grant et al, 2007).
The SOX also created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of accounting firms. All accounting firms are required to be registered with this board, (Carcello e al, 2005; McCarthy et al 2005).
In addition to the rules, the U.S stock markets also responded to the corporate scandals by adopting additional set of rules for companies wishing to list their securities in the U.S. stock exchange market. For example, in November 2003 the New York Stock Exchange (NYSE) and the NASDAQ stock exchange issued a number of new regulations for companies that want to list in the exchange, (Chadha et al, 2005). The American Stock Exchange (AMEX) followed suit in December 2003 with similar rules, (Chadha et al, 2005).
Also, in response to the scandals, rules based accounting standards have been complemented with principles-based accounting standards. The FASB and the SEC in recognition of the fact that rules-based standards have a number of bright-lines decided to complement rules-based standards with principles based standards so as to reduce the loopholes that preparers of financial statements may use to manipulate investors, (Lee, 2003; Williams, 2005; Schipper, 2006). The Security and Exchange Community (SEC) prefers a move to using the principle – based system because it reckons that the principle based system allows for appropriate professional judgement, hence it is a more flexible approach. The Financial Accounting Standards Board, (FASB) has already developed a proposal for the principle-based approach to the US setting (Lee, 2003; Williams, 2005; Schipper, 2006).
Moreover, the International Accounting Standards Board, (IASB) as well as the Financial Accounting Standards Board (FASB) have been working towards a common conceptual framework and have been issuing new accounting standards reducing the bright-lines in the old standards so as to ensure that financial statements present fairly. (Epstein et al, 2007).
Accoding to Jain et al, 2006, they observed that companies who have higher limits of coverage and smaller premiums would be viewed by investors as possessing a higher quality of financial statements (Jain et al, 2006). Whereas, companies with little or no coverage as well as higher premiums would be considered by investors to possess a lower quality of financial statements, (Jain et al, 2006). This would instil discipline on each company’s management in that they would be motivated to avoid this characterization, (Jain et al, 2006).
A few studies have been carried out on how effective SOX and other responses to the accounting scandals could be effective in mitigating Enron-like type of scandals. In particular, the only study that the researcher came across was the study by Jain et al.2006, which investigated the trends and determinants of market liquidity before and after the implementation of the SOX. The study provides evidence that that liquidity measures declined as a result of the scandals, (Jain et al, 2006). They also provide evidence that liquidity measures witnessed an improvement following the implementation of the SOX Act in 2002, (Jain et al, 2006). Following these findings Jain et al., conclude that the improvements of market liquidity in the period after the SOX act was passed and implemented, positively correlates with the quality of financial results, firm size and market factors like price volatility, volume as well as microeconomic events such as the NYSE Open Book, (Jain et al, 2006). In addition to the above findings, Jain et al. also observe that the improvement in liquidity measures were more prominent in companies who complied more with the SOX act provisions and less prominent in companies which less complied with the provisions of the SOX. From the above literature one can fairly say that less attention on how the responses (in particular the SOX implementation) are effective in mitigating Enron-like accounting scandals in future. Much of the literature has been documenting the causes of, consequences of and responses to the scandal with little attention toward how effective these responses could be. Even the few (e.g., Jain et al., 2006) that were carried out were on companies that are based in the US with no attention to European-based companies that are listed in the US and therefore required to comply with SOX.
Another important response is the issuing of new accounting standards and compliance requirements by the IASB and the FASB as well as the move towards harmonization of IAS/ IFRS with U.S GAAP by the IASB and the FASB, (Sellani et al, 2005; Ding et al, 2005, Ausbaugh, 2001).
This study is aimed at breaching the literature gap by studying how auditing standards have since changed post Enron collapse in 2001. New audit regulations were provided for to govern audit practices. For example the SOX in particular have helped in mitigating financial statement fraud in a UK-based company that is required to comply with SOX. There has been increased debate on whether European-based companies too should comply with SOX. Studies regarding the auditor’s independence with regard to its fee from non- audit and audit services have been examined and have shown that the auditor is likely to rely on the non-audit service fees as such this will impair his independence in carrying out his audit services.
Chapter 3
Methodology
There are two main types of research methods which are often used independently to achieve the objectives of a paper, namely the inductive and deductive research methods. The inductive approach often referred to as the case study approach. It involves the collection of data and developing a theory from the data observed. (Saunders et al, 2003). The approach starts with collecting and observing data, then from these observations, patterns are derived from which a hypothesis is formulated and a theory purported. Individual perceptions are often involved with this approach. This approach deals with non-statistical and non-quantitative methods of inquiry, hence this method of research is known to be qualititative and more advantageous than the deductive method.
Unlike the inductive approach, the deductive approach works in the opposite direction, it begins with the theory of a concept and ends with a confirmation as to whether the theory is relevant or not. Several factors such as the sample of population, age, sex religion, income amongst others determine the outcome of the result obtained as to whether the theory is relevant or not. The deductive approach is often associated with quantitative methods, because it focuses on large samples, standardised measures, and highly structured interview instruments as a means of collecting data to test hypothesis. (Marlow, 1993). This study will make use of the inductive approach because the research proposal does not involve drawing up theories and examining them as proposed by the deductive approach. The project is best suited to the inductive approach in which the raw data can be condensed into a brief, summary format; from which clear links could be established between the evaluation or research objectives and the summary findings derived from the raw data; and a framework of the underlying structure of experiences or processes that are evident in the raw data can be developed, (Thomas, 2006). The general inductive approach provides an easily used and systematic set of procedures for analyzing qualitative data that can produce reliable and valid findings.
In line with the inductive approach discussed above and does so by adopting BP as a case study. A case study is a research design that entails the detailed and intensive analysis of a single case. (Bryman and Bell, 2007). It may be extended to include the study of just two or three cases for comparative. (Bryman and Bell, 2007). Another definition by Robson (1993: p. 40) is found in Saunders et al. (2000: p. 94) as follows:
“the development of a detailed, intensive knowledge about a single case, or a small number of related cases”.
The advantage of the case study approach is that it enables a researcher to gain a detailed understanding of the context of the research, as well as the process being enacted. It also enables a researcher to provide answers to why, what and how questions. (Saunders et al., 2000: p. 94). However, the case study approach is limited by the fact that it may be difficult to generalise results from one case to all cases. (Saunders et al., 2000). For example, the it may be difficult to generalise the results obtained from a study of non-audit services in the UK to other countries such as China and Japan given the differences in Corporate governance structures between these countries. Despite this limitation, it has been argued that a case study may enable a researcher explore an existing theory. (Saunders et al., 2000). In addition, a researcher can challenge an existing theory or paradigm and identify new hypotheses through the use of a well-developed case study. (Saunders et al., 2000). Based on this, using BP as a case study can provide insights into development of theory relating to the provision of non-audit services in the UK, which can be used as a starting point for future studies of non-audit services in other companies and countries. Information relating to the non-audit services about BP will be drawn from various sources, including its annual report and accounts, its SEC filings, Financial and auditing websites such as Google finance, yahoo finance and Bloomberg. Conclusions will be drawn based on the results obtained from the case study.
Chapter 4.
Overview of BP Plc
BP Plc was incorporated in 1909 in England and Wales as The British Petroleum Company Plc. Following a merger with the Amoco Corporation, it was hence known as BP Amoco Plc. Today it is simply known as BP Plc. BP Plc is a global group which operates through subsidiaries, joint ventures or associates in different countries in the world, as such the company is subject to varied laws of the countries in which it operates in.
Board of Directors of BP Plc
The board of directors of BP consists of 9 non-executive directors. The company considers efficiency and effectiveness of the non-executive directors to be of paramount importance, (BP Plc, 1996-2008). The increased number of non-executive directors is justified by the fact that a larger number of non-executive directors are necessary to staff the different board committees such as the Audit Committee for example, (BP Plc, 1996-2008). To be eligible for membership of the non-executive Board of BP, members must be totally independent. They must not have any relationship with the company’s executive management, because a relationship of any kind may influence the exercise of the Board’s judgments and decisions directly or indirectly, (BP Plc, 1996-2008). As per the Board, it is held that this condition is fulfilled, particularly with the non-executive board of 2006. To strengthen this rule, all non-executive board members have to be elected and endorsed at the AGMs, BP Plc, 1996-2008). In addition, the company’s board governance policies require that the chairman or the deputy chairman must not be an executive employee of the group. Some of these non-executive board members make up the nomination committee, which is usually chaired by the chairman, (BP Plc, 1996-2008). The role of this committee is to scrutinize or screen potential members to join the board as older ones age out and retire, (BP Plc, 1996-2008). To an extent, the board also considers the nomination committee as an independent body, (BP Plc, 1996-2008).
The Audit Committee.
The audit committee’s combined code requires the board of directors to establish a formal and transparent arrangement on the company’s relationship with their auditors, what internal control principles they must follow and how their financial reports should be presented (Smith, 2003). The code also requires the board of directors to set up an audit committee which consists of non-executive independent directors of at least 3 members ((BP Plc, 1996-2008). The audit committee (AC) is therefore delegated responsibility from the Board of Directors. The audit committee has a responsibility to ensure that the financial reports and accounts as well as financial processes reflect a high degree of objectivity and integrity. On behalf of the board, it also monitors the activities of the executive directors in relation to financial matters thereby ensuring that the interest of shareholders is maintained, (BP Plc, 2006). The audit committee meets regularly and at the end of each meeting an agenda for the next meeting is set, (BP Plc, 2006). During the meeting, a review of issues that relate to the group’s chief financial officer and its external auditors are reviewed, (BP Plc, 2006). The committee reserves the right to meet with the external auditors in the absence of the executive directors. In addition, it is free to seek external advice from independent consultants if it deems necessary. For example, in 2006, the committee received external specialist legal and regulatory advice from Sullivan & Cromwell LLP. The audit committee also reviews all annual and quarterly financial results before these results are issued to shareholders, (BP Plc, 2006).
Internal controls and risk management
The audit committee is also responsible for overseeing the internal control activities of the company. For example, in 2006, the committee performed a review on risks, controls and assurance on all business divisions of BP. Moreover, the audit committee reviewed the group’s long-term contractual agreements as well as the risk management approaches adopted for these agreements. In addition to its standing agenda items, the committee also discusses regulatory issues throughout the year. For example, in compliance with section 404 of the Sarbanes Oxley Act of 2002, the committee carries out a quarterly review of the group’s internal controls systems.
External Auditors: Change in Audit and Non-Audit fees.
The lead partner of the audit firm Ernst and Young attends all audit committee meetings as requested by the committee chairman. The audit committee is also expected to evaluate the suitability of external auditors in order to determine their level of objectivity, independence and integrity. In line with the independence objective, The provision of non-audit services have been limited to tax and audit-related work in order to achieve the objective of auditor independence, (BP Plc Annual Report and Accounts, 2006). The audit committee had to pre-approve any non-audit work and a quarterly monitoring of all non-audit services is performed is carried out. The proportion of non-audit and audit fees which BP pays its auditors has changed since the Enron scandal in 2001. According to Investor Responsibility Research Center (IRRC), corporate scandals and audit failures and such as the Enron scandal have affected the amounts which companies pay their auditors in 2001. Before the scandal, BP paid its auditors; Ernst and Young $83 million for its services rendered, $59 million of these was for non-audit services. The balance of $24 million accounted for audit services. Published results from the company four years after reflected a decline in audit fees which BP paid to Ernst and Young. Ernst and Young received total fees of $73million in 2006 and only 16% of this amount; approximately under $12 million was for non-audit services, (BP Plc Annual Report and Accounts, 2006). This can be explained Audit staff are also rotated regularly to ensure that objectivity and independence. For example, every after five years, a new head audit partner is appointed, staff are being rotated once in seven years at least. In addition to the independence objective, all staff including senior staff from Ernst and Young who had connections with BP audit could not be employed at BP, (BP Plc, 2006).
Relationship with the Internal Audit Function.
The role of the internal audit function at BP is to provide advice to the audit committee on the identifying and controlling the amount of risk the company can be exposed to. General auditor participates in discussions with the committee in matters relating to the framework and effectiveness of internal controls application. For example, the audit committee approved the internal audit department’s work that was to be undertaken in 2006. The committee was also satisfied that the proposed work plan responded appropriately to the key risks facing the company and the internal audit department had enough staff and resources to complete its work. Two written reports of its findings were made by the internal audit department to the audit committee in 2006 which contributed to the committee’s view on how effective the company’s system of internal controls had been formed as well as the basis of its recommendations to the board. Private meetings were also organized between the head of the internal audit (the BP general auditor), in the absence of executive directors, (BP Plc Annual Report and Accounts, 2006). The audit committee also evaluates the performance of the internal audit function. For example, a quarterly report from the internal audit on instances of fraud concerns relating to financial accounting of the company by the audit committee, (BP Plc Annual Report and Accounts, 2006). In addition to evaluating the performance of the internal audit function, the audit committee also evaluates its own performance. For example in 2006, the committee carried out a survey of its members and other individuals regularly attending committee meetings. The audit committee met a total of 12 times during the year 2006, (BP Plc Annual Report and Accounts 2006).
In addition to the above, BP has been in active compliance with the SEC rules relating to the provisions of the SOX. For example, the company has been in active compliance with section 906 of the SOX, which requires that the auditor must include in a written statement to accompany the Form 20-F for that the report prepare complies with the reporting requirements of the Exchange Act and that the report contains information which portrays the financial conditions and results of the operations of the issuer. This information provided must be exact and not a mere relation o a knowledge based standard. Mayer et al, 2002).
Following a statement provided by the CEO The Lord Browne of Madingley that the Annual Report on Form 20-F for the year ended December 31 2002 (the report) of the company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents in all material respects, the financial condition and results of operations of the company.
BP has also been in regular compliance with section 404 of the SOX – Management Assessment of Internal Controls, which mandates that the securities and exchange commission should prescribe rules requiring each annual report required by the SEC Act of 1934 (15 U.S.C. 78m or 780o (d)) to contain an internal control report. In addition, each public accounting firm auditing a company that is required to comply with SOX must evaluate the internal control of the company as well as prepare a report on the assessment made by the management of the company (Moeller, 2004).
4.1 Summary of Key Findings
The key findings in this study can be summarized as follows:
That the cause of the accounting scandals were as a result of bad management and weak internal controls; pressure on management to produce high earnings and good performance; investors’ irrational exuberance; continuous dependence of auditors on CEOs and CFOs for auditing contracts; failure on the part of accounting standard setters; failure of accounting education to train future accounting students as well as other business students on ethical issues related to accounting; equity-based compensation plans; and ignorance of applicable laws and regulations on the part of auditors.
That the scandals resulted in a reduction of big five accounting firms from five to four; significant decrease in stock prices; corporate bankruptcies; financial statement restatements; and huge financial losses on the part of investors, creditors, and employees.
That a number of stakeholders including regulatory bodies, Accounting Bodies and Governments responded to the scandals by passing new laws and regulations for example the passage of the SOX Act and the subsequent creation of the PCAOB; issuance of new accounting standards; switch from a completely rules-based accounting standards system to a mixed accounting systems made up of a blend of rules-based standards and principles-based standards;
-That BP Plc adopted international accounting standards in its 2005 financial statements retrospectively restating its financial statements in 2004 prepared in accordance with UK GAAP to reflect IFRS standards.
-That BP Plc complies with all applicable sections of the SOX.
4.2 Analysis of Findings.
The first finding relating to causes of the accounting standards indicate that if bad management, weak internal controls, dependence of auditors on CEOs and CFOs for auditing contracts equity-based compensation, etc, could be reduced, then such scandals can be avoided in future. In addition, if auditors could be more aware of applicable laws and regulations, then they would easily identify non-compliance or illegal acts on the part of the management and thus point this out as early as possible. Also if students could be trained properly on ethical issues, then they would act with more integrity, independence and skepticism when carrying out professional engagements in the future careers as accountants or auditors.
As concerns the consequences, it is obvious that these consequences would occur. It is evident that when a company is not performing well or if it is suffering from poor management, then it must be subjected to the discipline of corporate bankruptcies, takeovers, financial losses and a fall in stock prices.
Chapter 5
Conclusion and Recommendations.
5.1 Conclusion
Based on the findings above, one can conclude that the accounting scandals brought about significant changes in the accounting profession across the globe as well as changes in laws and regulations relating to the practice of accounting. One can also conclude that BP Plc complies with all the new applicable laws and regulations. This can be reflected in its adoption of IAS/IFRS in 2005 as well as its constant filings with the SEC in relation to relevant sections of the SOX Act. BP has also changed it corporate governance structure to be in compliance with the provisions of SOX. Non- For example, the non-executive directors are completely independent of the management and external auditors are not allowed to perform non-audit services above a certain limit as was the case with Anderson and Enron. In addition, non-executive directors are not allowed to provide consultancy, management advisory, or any other related services for a fee as this is expected to impair their independence as non-executive directors as well as reduce their ability to serve as watchdogs of the executive directors. The SOX Act as well as the adoption of IAS/IFRS has therefore improved internal control, management as well as Financial reporting at BP Plc and have therefore reduced the likelihood that such scandals can occur at BP Plc in future. For example, the Board of Directors of BP ensures that audit engagement teams are completely independent of the company. In addition, non-audit services are placed at a minimum and the head of the audit team as well as team members are rotated from time to time to ensure that they do not form strong bonds with the company, which may in turn impair their independence when expressing an opinion on the financial statements. All these are in compliance with SOX, which in turn go a long way to improve financial reporting producing financial results that are free from material misstatements that can collectively or individually affect users’ decisions on the financial results.
5.2 Recommendations
Despite the success of SOX and accounting standards to eliminate accounting fraud, full elimination of accounting scandals can only be achieved only to the extent that auditors, accountants, CEOs, CFOs, internal auditors, board of directors, internal auditors and employees are willing to act with integrity, professional skepticism, objectivity and independence. Minimum ethical requirements should be placed on accountants, CFOs, CEOs and other employees directly concerned with financial statement preparation. This paper also recommends that other companies in Europe should adopt the provisions of the SOX irrespective of whether they are listed in the US or not. The European Union should require EU listed companies to comply with SOX. This will go a long way to improve financial reporting in Europe as well as increase investors’ confidence in financial results.
5.3 Areas for Further Research
In the course of the study, Renon (2002) proposed financial statement insurance as a safeguard to financial statement fraud. A study investigating the feasibility of financial statement insurance is therefore desirable. In addition, this study focused only on one single company, another study investigating a handful of European companies is also necessary to better understand how SOX and other regulations have helped to mitigate financial statement fraud.
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