Sample ACCY962 Auditing and Risk Assurance Assignment

ACCY962 Auditing and Risk Assurance Assignment Sample

Assignment Brief

Weighting: 20%
Length: 2,000 words ± 10% (excluding references and appendices)

The individual assignment aims to give you an understanding of real life auditing issues and an appreciation of the link between theory and practice. It further aims to foster your research, critical analysis and communication skills.

Your Essay Should Cover The Following:

The Wirecard collapse in Germany raised several issues with regard to accounting and auditing. Discuss three audit issues that arose during the Wirecard collapse. Refer to APES 110 in your answer.

Students must reference at least 5 academic journals for assignment help (and 5 or more newspaper or professional accounting magazine articles), and any applicable audit or ethical codes or standard(s). Students should also identify any other standards or references to the Code of Ethics for Professional Accountants, which should have enabled the auditor(s) to identify and address the problems in the Wirecard Audit. Less than 10 references will be considered insufficient.

Style and Format

• This assignment requires the student to complete an academic style essay (not report). Students can find the difference between essay/report here: link https://www.uow.edu.au/student/support-services/learning-development/resources/#d.en.5810

• This assessment task must be word processed, in size 12 Times New Roman font
using double-line spacing with a left margin of 2cm.

• The Faculty of Business uses the Harvard method of referencing. The library website
also provides useful information on how to correctly use referencing and citing:
https://uow.libguides.com/refcite/uowharvard

Assessment Submission

This assessment task has been set up to be checked by Turnitin, a tool for checking if it has unreferenced content. You can submit your assessment task to Turnitin prior to the due date and Turnitin will give you an originality report. You can then make any changes that may be required and re-submit your final version by the due date.

Solution

APES 110 Code of Ethics for Professional Accountants is a set of rules and regulations a professional auditor must comply with while auditing its client is based on the International Code of Ethics for Professional Accountants (including International Independence Standards) and the Final Pronouncement: Revisions to the Code Pertaining to the Offering and Accepting of Inducements of the International Ethics Standards Board for Accountants (IESBA), published by the International Federation of Accountants (IFAC) in April 2018 and July 2018 respectively, and is used with permission of IFAC (Apesb.org.au, 2022). In relation to APES and the violation of the code of ethics, a case of multi-billion fraud by Wirecard is addressed.

According to an article published by ABC News, the CEO of a prominent payments company Wirecard and two other ex-managers of the company was charged with fraud and false accounting, and it is believed that they had a significant role in the collapse of the company in 2021 (abcnews.go.com, 2022). The allegations raised by Germany's prosecutors stated that most of the company assets and its revenue were made up and presented in the company's financial statements. As mentioned in the article published by the Financial Times, 1.9billion euros were missing from Wirecard's accounts (ft.com, 2022). The article published by ABC News also stated that ex-CEO of Wirecard, Markus Braun, knowingly signed off on the false financial reports (abcnews.go.com, 2022). The prosecutors mentioned that Wirecard recorded false revenues attributed to several partnerships with international companies; the company used fake documents to show that the company had funds. Wirecard's former head of accounting and the managing director of a subsidiary company based in Dubai were also charged with fraud and false accounting. The banks were severely affected as the fraud cost them nearly 3.1 billion euros. The banks which provided funds for the company have to write off the loans (abcnews.go.com, 2022).

The first issue discussed is the Breach of Integrity. According to the Code of Ethics for Professional Accountants (including Independence Standards), section 100.1 A1 states that the accountancy profession is responsible for acting in the public interest (Apesb.org.au, 2022). The accounting professionals are not exclusively responsible for satisfying the requirements of the client or the organisation employing them. However, in the case of Wirecard, the organisation's members did not comply with the ethical code of APES 110 (Apesb.org.au, 2022). The members acted in the interest of the legal entity hence violating the code of ethics.

Under Subsection 111 - Integrity, R111.1 states that a member should comply with the principle of integrity (Apesb.org.au, 2022). This subsection necessitates the members to be direct, straightforward and honest in all sorts of business and professional relationships. However, this code was also violated by the CEO of Wirecard, Markus Braun and EY (Ernest &Young), the independent auditing firm (Ft.com, 2022). The independent auditor of Wirecard, Ernest &Young, has long speculated foul play by the company (Reuter.com, 2022). The auditing company decided to closely monitor Wirecard's payment settlements by partners in Asia. Upon scrutiny, it was discovered that the online merchants supposedly identified as Asian clients of Wirecard did not exist (Bloomberg.com, 2022). The executives of Wirecard carefully orchestrated the records to make the auditing firm believe that the payments were genuine and the partners in the Asian region were real. This is a direct violation of the APES 110 code of ethics. R111.2 under subsection 111 - Integrity states that a member should not be associated with having knowledge of returns, communications, reports or other information where they believe the information under clause (a) contains false or misleading financial statements, (b) contains information or statements presented carelessly (c) omission or obscuring necessary information which may mislead (Apesb.org.au, 2022). In this regard, Azim and Sharif (2021) stated that the member of Wirecard violated clause (a) of APES 110 code of ethics, as the CEO of the company knowingly signed off the financial statement, hence associating himself with the falsified financial statements.

Under subsection 111 - Integrity, 111.2 A1 states that presenting a reconciled financial report concerning a breach under R111.2 effectively disassociates the organisation's member from such breach of code. According to Apesb.org.au (2022), this violation could have been avoided if the CEO of Wirecard had provided a reconciled report with respect to the breach under R111.2. As Engelen (2021) mentioned, the CEO of Wirecard did not take such action and continued to present falsified statements and reports to the auditing firm and mislead them for nearly a decade. According to Krahnen and Langenbucher (2020), the APES 110 code of ethics has also laid down a provision under subsection 111 - Integrity; R111.3 allows the member of the organisation to take necessary steps to dissociate themselves when he or she becomes aware of a breach under R111.2 and is being associated with the event. As stated by Stadtmann and Croonenbroeck (2019), there were no such steps taken by the CEO and the executives of Wirecard; it implies that the CEO and the executives of the company were aware of the fraud, and this took place in their supervision and knowledge.

The second issue identified is the threat to compliance. A parliamentary investigation listed several incidents where Ernst & Young failed to take necessary steps to unearth the multi-billion euro fraud by Wirecard. According to the article published by Bloomberg, the documents and reports presented to Ernst & Young by Wirecard executives were either verbally or written statements. The documents were not substantiated by neutral third parties such as foreign banks. The auditing firm came under severe criticism for auditing Wirecard, and a criminal lawsuit was filed against the auditing firm. The article published by Bloomberg also stated that Ernst & Young was the sole auditor of Wirecard until the company's collapse; the auditing company defended itself by stating that they were a victim of an elaborate fraud.

APES 110, Section 120, subsection 120.1 states that certain circumstances in which a member functions might threaten compliance with the stated fundamental principles of ethics (Apesb.org.au, 2022). Under section 120, subsection 120.2, the conceptual framework has mentioned the approach for a member under clause (a) that to identify threats to compliance with the fundamental principles, clause (b) states the evaluation of threats identified, and clause (c) focuses on addressing the threat by mitigating or decreasing it to an Acceptable Level. Apesb.org.au (2022) has also stated that section 120 has set out the requirements and application material along with incorporating the conceptual framework to aid members in compliance with the fundamental principles and adhering to their responsibilities to act in the interest of the public. These requirements and application materials consist of an elaborate set of facts and situations along with several Professional Activities, relationships and interests. These may create scenarios where the threat may arise to comply with the fundamental principles. They also prevent Members from deciding that a scenario is permissible just because the code does not explicitly prohibit it.

In light of the conceptual framework of APES 110, Section 120 and the case of Wirecard, it can be said that Ernst & Young did not adhere to the fundamental principle. There could be several reasons for the auditing firm not adhering to the laid out fundamental principle of APES 110. As mentioned by Stadtmann and Croonenbroeck (2019), one fine example is when Ernst & Young conducted an Anti-Fraud investigation called Project Ring in 2016. The investigation conducted by the auditing firm discovered several accounting issues in the books of Wirecard. According to Fortune (2022), the auditing firm came across nearly 20 issues in their books. However, according to Azimand and Sharif (2021), Ernst & Young still signed off the financial report based on late replies from Wirecard's board, and Ernst & Young certified the 2016 financial statements without following up to get written verification. As stated by Voss (2020), to a certain extent, this action of Ernst & Young implies that the auditing firm might have been in some kind of threat which prevented the firm from complying with the fundamental principles of the audit and accounting code.

Subsection R120.9 re-evaluates and addresses threats that have been removed or lowered to an acceptable level if new information or modifications in facts and circumstances are discovered. Therefore, Ernst & Young, at the time of discovering the threat, could have taken the necessary steps to lower it to an Acceptable Level (Apesb.org.au, 2022).

The third issue which was discovered was the non-compliance with law and regulations. As per section 360(1), auditors of Wirecard are required to comply with fundamental auditing and accounting principles. It is the auditor's responsibility to apply the framework conceptually, which is identified in section 120. This framework helps auditors to identify and evaluate threats. Section 360(2) defines that Ernst & Young is unaware of the non-compliance of law and regulation of auditing standards (Apesb.org.au, 2022). Because awareness of non-compliance creates integrity and professional behaviour, which helps to protect the public interest from threats. Ernst & Young does not maintain suspected non-compliance-related laws and regulations during auditing in Wirecard. Section 360(3) defines awareness of non-compliance to help the auditor assess the matter's implication (Apesb.org.au, 2022). It also helps to assess possible courses of action where auditors should make an activity-related chart for their auditing team.

During auditing in Wirecard, every member of the team should follow the chart to complete the audit. As per section 360 sub-section 3 clauses (a), law and regulation help disclose Wirecard's financial statement items and help determine material amounts. Clause (b) defines other laws and regulations not directly related to the Wirecard financial statement to determine material amount and disclosure (Apesb.org.au, 2022).

Other laws and regulations affect the operating aspect of a business. Other laws and regulations affect business and avoid Wirecard incurred material penalties related to expenditure. In the given case, auditors do not respond to suspected non-compliance and non-compliance. Due to this, the public interest is affected (Jo et al. 2021).

Auditors should maintain integrity and professional behaviour; auditors are required to communicate those matters that affect the financial statement of Wirecard. In the given case, auditors are required to communicate cash transactions if auditors find any deficiency between the cash book and bank statement (Nyreröd et al. 2021). The auditor does not communicate this material transaction to the appropriate authority or those charged with governance of Wirecard, or it also happens that the auditor communicates material transactions, but the appropriate authority refuses to rectify the transaction. It is also the auditor's responsibility to give an adverse opinion or disclaimer of opinion in their auditor's report (Jo et al. 2021).

The auditor omitted this section in their opinion. Management and those charged with governance of Wirecard are also responsible for seeing whether client business is conducted in accordance with law and regulation. Management is also responsible for assessing and identifying NOCLAR for any individual who is working under the client's direction, a member of management, any individual who is charged with Wirecard governance and any member of management (Nyreröd et al. 2021). Wirecard fines and other consequences depend upon NOCLAR. It also affects the financial statement of Wirecard. NOCLAR also harms potential investors such as creditors, investors, the general public and employees. Due to non-compliance with law and regulation in the case of NOCLAR, Wirecard collapsed and was bankrupted. And it harms creditors, investors, the general public and employees (Jo et al. 2021).

According to Ft.com (2022), priority is given to the investigation of Wirecard's ex-executive by Munich prosecutors. No one has been charged as a result of either inquiry. Former CEO Braun, who is in judicial custody, denies any involvement or awareness of involvement in the payments business he formerly ran. Although Ernst & Young had some unexpected help from inside the company, it was still a difficult situation for the company. Some employees at the organisation were ecstatic when they learned that Wirecard was a scam in June 2020. People acquainted with the scene said that a senior Ernst and Young partner ecstatically exclaimed, "We nailed them." It is still unclear why Ernst & Young was unable to "nail" the Wirecard scam sooner.

References

Jo, H., Hsu, A., Llanos-Popolizio, R. and Vergara-Vega, J., 2021. Corporate governance and financial fraud of Wirecard. European Journal of Business and Management Research, 6(2), pp.96-106. Nyreröd, T. and Spagnolo, G., (2021). Surprised by Wirecard? Enablers of Corporate Wrongdoing in Europe. Enablers of Corporate Wrongdoing in Europe (April 9, 2021). https://www.econstor.eu/bitstream/10419/249249/1/hasite0054-1.pdf

Apesb.org.au, (2022). [online] Available at: <https://apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Code_Nov_2018.pdf> [Accessed 6 July 2022].
Ft.com, (2022). EY and Wirecard: anatomy of a flawed audit. [online] Available at: <https://www.ft.com/content/bcadbdcb-5cd7-487e-afdd-1e926831e9b7> [Accessed 6 July 2022].

Abcnews.go.com, (2022). German prosecutors charge 3 with fraud in Wirecard collapse. [online] ABC News. Available at: <https://abcnews.go.com/International/wireStory/german-prosecutors-charge-fraud-wirecard-collapse-83432812#:~:text=Wirecard%20grew%20rapidly%20and%20wound,a%20trial%20can%20be%20held> [Accessed 6 July 2022].

Reuter.com, (2022). [online] Available at: <https://www.reuters.com/article/us-wirecard-accounting-stock-report-idINKBN1WU14K> [Accessed 6 July 2022].

Bloomberg.com, (2022). Bloomberg - Are you a robot?. [online] Available at: <https://www.bloomberg.com/news/articles/2021-04-17/ey-s-wirecard-audits-faulted-by-german-parliament-investigator#xj4y7vzkg> [Accessed 6 July 2022].

Wsj.com, (2022). [online] Available at: <https://www.wsj.com/articles/wirecard-scandal-puts-spotlight-on-auditor-ernst-young-11593286933> [Accessed 6 July 2022].

Fortune, (2022). If Wirecard's auditors had done this one thing, they might have uncovered a $2 billion fraud years sooner. [online] Available at: <https://fortune.com/2020/06/30/ey-wirecard-fraud-2-billion-euros-auditing-auditors/> [Accessed 6 July 2022].

Stadtmann, G. and Croonenbroeck, C., (2019). The ups and downs of Wirecard AG: An application of the reversed news model (No. 414). Discussion Paper. https://www.econstor.eu/handle/10419/204840

Krahnen, J.P. and Langenbucher, K., (2020). The Wirecard lessons: A reform proposal for the supervision of securities markets in Europe (No. 88). SAFE Policy Letter. https://www.econstor.eu/handle/10419/222230

Engelen, K.C., (2021). Germany's Wirecard Scandal. The International Economy, 35(1), pp.9-12. http://www.international-economy.com/TIE_W21_EngelenLetter.pdf
Voss, D., (2020). What the Wirecard scandal reveals about the state of German financial supervision. LSE European Politics and Policy (EUROPP) blog. http://eprints.lse.ac.uk/107683/

Azim, M. and Sharif, M.J., (2021). IMPACTS OF EARNINGS MANAGEMENT ON CORPORATE FAILURE: A CASE STUDY OF WIRECARD. International Journal of Accounting & Finance Review, 8(1), pp.37-49. http://cribfb.com/journal/index.php/ijafr/article/view/1411