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1.The responsibility of either an individual or department to perform a specific function in accounting.

An auditor reviewing a company͛s financial statement is responsible and legally liable for any
misstatements or instances of fraud. Accountability forces an accountant to be careful and
knowledgeable in their professional practices, as even negligence can cause them to be legally
responsible.

  
 
 

Individual or departmental responsibility to perform a certain function. Accountability may be dictated

or implied by law, regulation, or agreement. For example, an auditor will be held accountable to
financial statement users relying on the audited financial statements for failure to uncover corporate
fraud because of negligence in applying Generally Accepted Auditing Standards GAAS) .

  

 

Framework for justifying management organizational actions, whether they are financial or
employment-related. Ajunior manager is accountable to a senior manager for the completion of an
organizational program by a particular date and within budget guidelines.

Accountability is one of those principles of business that is an important foundation of organizational

culture but is easily shrugged off as a buzz-word. Ask someone in your organization to define
accountability, and you may hear any number of answers, from "I don't know" to "following the rules."
You might even see some eyes roll.

 
 

Accountability is rarely explicitly defined, whether for the organization as a whole, or for the
departments and teams that work within them. While a well-designed performance management
system may hint at the underlying accountability philosophy, rarely does an organization define the daily
act of accountability, even for its leadership team for whom it is most important.

What is accountability?

A quick search at Dictionary.com reveals the following definition: "ac·count·a·bil·i·ty [uh-koun-tuh-bil-i-

tee]: the state of being accountable, liable, or answerable." Certainly, it is an obvious answer to the
question, but it does not shed much light on what it means for people in organizations to be
accountable.Intuitively, everyone has a sense of what accountability means to them. A warehouse clerk
is accountable for accurate parts inventory every month. A human resources director is accountable for
ensuring the company heeds employment laws. A CEO is accountable for business results. For each of
these examples, the word "accountable" could be replaced by "responsible." Each person is responsible
for achieving a result.
Yet, accountability means more than responsibility. There is a sense that other people are involved. The
same CEO is accountable to shareholders. The warehouse clerk is accountable to his manager. The
human resources director is accountable to the employees. Accountability requires that someone has a
stake in whether or not the desired result is achieved. In fact, the person who is responsible for the
result also must have a stake in achieving the outcome. There must be a consequence - positive or
negative - based on whether or not the outcome is achieved. The basic definition of accountability, then
is: Accountability is a promise to yourself and others to deliver specific, defined results, with
consequences.

Accountable for what?

Accountability starts with an outcome, a result that needs to be accomplished. It is important to

distinguish between responsibility for activities and accountability for results. Micro-managers define
the activities that are expected and then hold employees responsible for performing those activities.
However, accountability for results requires room for judgment and decision-making. Someone can't be
accountable for an end result if someone else tells him what to do and how to do it. Ultimately, it is the
end result that forms the expectation upon which accountability is based.

Who is accountable?

Next, assign who holds the responsibility for the result. Ultimately, accountability is not shared. A
manager who has taken on responsibility for a result may delegate that responsibility to an employee,
however the manager does not give up the accountability for that result, nor does she truly share the
accountability with that employee, since they are accountable to different people.

Accountable to whom?

Everyone is accountable first to himself. The result must be achieved within the scope of one's own
personal values, ethics and abilities. Identify the party or parties who have a stake in the outcome. If
there is more than one stakeholder, determine if the expected outcomes are the same. If the
expectations are different, then an agreement should be made between the stakeholders on how those
outcomes are related.

What are the consequences?

Accountability is meaningless without consequences, positive or negative. The concept of holding

someone accountable comes in here. If someone accomplishes the results they promised to achieve,
then he should be recognized for that. If someone misses his target, then he should at best not receive
the recognition, and at worst he should be penalized. It is important to define the consequence up front.
Accountability is not conditional. Accepting unconditional responsibility means there are no excuses and
no one to blame, even if events are beyond one's control. Also, accountability for results means
activities are not enough. It is not enough to execute activities perfectly if the desired outcome is not
achieved. If people receive the expected reward for trying hard, then accountability will not work. If the
organization wants to reward risk-taking or trying hard, then it should be done outside of the original
accountability agreement.

How accountability is assigned and followed up in your organization defines how results-oriented your
organization is. Explicitly defining accountability and setting clear guidelines for holding people
accountable can go a long way toward achieving results.

c


 

 


1. Audit quality is viewed as one ofthe important factors that affectthe credibility offinancial
statements (Arrunada, 2004). Users are more likely to demonstrate high level ofconfidence on the
information presented in the financial statements if the audit of thefinancial statements is
perceived to be of high quality. Assessment on audit quality of auditfirms ensures that an audit firm͛s
processes are systematic and effective (Brinkley, 2006).

Auditing the auditors through external evaluations is becominga driving force ofcontinuous
improvement for the profession (Brinkley, 2006). To compete successfully in this environment, audit
firms must continually strive to improve audit quality and hence,maximize client satisfaction.

Recent development concerning audit quality control by International Federation

ofAccountant (IFAC) has required audit firms to comply with the International Standards on Quality
Control (ISQC 1). Malaysian Institute of Accountant (MIA) has, in July 2006,adopted ISQC 1
as part of the approved standard of auditing in Malaysia. In essence, ISQC1 focuses on thequality of
audit performed by the audit firms andthey are expected tocomply with the standard.
Nevertheless, evidence showed that the implementation to ofISQC 1 is rather limited in
Malaysian small and medium audit firms (Omar & Johari,2007). Small and medium audit
firms tend to operate based on non-standard operatingprocedures, which essentially does not
reflect total compliance with ISQC 1.

2. DeAngelo (1981) defines audit quality as the market-assessed joint probability that a given auditor
will both detect material misstatements in the client͛s financial statements and report the material
misstatements. This is a definition of perceived audit quality since DeAngelo (1981) emphasizes the role
of the market in assessing audit quality. The willingness to report discovered material misstatements is
defined by DeAngelo (1981) as auditor independence. Therefore, according to DeAngelo͛s (1981)
definition, audit quality is a function of the auditor͛s ability to detect material misstatements (auditor
competence) and auditor independence. Since actual audit quality is unobservable before and when an
audit is performed, a valid proxy is needed when investigating the relationships between actual audit
quality and other factors. DeAngelo (1981) analytically demonstrates that auditor size has a positive
relationship with audit quality, since a large audit firm has ͞more to lose͟ by failing to report a
discovered material misstatement in a client͛s records. Following DeAngelo͛s study, many other studies
empirically examine the relationship between auditor size and audit quality (e.g., Krishnan and Schauer,
2000; Colbert and Murray, 1998; and Palmrose, 1988).

3. What is audit quality?

Auditors, shareholders, directors and regulators may be in agreement on the desirability of audit quality
but each may have a different meaning of the term. The definition or measurement of audit quality has
been the subject of much research, consultation and debate on an international scale. Audit is not a
commodity and each audit will to some degree be tailored to address the circumstances of individual
clients. Audit is not an exact science and relies on professional judgment in reaching conclusions and
making decisions before expressing an opinion.

Audit quality is not defined in auditing standards. Standards guide auditors on what to do in an audit
and compliance with standards will indicate that an audit has been carried out to acceptable levels of
quality. In the standards in use now, two specifically address quality ʹ HKSQC 1, which addresses quality
control procedures across the whole audit firm and HKSA 220, which focuses on quality control in the
context of individual audit engagements.

Many factors contribute to or influence the quality of audit, and chief among them are the skills and
experience of the people doing the audit. Another is the rigour of the audit methodology. The balance
may vary from audit to audit. In February 2008 the United Kingdom Financial Reporting Council (UKFRC),
following extensive international consultation and drawing on earlier work by the auditing profession,
published ͞The Audit Quality Framework͟ to help communication between auditors, audit committees,
preparers, investors and other stakeholders on audit quality. This publication identified five elements of
audit quality, which have generally been accepted internationally as the key influences on audit quality
and have been used in further consultation and discussion by bodies such as IOSCO.


 


  


 

 

1. The various changes in accounting, financial reporting and auditing were all designed to provide
protection to investors. This is being achieved by imposing a duty of accountability upon
the managers of a company (Crowther and Jatana, 2005). In essence, auditing is used to provide the
needed assurance for investors when relying on audited financial statements. More precisely, the role of
auditing is to reduce information asymmetry on accounting numbers, and to minimize the
residual loss resulting from managers͛ opportunism in financial reporting. Effective and
perceived qualities (usually designated as apparent quality) are necessary for auditing to produce
beneficial effects as a monitoring device. The perceived audit quality by financial statements users is at
least as important as the effective audit quality. Conceptually, DeAngelo (1981) defined
audit quality as the market-assessed joint probability that the auditor discovers an anomaly in the
financial statements, and reveals it.

Agency theory recognizes auditing as one of the main monitoring mechanisms to regulate conflicts of
interest and cut agency costs. Therefore, assuming a contracting equilibrium in the monitoring policy, a
change in the intensity of agency conflicts should similarly involve a change in the acceptable quality of
auditing.


  !

 

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Audit quality is always a hot problem in the auditing field. A high-quality audit has an obvious effect on
ensuring information disclosure quality of listed companies and improving the allocation efficiency of
the capital market. But due to the characteristics of auditing industry, the phenomenon of low-quality
auditing and the͞conspiracy͟between auditors and listed companies frequently arise in practice. For
example, in Enron event which shaking the whole world, Andersen CPA firm in a long time had
concealed the deficit fact for Enron and destroyed an amount of relevant auditing materials when the
truth was revealed. Henceforth, the World Com Group, global dispatch and Xerox etc.,͞Big Five͟CPA
firms also had been involved in more and more financial scandals. In homeland, from the͞old three
fraud cases͟, the͞new three fraud cases͟to Lantian, Yi-an, Qinfeng agriculture and KeLon etc., the
financial scandals of listed companies have been exposed. At the same time we always could find a
conspirator, CPA firm, under the shadow. Similar to scandals floating out, fraud cases in the listed
companies also show the conspiracy between regulating institutions and companies. These financial
scandals in which auditors had been involved appeared one after another, making audit quality
problems become more noticeable.It is not accidental that a series of financial scandals happened in
domestic and abroad, and the problems bringing out are quite more, of which the most serious problem
is the inefficient regulation on auditing industry. So it becomes an issue both in theory and in practice
that how to reinforce the government regulation in auditing industry to improve the audit quality. This
dissertation studies audit quality just from this viewpoint, and the research approach is as follows:
Firstly, based on analyzing the failure of auditing market, the author systematically analyzes the function
mechanism of government regulation to improve audit quality in theory using regulation economics and
government regulation theory and so on. Secondly, after analyzing three kinds of auditing regulation
patterns and their suitable conditions, the author concludes that the regulation pattern in our country
should "mainly focus on government regulation with supplementary of industry discipline", and deeply
analyses the defects existing in our regulation system. Thirdly, taking the penalty notices announced by
China Securities Regulatory Commission to auditors as samples, the author investigates the factors
influencing audit quality from the government regulation, and examines the effects of government
regulation to improve audit quality from governmental rules and punishment. Finally, in view of the
results, the author proposes some strategic suggestions.This dissertation is composed of eight chapters,
and the main contents of each chapter are as the following.Chapter one is an introduction, leading out
the research subject, re-defining the concepts of audit quality and government regulation, and
indicating the research approach and structure. In this chapter, the author divides influencing factors of
audit quality into direct and indirect factors at two levels. As an indirect factor, government regulation
improves audit quality through affecting auditors or corporate governance factors. However, in the
direct factors, in addition to professional competence and independence, the author adds due care as
the third factor which directly affects the audit quality.Chapter two is literature review. In this chapter,
the author systematically reviews the empirical documents on audit quality, and classifies the existing
literatures on the government regulation and audit quality into two categories: one is about taking the
regulation results as a measure of audit quality, the other is about analyzing the effect of government
regulation on audit quality. The former mainly examines the factors affecting audit quality just by taking
lawsuit or punishment as a result of poor audit, and the latter mainly tests the effectiveness of
regulatory policies in China's securities market and statistically analyzes the penalty notices.Chapter
three is the theoretical analysis on government regulation and audit quality improvement. The purpose
of this chapter is to provide a theoretical framework for the theme of this study. First of all, the author
reveals the nature of auditing is͞control͟by applying the theory of accountability, and concludes that
high audit quality plays a necessary guarantee for achieving the audit function of value-added. Then, the
author analyzes the influence of the current engage model on audit quality and concludes the factors
resulting in the failure of audit market: insufficient demand for high-quality and low-quality audit
services. After that, associating with the regulation economics and evaluating them, the author
concludes that the public interest theory could preferably provide a theoretical basis for China's
regulation in audit market. At last, the author analyses the function mechanism of government
regulation to improve the audit quality in details. Chapter four is a discussion of China's auditing
regulation pattern and current situation. In this chapter, after analyzing and evaluating the current three
auditing regulation patterns, the author points out China's current auditing regulation pattern. Then, in
accordance with the regulation practice of main bodies in China, the author indicates the problems
existing in the current regulation system which lays hints for the following empirical studies. Chapter
five is an empirical analysis on factors affecting the audit quality from the government regulatory
perspective. This chapter takes the penalty notices announced by China Securities Regulatory
Commission from 2002 to 2006 as the research samples to examine whether the primary factor which
affects the China͛s audit quality is professional competence or independence. The result shows that
independence is the chief reason for low quality audit. Chapter six mentions the establishment of
government rules and audit quality improvement with the mandatory rotation of auditors as an
example. According to the conclusion of chapter 5, the author selects the mandatory rotation of
auditors as an example to test the government rules͛effect on improving audit quality from the pre-
regulatory perspective. The results indicate that the rule of CPA mandatory rotation does not reach the
expected purpose. In mandatory rotation, the firms change plays a better role on the improvement of
audit quality than the rotation of CPA does. However in voluntary changes, when audit opinion in last
year was qualified, the rotation of CPA plays a better role on the improvement of audit quality than the
firms change does, but the conclusion is contrary when audit opinion in last year was
unqualified.Chapter seven is an empirical discussion of the government punishment and audit quality
improvement. Following chapter 6, this chapter from the post-regulatory perspective to test the
government punishment͛effect on improving audit quality. The results indicate that China's government
regulation can identify the poor audit quality in a certain extent. But due to the constraints of regulatory
power and force, it diminishes the efficiency of government regulation to improve the audit quality.
Specifically, auditors only in negative earnings management group improve audit quality by reducing the
surplus space after being punished.Chapter eight gives policy recommendations on strengthening
government regulation and improving the audit quality. On the basis of summarizing the main
conclusions of this paper, the author proposes some corresponding policy recommendations from
strengthening regulation for improving audit quality, and points out the limitations of this study and the
directions of future research.There are several innovations in this dissertation.Firstly, the anthor
comprehensively and systematically studies the relationship between government regulation and audit
quality improvement from the government regulatory perspective in this dissertation. She not only
clarifies the function mechanism of government regulation to improve the audit quality in theory and
establishes the important status of government regulation in policy arrangement of independent
auditing, but also obtains some valuable empirical evidences by using the method of empirical research
to test the effect of government regulation on improving audit quality.Secondly, this dissertation
develops the analysis approach on the factors affecting audit quality, and divides them into direct and
indirect factors at two levels. In direct influencing factors, in DeAngelo͛s view on audit quality that
professional competence and independence are two influencing factors of audit quality, the author adds
due care as the third factor according to analysis of penalty notices announced by China Securities
Regulatory Commission. In indirect factors, such as company, government regulation and other factors,
the author considers government regulation is one of the most important factors which will influence
audit quality through direct or indirect factors.Thirdly, this dissertation amends and innovates the
indicators of audit quality and the model. On testing what influence audit quality, the author uses the
punishments of China Securities Regulatory Commission made to auditors as the indicator for audit
quality, which better associates the government regulation with the audit quality. Furthermore, this
dissertation innovates the Lennox model by introducing the ͞mandatory rotation ͞variable to test the
effect of mandatory rotation of auditors in improving audit quality.

  
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Debates on corporate governance are numerous and diverse. This study explores the role of the auditor
in the context of corporate governance and researches on elements that might impact the audit
process. The findings of the study are that auditor independence and professional judgement are key
elements for reaching professionalism in financial audit. In turn, corporate governance is positively
influenced by audit professionalism.

1. INTRODUCTION

There is a variety of academic contributions on the topic of corporate governance. This concept is dealt
with from an array of perspectives: narrow and broad perspectives (Solomon, 2010), managerial
perspectives (Huse, 2007), but also finance, legal and compliance perspectives. Here, corporate
governance is understood as the way a company is directed and controlled, and, as Sison (2008) notes,
as "he system of checks and balances, both internal and external to companies, which ensure that
companies discharge their accountability to all their stakeholders [...]". One of these accountability
mechanisms is financial audit. This type of external auditing has been previously researched in
connection with ethics and professionalism. The present paper builds upon the existing research and has
the purpose to explore the relationship between auditor independence, professional judgment and
professionalism in the context of corporate governance.

2. RESEARCH DESIGN

The research methodology is analytical and argumentative in nature: first, the concept and mechanisms
of corporate governance are discussed; second, the auditor's role is analyzed and arguments in favor of
the existence of interdependencies between external auditors, internal auditors and audit committee
are brought; third, the main pressures exerted on the financial auditor are analyzed, with reference to
auditor independence; and last but not least, authors argue there is a strong relationship between
auditor independence, professional judgement and professionalism on one hand and corporate
governance on the other hand. Thus, the paper has the structure of an argumentative essay, whereas all
arguments converge to the main concluding idea.

3. CORPORATE GOVERNANCE

Generally, corporate governance represents a set of relationships between the entity's management, its
shareholders and other stakeholders. From the perspective of agency theory, the owners of the
resources (entity's shareholders) play the role of principles, who entrust their resources to the entity's
managers (agents), for them to manage those resources and create added value. In order to ensure an
honest, efficient and effective administration of resources, the entity's shareholders, in particular and all
stakeholders, in general, establish a group of mechanisms that build up the governance system.Mainly,
these corporate governance mechanisms are: the board, the audit committee, the internal audit
function and the external audit.

4. FINANCIAL AUDITOR'S ROLE

The auditor's explicit role is to issue an opinion on the financial statements of an economic entity. He
concludes on whether they present fairly, in all material respects, the financial position and
performance of the audited company. The auditor's implicit role, on the other hand, is to offer
credibility to the financial statements. This need for trust belongs to investors and other stakeholders
due to the fact that the preparation of the financial statements is the responsibility of the managers
entrusted with financial resources. These managers might be tempted to pursue their own interests and
not those of the company's shareholders. Thus, from the perspective of agency theory, auditor's role is
of monitoring and bonding in the contract between agent (manager) and principle (investor). Auditor's
work reduces the information asymmetries between shareholders and managers, who cannot be
directly controlled.

However, financial audit cannot fulfill its role without interacting with other corporate governance
mechanisms, among which the most relevant are the internal audit function and the audit committee.
On one hand, internal auditors support financial auditor's work in several ways. First, they can enable
external auditors a better understanding of the internal control system. Second, they may assist in
choosing a sample to be tested and in sending confirmation letters to debtors and banks. On the other
hand, the audit committee has the task to monitor the activity of the financial auditor. It is essential for
the auditor and the audit committee to communicate in an accurate and timely manner. Additionally,
the audit committee monitors an important professional trait of the auditor: independence.

5. AUDITOR INDEPENDENCE AND PRESSURES

Audit and auditor's work are intrinsically linked to the concept of accountability. It is generally accepted
that one of the more important roles of an audit is that of monitoring and securing accountability. In
fact, this is why audit is so important, mainly because it is a critical element in achieving accountability.
However, a central point of audit and accountability is that of independence. The argument is that
credibility can only be associated with persons seen to be independent of both the subject of the audit
and of any interested stakeholders. Therefore, auditor independence clearly adds value to the financial
statements by transforming them from unaudited information to credible information. In view of the
importance of auditor independence, research done by scholars has identified possible areas of conflict
between different groups of stakeholders. It suggested that, where conflict existed, pressures affecting
auditor independence might arise. Therefore, the pressures the financial auditor must deal with are
numerous. On one hand, the auditor-auditee contract leads to pressures related to the time budget, the
negotiated fee or the existing competition (Arnold et al., 2001, pp. 326).

First, time pressures originate in the limited time resources allocated to performing certain tasks during
audit engagements (Liyanarachchi and McNamara, 2007, pp. 62). Second, fee pressure acts in two
different ways: (1) stimulated by the high level of fees, auditors may exert increased effort in the
auditing work and thus they can offer higher quality audit services; (2) fees can create the appearance of
an economic dependency on the client. Last but not least, auditors face competition-driven pressures.
The client company may refuse their services, and chose another supplier of audit services (Mocanu,
2009, pp. 12).

Factors of pressure on the financial auditor are also generated within the social contract. The interest of
the profession and its members is to maintain their self-regulatory powers, and to offer at the same
time an accepted level of audit quality. For accomplishing this interest, the profession issues new
standards, improves the existing ones and revises entrance requirements (Arnold et al., 2001, pp. 326).
The auditor is thus pressured to constantly adapt to such regulatory changes.

Ideally, both contracts can be satisfied by the financial auditor, to the content of all participants within
the audit environment. For that purpose, the financial auditor ought to identify a solution that meets
both the social contract and the auditor-auditee contracts (Arnold et al., 2001). Identifying this solution
is not possible without exerting professional judgment and has no value without maintaining the
independence of the financial auditor, in spite of all pressures.

6. AUDITOR'S PROFESSIONAL JUDGMENT

The financial auditor, as a professional in accounting and audit, adds credibility to the financial
statements. Throughout his work, during the audit process, the auditor uses an element which is central
and critical for its entire activity: professional judgment. Professional judgment in auditing is the
application of relevant knowledge and experience in reaching decisions, within the context provided by
auditing and accounting standards and rules of professional conduct. Professional judgment is the
cornerstone for the audit profession and is applied in all stages of an audit, from planning stage to the
audit opinion. Professional judgment is an integral part of audit and cannot be dissociated from it. In
audit, there is a direct relationship between professional judgment and the financial auditor's
professionalism.

7. PROFESSIONALISM AND ITS RELATIONSHIP TO AUDITOR'S PROFESSIONAL JUDGEMENT

Professionalism in audit can be identified with specialists that represent complex behavioral models,
persons with a spirit of duty and accountability. Among the many characteristics of a professional there
is creative thinking, critical analysis, attentiveness, elevated language, relentlessness and a fine overall
equilibrium. But above all these there is the professional judgment which is part of every profession's
definition. There is a close relationship between professional judgment and professionalism because
professional judgment is present in every decision that an auditor takes during an audit and that has
direct implications on the quality of the audit. In turn, the quality of the audit determines the level of
professionalism but it has to be recognized that professional standards also play a prominent role. The
quality of professional standards will definitely impact the professional judgment of the auditor and
both will impact the quality of the audit work.

The professional judgment exercised by the auditor in the course of an audit together with the quality of
the audit work will, consequently, impact the level of audit professionalism. Professional judgment takes
place in the context of professional standards that reflect the collective judgments of the profession and
the characteristics of a particular industrial sector. Hence, the critical importance of professional
judgment in audit appears as evident.

The absence of comprehensive professional judgment affects the financial auditor's professionalism and
leads to a lower audit quality, to a negative impact on the process of corporate governance and to an
increase in auditors' exposure to liability claims.

8. CONCLUSIONS

Corporate governance is an internationally debated interdisciplinary concept. Given the main directions
which corporate governance covers, particularly directors, remuneration, accountability and audit as
well as relations with shareholders, auditors play an increasingly important role within corporate
governance.

The results of the present study are: (1) the clear identification of the roles of financial audit in relation
with other corporate governance mechanisms such as internal audit and audit committee; (2) the
significance of independence for the proper fulfilment of the auditor's roles, given the numerous factors
of pressures on the auditor; (3) the arguing of the critical importance of professional judgement in the
audit work; (4) the fact that auditor independence and professional judgement are key elements for
reaching professionalism in financial audit; (5) the positive impact of audit professionalism on the
process of corporate governance.
This study has certain limitations: it is mostly an argumentative and analytical work representing
research at an incipient level and only provides a basis for the hypothesis development in a future
empirical research. In fact, the research could be extended by conducting empirical studies on: how are
the financial auditor's role and professionalism perceived by internal auditors, audit committee and
board of directors and which are the factors that influence auditor's professionalism. Such further
research would consolidate this paper's idea that financial audit is a significant corporate governance
mechanism.