Audit risk is the susceptibility to issuing unqualified opinion where a qualified one suffices and vice versa. Whereas unqualified audit opinion approves financial statement as fully representation of material facts, a qualified opinion draws attention to specific issues needing requiring further interrogation because they were not adequately dealt with in the audit. A qualified report gives the auditor the opportunity to expose incidences of fraud in a company’s financial accounting records, and failure to do so either knowingly or unknowingly could attract hefty fines or even imprisonment. It is for this reason that auditors and audit firms are increasingly finding the need to deploy remedial measures such as audit insurance subscriptions.
Therefore, although the auditor’s objective is always to provide the true position of financial statements, there are occasions when professional liabilities can become inevitable. Omission crucial audit procedures or commission of misleading errors, whether knowingly or unknowingly, can be catastrophic to the ethical and integrity standing of auditors. In fact, auditors and audit firms experience unforgiving business environment due to corporate failures attributable to fraudulent financial reporting.
What was the impact of Past Trend Setting Events?
In 2001 and 2002 the world witnessed collapse of Enron Corp and WorldCom as a result of financial reporting scandals. According to an online news article published at The New York Times website on July 22, 2002, WorldCom overstated its earnings by fraudulently understating expenses amounting to $3.8 billion. Enron’s was similarly a case of fraudulent overstatement of profits to in a scandal that was designed to mislead the stockholders, creditors and other stakeholders of the company. The other common denominator is that senior officials of both companies repeatedly colluded with their respective auditors for several years to secure favorable declarations (qualified opinions) for their annual financial reports.
These unfortunate events would go on to shape the principles of corporate governance as companies were required to demonstrate greater transparency in financial reporting. It was for this that auditors and auditing firms were not spared either by reviews of corporate governance regulations. Auditors now experience the risk of breaching professional codes of conduct, especially when they fail to blow the whistle over issues of fraud in financial accounts of client companies.
Why Deploy Insurance as a Mitigation Measure?
Audit risks pose challenges for both internal and external auditors. As such, it is always wise for auditors and audit firms to secure audit insurance subscriptions as contingency measures against unforeseen professional liabilities that might arise from auditing processes. Just as an audit firm would be collectively culpable to erroneous auditing, an auditor equally bears individual culpability to audit risks.
Enron’s collapse best illustrates the significance of insuring audit programs against liabilities. For instance, the firm that Enron had hired to audit its books of accounts, Arthur Andersen Auditors, fell into disgrace soon after Enron’s demise due to a chain of court petitions that were filed against it and its auditors. Such unfortunate outcomes of audit-related frauds show just how important an audit insurance could be in cushioning auditors from job losses and financial obligations of lawsuits. Such mitigation measures also help auditors build self confidence when performing their duties.