The article written by Cris Shore gives a comparison of audit failure and corruption and how it
relates to Mediterranean Patron-client relations. First, Patron-clientelism and corruption "were
traditionally viewed as problems endemic to underdeveloped marginal countries with weak states,
powerful self-serving elites, and widespread civil disengagement." It could also be described as "an
informal contractual relationship between persons of unequal status and power, which impose a
reciprocal obligation of a different kind on each of the parties." An example of these types of
relationships would be "entitled villagers, peasants, shepherds, and other lower status or
subordinate groups giving service and political support to their higher status patrons; which
included the likes of local mayors, landlords, priests, merchants, doctors and other members of
the local elite, in return for small favours, political protection, and support in dealings with the
world beyond their local community." d
Areas of corruption and audit failure are evident in the evolution of the Big Four. Before the Four,
eight accounting firms had risen to global prominence, referred to as the Big Eight. These included
the likes of Arthur Anderson, Arthur Young & Co, Coopers and Lybrand, Deloitte Haskins & Sells,
Ernst & Whinney, Peat Marwick Michell, Price Waterhouse, and Touche Ross. With scandals such
as Enron and WorldCom, prominent accounting firms were reduced to four. After the 2008 global
financial crisis, these institutions effectively increased their hold over international accounting, tax
preparation, bookkeeping, and payroll services. Over 80% of all public companies in Japan and
97% of all US public companies were audited within these entities. These establishments were also
ethically organized and dedicated to transparency and honesty; they were viewed as "watchdogs
for the corporate world." Unbeknown to the public, "they have been key players in establishing
the post-1970s hegemony and major beneficiaries of the financial financialisaton of the economy;
they have also become adept at bending the rules to advance their economic interests." They
established a new business model designed to make them more flexible and responsive to their
global clients in the financial market. They became more prone to risk-taking and fraud."
An example of this would be "one part of the company may audit a company's books while
another part advises the same client on strategies to avoid tax liabilities... In essence, creating
conflicts of interest." Price Waterhouse Cooper in 2014 was fined $25 million and "banned for two
years for consulting work to settle allegations that it had watered down an anti-money laundering
report for the Bank of Tokyo-Mitsubishi; in 2013, Deloitte agreed to a one-year suspension to
consulting for New York regulated banks and paid $10 million to settle allegations that the firm
mishandled its anti-money laundering works for our Standard Chartered." d d
The Mediterranean patron-client relationship parallels the actions of these significant accounting
firms in that both "became entangled in collusive relations and corruption of their own." During
turbulent years in rural Italy, wealthy landlords delegated power to local forepersons and armed
bodyguards to protect their estates and to guard against thieves and bandits. These groups, later
referred to as the Mafia, use their position of power to extort money from the parties they were
charged to protect. They also began to conspire with local criminals. d
Undoubtedly policies of deregulation, outsourcing, a marketization have profoundly contributed to
the contemporary corruption of financial institutions. Despite the growth of audit culture,
corruption and fraud appeared to increase, undermining states' regulatory role and producing new
opportunities for the predatory interests of financial capital. Government regulators are reluctant
to indict any of the Big Four for criminal actions for fear that another collapse would result in
further concentration of power and what would be the remaining "Big Three." The argument that
these firms are "too big to fail" and "too concentrated to indict" exacerbates moral hazard
behaviour and gives the Big Four a curious kind of legal immunity. As with the Mediterranean
patron-clientelism and corruption, the rise in accountancy scandals reflects a new political
economy of crime that involves significant financial industry actors- including banks, credit rating
agencies, and auditing firms- colluding with government officials and political elites. In both
examples, an "unhealthy close relationship" Between influential motive-driven individuals and the
government Is developing into its class power. d
After reading this article, I thought the current climb in the accounting field was in serious need of
review and overhaul. The standards, requirements, and regulations their auditors demand of
entities they service should also be required of themselves. With the advancement of technology
and global expansion where accounting rules vary, I agree with the author that financial
institutions, accounting firms, and big businesses can and do as they please Until their ultimate
implosion. And at that point, even with fines and potential prison sentences, the prominent
individuals affected and harmed are members of the public who trust them to provide accurate
and reliable financial information. As we have seen in cases of significant fraud, many shareholders
and investors have completely lost everything due to greed and corruption. And sadly, these
trends have not seemed to slow down; on the contrary; they are on the rise. Members of the
auditing world that uphold their independence and integrity must play catch up and frequently are
too late to prevent such atrocities, but they do their best to prevent them from continuing.
Combating fraud is an uphill battle that is continuing to evolve.
The current trend of increasing robotics (AI) in the accounting field. With the increase of
computers and information systems in an increasingly paperless age, it has become more and
more necessary and beneficial to implement automated systems. There are many benefits to
having an automated system in reference to auditing. It can assist in a quicker and more accurate
analyzation process as well as provide tools for evaluating and calculation real time ratios.
Some negative aspect about automating the Auditing field would be loss of jobs for people like me
:)
However, it can be augured that it is merely a tool for auditor to make their job easier. The
startup cost may be too great for smaller companies, but it would be financially beneficial in the
long run for companies that can afform to invest in the implementation of the systems. An
additional risk that I can see it the security risk involved. Addition security features would need to
be implemented to prevent fraud and unauthorized adjustments.
I personally have always been a paper backup kind of person, however with all the benefits of
utilizing an automated system I believe that it would make an auditor’s job easier, more accurate
and efficient.
I decided to investigate an audit failure. I pulled my selected article from the Shapiro Library. The
full citation can be found below.
This failure was the responsibility of KPMG, one of the Big Four accounting firms. As a result,
KPMG had to pay a settlement of $6.2 million. This was due to their failure to properly audit the
financial statements of Miller Energy Resources. According to the SEC, Miller Energy Resources
grossly overstated some oil and gas assets by $400 million in prior years, and that fraud was
completely undetected by KPMG. This allowed for the company to have major growth in the
market and appear to be performing much better than their competitors. (Cohn, 2017) This type
of fraud, of course, hurts investors greatly, which is why the SEC imposes heavy fines for fraud and
negligence. KPMG accepted the valuation of the asset (land) without conducting further steps to
verify its existence and accuracy.
To avoid this audit failure, KPMG could have easily conducted research into the company and the
industry before accepting them as a client. The audit team clearly did not understand how oil and
gas land accounting works. Further, they did not do their due diligence as auditors and verify the
existence of assets. It is interesting to me to see land valued so highly, at such a great year over
year increase, and the auditing team did not think to investigate how much land the company
owned. Had they did, they would have detected the vast overstatement and fraud. Their failure to
do so made them complicit, which is why they were ordered by the SEC to pay a large fine. KPMG
also had to agree to improve their quality control system. Surely, KPMG is now more careful about
which clients they accept, as well as verifying vast claimed acreages of land and other assets as
part of future audits.
My opinion on the current climate of auditing is that auditors must be more vigilant than ever.
There are countless ways to commit fraud, given all the advanced systems and technology that we
have today. Further, given the current economic client, I am sure fraud risk is at a high for many
companies. At the company I work for, fraud from economical pressure has been a risk that has
been raised into the top tier. While advances in software are great for auditing, it is important to
note that others can learn about our software and how to manipulate them. I have been an
auditor for about a year now, so I do not have that much experience under my belt yet, but I have
learned that, in this environment, it is best to keep your head on a swivel.
References
Cohn, M. (August 15, 2017). KPMG to pay $6.2M to settle audit failure charges. Accounting Today.
Retrieved from https://bi-gale-
com.ezproxy.snhu.edu/global/article/GALE%7CA500646961?u=nhc_main&sid=ebsco
Ashoka, M. L., N., A., & M. S., D. (2019). Emerging Trends in Accounting: An Analysis of Impact of
Robotics in Accounting, Reporting and Auditing of Business and Financial Information.
International Journal of Business Analytics & Intelligence (IJBAI), 7(2), 28–34.
https://eds-p-ebscohost-com.ezproxy.snhu.edu/eds/pdfviewer/pdfviewer?vid=4&sid=58c1bfa4-
ceca-4377-b5fe-3e3ee92172d9%40redis
https://ezproxy.snhu.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=sih&
AN=150765706&site=eds-live&scope=site
Messier, W. Glover, S. Prawitt, D. (2019). Auditing & Assurance Services: A Systematic d d d Approach
11th Edition. McGraw Hill Education.
Shore, C. (2021). Audit failure and corporate corruption: Why Mediterranean patron-client
relations are relevant for understanding the work of international accountancy firms. Focal, 90, 91–
105. https://doi-org.ezproxy.snhu.edu/10.3167/fcl.2020.072004
