Role of External Audit Quality in the Reduction of Financial Statements Manipulation

Introduction

External auditing is the review of financial accounts by an external party to provide an opinion of their validity in relation to the organization financial position. The external auditors play an important role in the review of the internal controls of the banks that could affect the financial accounts and the audit ensures that they are working as intended. External auditors operate independently which makes their review trustworthy to external parties (Al-Khaddash, Al Nawas, & Ramadan, 2013). Banks security is a matter of public interest in the Jordanian economy because of their impact on the economy. Poor auditing and manipulation of statements can lead to an economic crisis. External auditing is a measure that is used to create public trust in the financial institutions (Ahmad & Alrabba, 2017). External auditing of banks ensures that banks operate in compliance with the set financial rules that govern financial banks operations and reporting (Al-Khaddash et al., 2013). The credibility created by external auditors helps banks to maintain a positive public image which helps in promoting investors trust in the economy. This paper will assess the role of external audit quality in the reduction of financial statements manipulation in Jordanian commercial banks.

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Research Hypothesis

If the quality of external audit is high, the manipulation of financial statements in Jordanian commercial banks decreases.

Minor Hypothesis

1. If the external auditor has independence, the manipulation of financial statements is reduced.
2. If there is high professionalism amongst external auditors, financial statement manipulation declined.
3. If the regulations and laws are followed, financial statement manipulation is overcome.

Research Questions

1. What is the role of external audit quality in reducing financial accounts manipulation by commercial banks?
2. What is the role of government regulations in improving external audit quality?
3. What are the responsibilities of auditors in ensuring quality audit and detection of financial accounts manipulation?
4. How does auditor's independence and professionalism affect external audit quality?
5. Which regulations are in place to promote external audit quality in Jordan?

Research Significance

The quality of external audit reports in the Jordanian economy is very important due to the important role that banks play in the economy in defining the monetary policy. The growing competition amongst the commercial banks in Jordan and other parts of the world necessitates high-quality audit reports especially for managers who seek to improve their bank public standing and trust. The quality of external audit should be investigated to assess its role in improving banks to improve their internal auditing controls. Practical experience and activities in external audit aimed at improving the quality of external audit reports can help in reducing the manipulation of financial statements by banks with the aim of postulating a better image in the eyes of the government, lenders and the general public using the banks.

Literature Review

Factor Affecting External Auditing

Some elements such as the size of the firm, uniqueness of the services provided by the company band the cost required by the audit provider are some of the considerations when deciding to retain an auditor (Alabede, 2012). The auditor has to be paid the appropriate wages which they feel they are not being oppressed. Also, the uniqueness of the services offered by the firm enables in maintaining the clients who need access to the service. Besides, the firm benefits from the excellent profit which is gained from the services offered to the customer. More so, the compatibility existing between the firm and auditor enables them to determine how they will meet the goals and objectives of the firm.

Furthermore, the size of the audit firm determines the fine it receives from outside auditors. Fine increases with an increase in the audit size due to the addition of experiences and knowledge in the field. The global businesses require the significant assets which are offered by large auditors. For example, the assets offered are the high number of employees, availability, and knowledge needed to run the firms. Consequently, a significant audit is required by the big firms to facilitate in carrying out the activities of the review. It is not necessary for the smaller organizations to employ the large firms to carry out the audit.

It is also essential to consider the reputation of the auditor when one is making decisions concerning which auditor would be retained in a firm. Associating with the auditor enables one to improve the engagement they have with the auditor thus ensuring they make appropriate decisions. Besides, some of the audit firms create an understanding which allows them to cater for the audit activities. Agyemang & Castellini (2015) stated that the efficiency of the audit could also be affected by the audit firm which results from not communicating the breach seen in the audit feature.

More so, the distinctiveness of the organization leads to provision of quality audit task. Also, the quality is brought by some motives which are professional expertise, advanced technology of the audit and the reduction in the charges facilitated by the decrease in scale. Fake reporting in the organization is also detected by the number of years during which the review has worked with them. The risks which result from the retention and auditors choice are mitigated by ensuring the auditor is chosen depending on the organizations' references and recommendations.

Principles for External Auditors

External auditors have to respond appropriately to the dangers which are posed by the misstatement which exists in the financial organizations. More so the audit committee requires to have procedures which will enable them to appoint, reappoint and to approve the external auditors (Daniels & Booker, 2011). Besides, the committee which is set for recruiting the external auditors needs to assess how independent are the external auditors. Additionally, the committee has to verify and display the outside audit effectiveness.

On the other hand, the external auditor has to record the subjects that are of importance to the supervisor. The organization usually have conversations between the audit firm, banking supervisory authority and the accounting department on the issues and the challenges which exist in the financial institution. Consequently, when sharing the records with the external auditors, the authority and the internal audit have to ensure that there is confidentiality by the outside auditors (Turlea et al., 2010).

The external auditor also tends to have detailed verbal communication with the audit committee which enables them to perform their duties. The conversation also ensures the external auditor to [provide some vital information which they use to carry out their oversight responsibilities. More so, external auditors give the facts which apply to conduct the statutory duties in the financial institutions.

Role of External Auditors

The auditors are needed to heed to the moral standards which are internationally recognized. Additionally, externals auditors of the financial institutions have to observe the rules in this organizations due to the risks and complexities which are present in the banks. More so, these auditors have to use their specialized knowledge and other expertise when doing the audit to the financial organizations. The standards of the review have to be maintained during the process of auditing thus ensuring the provision of quality services (Desai et al., 2011). Further, the rules enable the auditor to do the work according to the timeline set by the financial institutions thus making them not to have additional payments.Further, these auditors have to conform to the international standards of auditing thus enabling them to assess the capabilities, objectivity and the competence of professionals in the financial organizations. More so, doing this also facilitates them to determine how reliable the records of the professionals are. Moreover, the audit committee ensures the external auditors comply with the standards for public hobby entities thus ensuring they observe the rules of morals in the banks (Rossouw et al., 2010).

The outside auditor has to re-correct the management biases which exists in the financial organizations and inform the charged with governance in this organizations. The external audit has to put into documentation the evidence attained from the review conducted and make it understandable to the target group. The literature has to demonstrate the reasons as to why, how and what conclusions were derived by the external auditor (Elmaleh, 2008). Moreover, the audit documentation provides minimum requirements during the previous audits which have been conducted.

Additionally, the external auditors ensure the financial institutions are free from fraud. More so, the effort of the outside auditor is seen when they respond through documentation to the problem of the employer and the internal audit functions caused by the mistakes and the planned misstatements in the organizations. Additionally their role increases in the capitalist systems where the wealth introduction and the political stability relies on the confidence in accountability of the way the roles have been fulfilled (Stirbu et al., 2009). Besides, this action leads to an increase in the expectation gap between the public and the audit on how well have the objectives been met.

According to Malkawi (2008), the earnings in the financial institutions are managed in several ways. For example, the tended profits are incorporated in the currents earnings, and the non-recurring gains are accounted for through recurring. The external auditors are involved in checking what resulted in the errors in this financial institutions. Additionally, the managers take advantage of the mistakes thus being able to make extra income from the organization. The error result to manipulation of the earning thus leading to the collapse of the financial institutions.

Discussions

External Audit Quality in Jordanian Commercial Banks

External audit is amongst the most important processes in any financial institutions of a country due to its ability to increase the reliability of the accounting information. External auditing is able to achieve its goals through the use of controls in reviewing a bank's financial statements. Every external audit objective is to contribute towards creating an opinion on the financial statements (Al-Khaddash et al., 2013). The quality of external audit activities in Jordan depends on the independence of the auditor and the objectivity which determine the trust and confidence that is derived from the external audit results.

The quality of the external audit in Jordan banks is influenced by many factors both internal and external. The regulatory environment is an important aspect that can affect the quality of the external audit of a bank's financial statements (Ahmad & Alrabba, 2017). The commitment of the external auditor towards professionalism has a significant impact on the overall quality of the external audit results. Lastly, the independence of the external auditor can play a significant role in the quality of the audit results (Nawaiseh, 2016). It is essential for the financial institutions to provide the external auditor with all the necessary records and assistance throughout the auditing process and also to maintain neutrality and give the auditing organization independence.

The ext...