Wal-Mart Stores, Inc. is a retail corporation with is headquarters in the United States with numerous branches in many countries all over the world. Among the products available at Walmart are household goods, groceries, clothing and beauty products and electronics as well as automobiles. It also offers services such as online marketing, money cards and delivery of goods. This paper will look at Walmart’s forms 10-K and DEF 14A for the fiscal year 2015.
Roles and objectives of internal and external auditors
Walmart has both internal and external auditors who are under the supervision of the Audit Committee. External auditors for the company for the fiscal year 2015 were Ernst and Young LLP. Internal auditors play an important role in reviewing and determining the efficiency and effectiveness of the internal control system. Internal auditing is meant to ensure that the company’s operations utilize the available resources and systems appropriately. External auditors on the other hand ensure that the interests of the investors and the public are well protected by providing independent and reliable third party information about a given company’s financial position. They look at the company’s compliance with regulatory bodies; accordingly advising the companies to do so if they have not. They review the company’s financial statements and form opinions about the company’s position and write a report about the same to interested parties (Drury, 2012).
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As stated by Porter, et al (2014), the objectives of auditors include:
Examining the documents and systems to establish validity and authenticity of the financial statements based on accuracy of calculations, costing and balancing.
Checking and confirming the true value of the existing assets and liabilities and establishing the transactional distinction of capital and revenue.
Establishing, confirming and consequently advising the companies on the fulfillment of the statutory requirements and verifying the true financial position of the company as stated in its financial and income statements.
Provide for a means of detecting and preventing errors such as: errors of omission, commission, principle and compensating errors that may arise as a result of carelessness or lack of adequate knowledge by the employees.
They establish misconduct such as misappropriation of goods and finances and undervaluation or overvaluation of products that may lead to false reporting especially in cases where company’s plan to evade taxation or depict success.
Types and assessment of audit and Internal control risks
According to Singleton and Singleton (2010), there are five types of audits that may be performed in a company. They include: financial, compliance, operational, investigative and information system audits. Financial audits deal with recording and reporting of accounting matters which include financial transactions for the fiscal year in question. It also looks at the appropriateness in the use of finances such as during compensations. Compliance audits look at the level at which the companies follow and implement policies and procedures as required by federal and state governments and regulatory bodies. The company’s management provides all required information to help in evaluating its compliance to regulations over time. Operational audits look at the utilization of resources within the company to fulfill its goals and objectives. Investigative audits are performed when a company is alleged to have violated the requirements stated by government policies and regulations. Such allegations may include corruption and theft cases and if proven true may lead to severe implications to the company. Information system audits are reviews of the information control system such as use of computers within the company. It looks at the system’s storage and processing vital data and its security due to probable access and manipulation of the data. Auditors are entitled to accessing vital company information so as to be able to make informed opinions about the company’s position. Among the types of audits carried out by Ernst and Young LLP (EY) for Walmart are financial, compliance, operational and information system audits. They formed an opinion on the same and submitted the report to relevant authorities (SEC, 2015b)
Internal control risk is one of the five components of the COSO framework and it is defined as a risk that may prevent the achievement of the company’s objectives by making the internal control system ineffective and inefficient. They are either operational or compliance risks. Operational risk involves the unexpected failure of the company operations resulting from personnel or process problems and may halt operations for some time. An example of personnel failures includes the inability of the employees to perform crucial tasks as required by the organization. On the other hand, compliance risk involves risks that result from the company’s non-compliance with the government laws and requirements (Drury, 2012). For example, the failure of the company to file its returns with the body charged with taxation. According to the report by EY, the internal control system has catered for all possible risks and there was minimum chance they there arose any risk for the fiscal year 2015 (SEC, 2015b).
Ethical standards in auditing and the implications of unethical behavior
According the Financial Reporting Council (2016), there are a number of ethical requirements that should be followed fully by the company, failure to which penalties are issued. Ethical standards seek to ensure that companies carry out their operations and report on the same with integrity, objectivity, independence, competence and confidentiality; aspects that are required of auditors as well. Firms and companies are required to ensure integrity is adhered to in day to day operations, filing compliance forms, summarizing financial statements and utilization of the internal systems so as to provide a clear and true pictorial reflections of the company’s position at all times. The auditors need to access all relevant data form the departments and use it appropriately to make opinions and inform the public and investors of the real picture of the company. Walmart and EY followed the ethical standards as required by PCAOB and COSO thus acting within the law. The reports and audits submitted are based on work done with high levels of integrity, independence and competence (SEC, 2015b).
Oseni (2011), states that there are several types of unethical behavior which include monetary gratification, sexual harassment of auditors by the female staff, sale of employment (corruption), poor storage of financial records, and employment of unqualified or semi qualified personnel leading to incompetence. He also describes the reasons why companies may engage in unethical behavior. They are: greed and self-gain motives by the company managerial staff or the auditor, desire to post positive performance by the company, fear of losing jobs in cases of internal audit, conflict of interest by the between the auditor and the company and inadequate evaluation of the reports by the auditors and thus false reporting. There are a number of implications related to unethical behaviors that may have adverse effects on the company. The company may lose a lot of money on legal cases, the company loses reputation and potential customers, the firm may be penalized causing financial problems and at times, operational licenses may be revoked and certain outlets closed down. To the auditors, they risk losing their practicing licenses, incurring heavy fines, jail terms and loss of credibility in the field of accounting and finance. To avoid all these, the company needs to avoid engaging in unethical behavior and look to fulfilling all which are required of them in day to day activities.
Lately, Walmart has been under investigation for corruption allegations in Mexico and face legal proceedings including consumer, employment and other implications. If the allegations are proved to be true, the company may face serious financial and reputational consequences (SEC, 2015a)
Internal control system
Internal control in auditing refers to the process of enhancing efficiency and effectiveness, reliability of financial statements and compliance with regulations and policies so as to achieve the goals and objectives of the firm. The firm management lays down the procedures for setting up a functional control system. The role of Internal Control System is to identify and try to prevent asset losses risks that may result from inaccurate information and problems that may arise with non-compliance with the law. In auditing, the internal control system is assessed to determine if the control design is appropriate, if the design is implemented by employees in the company and its effectiveness. Auditing provides establishes shortcomings and even provides information for future improvements (Drury, 2012).
Today, the advancement of technology has enabled use of computer systems and techniques in auditing by automating the process. This has helped in auditing large volumes of data to determine problems. The process reviews all aspects of the company as opposed to the traditional auditing where a person just looked at a few samples and made a conclusion about the firm. With automated systems, the auditor just has to extract the data from the software and test it to determine efficiency and effectiveness for the period reviewed. The use of automated techniques ensures independence as it cannot be manipulated easily. The information is already in storage so there is no need for manual storage saving on time and space. The software can be used to perform statistical analyses with the information thus making it easy to reach conclusions with all items taken care of (Porter, et al, 2014). Walmart has implemented an effective control system by embracing a controlled computerized system to capture, update and store data and share information when need be. This has made it easier for auditors to perform their duties.
GAAS, GAAP, PCAOB, and COSO requirements for audits
Generally Accepted Auditing Standards (GAAS) are ten standards stated in section 150 of AU which are used to determine the quality of audits, states PCAOB (2016). In total they are ten standards broken into general standards, fieldwork standards and reporting standards of which auditors should meet if their work is to be rendered credible. The auditor must remain independent mentally at all times when performing and audit, they should have adequate competence and knowledge about auditing and must practice professional care to perform the audits and writing of reports about the same. The auditor must as well include in their reports inadequacies, disclosures and compliance practices by the company in recording and reporting financial statements. They also have to understand the company’s environment, plan the audit and supervise their assistants, if any. They have to access adequate information from the firm so as to make informed opinions about the company’s position as stated by the Board of Management.
Generally Accepted Accounting Principles (GAAP) are standard guidelines that accountants follow in recording, reporting and preparing financial statement summaries for given time periods. The information provided needs to be relevant and honest; it should be verifiable, provided on time and easily understood. There are five elements that are usually included in financial statements namely: assets, liabilities, equity, revenues and expenses. Companies and auditors are required to provide statements on the elements in their reports (PCAOB, 2016). The Public Company Accounting Oversight Board (PCAOB) and Committee of Sponsoring Organizations (COSO) are corporations that oversee public company audits to help enhance transparency and protect the investor’s interests and the public at large and help in combating fraudulent behavior by public companies. It is required that the independent auditors perform their work with independence, proficiency and document the audit reports accordingly (PCAOB, 2016). COSO focuses on business ethics, internal control, enterprise risk management and financial reporting.
As reported in DEF 14A at the Securities and Exchange Commission, EY auditors and Walmart followed the requirements by the above bodies in their operations, assessment, reporting and formulation of summaries and thus complied with the regulations and policies (SEC, 2015b).
Wal-Mart’s audit Committee members
The audit committee for Wal-Mart is usually made up of at least three independent persons who are appointed by the Board of Management annually. For the fiscal year 2015; ending January 31, 2016, the committee was made of four members namely: Timothy P. Flynn (Chairperson), James I. Cash, Jr., Pamela J. Craig and Tom Horton. During the immediate past fiscal year, the audit committee held 15 meetings; nearly half of which were to do with the FCPA-related investigations (SEC, 2015b).
Functions of the audit committee
Primarily, the function of the committee is reviewing and examining records, systems and activities to establish compliance with set policies and procedures. Resulting findings may be used to help make decisions on changes that impact future operation. The members of the committee use data provided by: the organization, its leadership and previous and present audits. The committee is also tasked with the preparation of the Audit reports as a requirement by the Security and Exchange Commission (SEC) which are then included in the annual reports filed by the company. The committee is also mandated with appointing, retaining and firing of External Auditors; who report directly to the commission. It also reviews and evaluates work done by external auditors and settles the disagreements between External Auditors and management over financing issues. It enhances the integrity of the audit process within Wal-Mart. It also pre-approves services which are provided by External Auditors (SEC, 2015b).
Other than the basic functions of the committee, there are other specific functions that they perform within the company. Financial Statement and Disclosure - Review and discuss with management about the need to have internal and external auditors and when it is necessary for companies to file statements with SEC. Oversight of the Company’s Relationship with the Outside Auditors – This is done by reviewing the eligibility of the external auditors as well as reviewing the reports made by them. Oversight of the Company’s Internal Audit Function – involves ensuring the company has an effective and functioning internal audit system. The committee evaluates the work and reports by the internal audit department to establish its functionality. Compliance Oversight Responsibilities – the committee works closely with the management and the external department to determine if the companies are operating within the recommendations by the government and other regulatory bodies (SEC, 2015b).
Composition of the Audit Committee
Wal-Mart’s auditing committee fulfills both requirements for age and gender and the vast knowledge in the field of auditing. Timothy P. Flynn (Chair), James I. Cash, Jr., Pamela J. Craig and Tom Horton have for years worked in the accounting field and were cleared by the Board of Directors as Financial Experts in fulfillment of regulation S-K of SEC. Previously they worked with other firms and hence are deemed to be conversant with issues to do with auditing. They are independent people since it is the policy of Wal-Mart that the Audit Committee is made up of people who can make independent mental decisions without interference from the company’s management or even bias due to given reasons.
Audit Committee Report
In the report by the committee, Ernst and Young LLP’s independence and efficiency was scrutinized and approved by the committee as required by the law. This led to the choice of Ernst and Young LLP as the company’s independent auditors for the next fiscal year, 2016. The decision was based on the longevity of the firm’s services to Wal-Mart and the stability associated with using the same firm for the next year. The scrutiny and engagement of Ernst and Young LLP by the Audit Committee helped in determining determine the firm’s independence and thus clear any doubts about biases that may rise with the firm’s actions and reports. The firm has been reliable for over forty decades providing quality services at affordable prices. As reported by the Audit Committee, Ernst and Young LLP remained independent of any interference from the firm’s management.
Wal-Mart’s independent accountant firm
Wal-Mart’s independent registered public accounting firm for the fiscal year 2015 was Ernst & Young LLP. Ernst and Young LLP has been Wal-Mart’s accountants for the past 45 years; 1970-2015. It reported the Wal-Mart’s consolidated financial statement for the fiscal year 2015. There is a proposal that the same firm remains as the external accountant for Wal-Mart.
Services provided by Ernst and Young Firm
The firm audited the financial statements for the company to determine their relevance and validity as reported by the Board of Management. Ernst and Young LLP also looked at the effectiveness of internal control system, reviewed the company’s compliance when reporting on form 10-K and registration statements at Securities and Exchange Commission. It also audited the benefit plans for employees within the company, use of GAAP recommended transactions and compliance with Sarbanes-Oxley obligations. The firm also advised on matters of taxation; both domestically and internationally as well as related services such as appeals and audits.
Fees paid to this Ernst and Young by type of service provided.
In fiscal year 2015, Wal-Mart paid slightly over $20 million to Ernst and Young LLP firm for the services the firm rendered during the fiscal year. The payments are broken down into audit, audit related, taxation and all other fees as shown below (SEC, 2015b).
Type of fee Amount paid
Audit Fees $ 17,977,000
Audit-Related Fees $ 1,300,000
Tax Fees $ 1,175,000
All Other Fees $ 26,000
Total Fees $ 20,478,000
Changes
Despite Ernst and Young LLP reporting that Wal-Mart acted within the regulations and complied with the policies as required, its form 10-K discusses allegations that the company engaged in fraudulent activities and is currently facing investigations which may result in adverse effects to the company (SEC, 2015a).
Ernst and Young LLP reports on internal control and consolidated financial statements
As stated in Wal-Mart 2015 annual report, the report by Ernst and Young LLP on Wal-Mart’s internal control suggests that the company’s internal control was well maintained in accordance with the of COSO criteria for the financial year. The report meets the criteria of COSO and PCAOB, meeting their obligations and requirements and fulfilling them accordingly. Ernst and Young LLP’s report on Wal-Mart’s audited financial statements gave a fair opinion on the same; “the financial statements present fairly the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2015 and the consolidated results of its reports and cash flow is in conformity with the US GAAP.” The work is in line with the PCAOB, COSO, GAAP and GAAS guidelines (SEC, 2015b).
References
Drury, C. (2012). Management and Cost Accounting . Cengage Learning. Print.
Financial Reporting Council 2016. Ethical Standards: Integrity, Objectivity and Independence. Revised Ethical Standard 2016.
Oseni, A. I. (2011). Unethical Behavior by Professional Accountant in an Organization. Research Journal of Finance and Accounting, 2 (2)
PCAOB. (2016). Auditing Standards . Retrieved November 21, 2016 at: https://pcaobus.org/Standards/Auditing/Pages/ReorgStandards.aspx .
Porter, B., Simon, J., & Hatherly, D. (2014). Principles of external auditing . John Wiley and Sons. Print
Securities and Exchange Commission. (2015a). Form 10-K: Wal-Mart . Retrieved November 21, 2016 at: https:// www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm
Securities and Exchange Commission. (2015b). Schedule 14A: Wal-Mart . Retrieved November 21, 2016 at: https://www.sec.gov/Archives/edgar/data/104169/000130817915000149/lwmt2015_def14a.htm
Singleton, W. T. & Singleton J. A., (2010). Fraud Auditing and Forensic Accounting. John Wiley and Sons. Print
