Qantas Audit Risk Factors: Industry and Corporate Analysis

Introduction

This paper addresses two general questions as they relate to Qantas Airlines. The first is to identify and explain the inherent risk factors that can or will be found in the audit results for Qantas Airlines for the audit period ending June 30, 2014. The second major section utilizes the information described within the risk factor identification section to assess how those risks affect the audit process before, during, and after it takes place. While Qantas is generally performing reasonably well in the operations subject to audit, there are some very real risks and concerns that the airline can and should address.

Risk Factor Identification

Some of the risk factors for Qantas are general and specific to the airline industry rather than particular to Qantas alone, but they warrant mention nonetheless. Other risk factors are challenges that Qantas specifically is enduring and are not endemic to the industry as a whole, at least not at this time. The various risks — both specific to Qantas and more general in nature — often cause or otherwise feed into one another, but each will be discussed in its own section, as each stands on its own merit to at least some extent.

Corporate Transparency and Executive Compensation

The first risk factor that Qantas must be wary of — and this applies to all publicly traded companies — is general corporate transparency and the visibility of operations. This factor is even more important when discussing companies that provide an essential and non-optional service, such as airlines, utilities, and government agencies — anything the public relies on extensively but whose pricing tends to fluctuate due to market conditions, political climates, and other factors. Lack of transparency can manifest in a number of forms. The major forms it takes in the modern political and business environment include: what executives and other employees are paid; who comprises the executive and board membership positions of a firm and how those individuals are selected, retained, and removed; who is involved in preparing reports; and how decisions are made regarding what is recorded, how it is recorded, when it is recorded, and why (Hermalin, 2007).

Executive compensation is one subject that consistently generates strong reactions and allegations of misconduct. There are two firmly entrenched camps regarding what executives earn and why. Those in favor of higher executive pay insist that attracting the best talent requires outspending competitors. They argue that global competition for top performers has necessitated raising compensation standards. However, when executive compensation packages are crafted with even a hint of limited transparency or questionable ethics — even if only perceived rather than proven — this can generate significant ill will both within the firm and among external stakeholders, including stockholders, pro-union advocates, and income equality voices (Kelly, 2014).

Transparency regarding the selection and retention of personnel is also a major concern. In the United States, the founder and public face of men's clothing retailer Men's Wearhouse was forced out by the company's board. While transparency was not an overt issue in that particular case, similar actions can become problematic if a firm's decisions are not conducted openly or do not appear to make logical sense. The best way to mitigate concerns about the hiring and dismissal of board members and executives — as well as their compensation — is to involve independent board members who have no financial vested interest in the decisions being made. Keeping matters open to the public is generally wise, unless there is an overriding reason for discretion, such as in the case of criminal investigations or, in the context of airlines, crash investigations where public disclosure could compromise justice.

Terrorism, Safety, and Industry-Specific Risks

Another major concern for Qantas — and one that is more general to the airline industry — is terrorism. As demonstrated by the September 11 attacks in the United States, as well as the disappearance of Malaysia Airlines Flight MH370 — which at the time of writing appeared to involve deliberate action by the flight crew — threats can come from both external actors and from within. This requires that Qantas be very clear about the security measures it takes to prevent attacks, as well as the background checks and certification procedures used to verify the abilities and integrity of pilots and other safety-critical professionals (Ross, 2011).

An additional concern that must be accounted for — and one with which Qantas has had prior difficulties — involves mechanical issues with its aircraft. Although Qantas's safety record has been strong in recent years, past incidents have raised concerns, and any evidence of inadequate maintenance or audit procedures could negatively affect the airline's bottom line. At the same time, stakeholders continue to demand that costs be controlled, placing Qantas under pressure from both directions simultaneously. Ultimately, Qantas carries a greater responsibility for passenger safety than it does for maximizing dividends — or at least that is how it should be.

Conclusion

There are obviously political and other non-business pressures at play, and not all of the cards are in Qantas's hand. If Qantas is struggling and would continue to do so even absent the executive pay controversy or the price-fixing case, that reality needs to be taken seriously by auditors and policymakers alike. Whether that will happen remains to be seen. As part of the upcoming audit, Qantas needs to be open and honest about what it has done wrong and what steps it is taking to correct those issues. Equally, it must explain and provide evidence regarding the political and economic conditions it faces. Qantas must make clear that even with fully ethical behavior and rigorous compliance, some of the challenges it faces cannot be resolved through internal conduct alone. If the airline communicates this effectively and supports it with evidence, it should be able to obtain the reform and support it needs, and the audit should proceed favorably.