...The Impossibility of Auditor Independence Introduction: * Investors seriously rely on audited F.S. and auditor integrity. * Audit firms face lawsuits from investors, paying judgments and settlements for their involvement in financial reporting process. * Audit failures rarely result from the deliberate collusion of auditors with client. Instead, auditors may find it psychologically impossible to remain impartial and objective. * AICPA: auditors should achieve a level of independence * Courts’ view: auditors must act in the interest of external users of F.S. * However, such impartiality is impossible under current institutional arrangements. The Structure of the Auditing Relationship External users: Stockholders, financial advisers, regulators, lenders, creditors, etc. Client (audited firm): has incentives to present the “best” F.S. Hires and pays Represents Independent auditor: Give an opinion on F.S. * Through an qualified audit report, management provides external users a reasonable assurance. * Economic incentives also may bias an auditor’s judgment. The Psychology of the Impossible of Independence * Model of auditor psychology: Assumption of deliberativeness: any tendency towards bias can be rectified by moral suasion and/or the threat of sanctions. * Psychological research: the Model is unrealistic. * “self-serving” bias: when presented with identical information, individual perceptions of a situation...
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...Topic: Can the auditor ever attain perfect independence? Is it economical and practical to achieve and, if not, should the government should be handling auditing or be part of the audit process? My paper shall be addressing the issues revolving around auditor independence. Auditor independence is defined as the reference to the independence of internal or external auditors from parties that might have a financial interest in the business being audited. Independence involves two forms, independence of mind and independence in appearance. Independence in mind is being independent in actuality and while independent in appearance is being independent to the perspectives of the public. Auditors require independence as they must be objectively unbiased when providing attestation services to their clients, so that the financial statements they audit would be trusted by the stakeholders who would be using them. Without unquestioned independence, audits have little value. ( Karla M. Johnstone, 2000) Auditor independence depends on whether the auditor is able to be free from all economic, financial and other relationships related to the client. The more unrelated, the better. However, as members of the society, it would be difficult to be completely free of relationships with others. More significantly, the fact that the client pays for the audit fee puts the biggest strain on independence, especially so when the client represents a large percentage of an auditor’s total billings...
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...Case 1 a) Arguments indicating that the firm’s independence has not been impaired: • Moore and Scott for the time being are just friends, not legally married. • There is not a common financial interest since they are not legally married. • By Scott investing in shares, Moore would view this as indirect since Scott would receive any benefits from the investment and are in her name. • Since Moore’s interest is not direct, his independence should not be impaired since Scott’s shares that she invested in are not material to their overall net worth. • Should a third party have access to all the facts, this does not indicate an intolerable risk to the firm’s independence has been established. (Goria and Yaffe, 2002). b) Arguments indicating that the firm’s independence has been impaired: • The appearance of independence to a third party is compromised. Most parties would view a couple living together the same as being married. This would cause Moore’s independence to be impaired (AICPA, 2011). • In reading The AICPA’s Code of Professional Conduct, in order for Moore to evaluate his position, he should consider his capability to perform independently and if a third party that knew all the facts would consider Moore’s and Scott’s relationship to be the same as a married couple. A third party could assume that Moore would be involved and concerned over Scott’s finances and could end of being a conflict since Scott has investment is linked to audit clients (AICPA, 2011). c)...
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...IN ACCOUNTING EDUCATION Vol. 24, No.2 May 2009 pp.237-252 IS^SUES A Case Study on Professional Skepticism and Auditor Independence Robert L. Braun and H. Lynn Stallworth ABSTRACT The purpose of this ieaching case is to expand students' understanding of the concepts of professional skepticism and independence. The case is based on an actual incident and illustrates the exercise of professional skepticism by a staff auditor who finds himself in the uncomfortable situation of accusing a friend of fraud. The case demonstrates the difficult personal and professional choices that auditors must sometimes make. ln analyzing the case, students consider auditor independence rules, as well as the concepts of independence in appearance and independence in mental attitude. Students are asked to identify the types of audit evidence and internal controls needed to detect and prevent the fraud, and to consider the appropriate audit response to an adverse situation. If You Need Love, Get a Puppy: Keywords: auditing; professional skepticism; fraud; independence; internal controls; misappropriation of assets. THE CASE ifu is good, thought Will Stallard as he got into his truck that October morning. He T I could have been thinking of any one of a number of things-his wife of seven years, I-/his beautiful baby girl, or his job as a staff auditor at Dykstra, Banister, and Huston (DB&H), a CPA firm with offices in Montgomery and Mobile, Alabama. Or, maybe it was the slight chill in...
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...journal is available at www.emeraldinsight.com/0268-6902.htm An empirical comparison of non-Big 4 and Big 4 auditors’ perceptions of auditor independence Non-Big 4 and Big 4 auditors’ perceptions 917 Philip Law Department of Accounting, Faculty of Business Administration, University of Macau, Taipa, Macau Abstract Purpose – Perceived independence is one of the corner-stones in auditing theory. Despite prior research on auditor independence, the results are inconclusive. The lack of research in the Hong Kong ´ˆ auditing environment motivates this study, particularly following the Enron debacle. The purpose of this paper is to examine the non-audit services (NASs), competition, rank and types of auditors, in respect of the independence problem as it relates to the practices of Hong Kong auditors in the post-Enron environment. Design/methodology/approach – Four independent variables identified from literature gaps are examined, namely NASs, levels of competition, auditors of different ranks and types of auditors. Mixed ANOVA are employed to analyze survey responses from 207 “Big 4” and 185 “non-Big 4” auditors. Findings – Results of the study show that the provisions of NASs and high competition could have a negative influence on auditors’ perceptions of independence. Second, auditors’ perceptions that the influence of NASs on independence depends on an individual auditor’s rank are supported. Senior managers have the highest mean rating on perceptions...
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...Opinions given by the auditor gives an added credibility to the financial statements (Maqableh, 2014). Commonly, investors often rely on financial statements provided by auditor in making investment judgement and increase the productivity of financial markets. Financial statements provided by the auditors are often reviewed as credible, unbiased opinion that truly reflects the company financial positions. There’s no doubt that auditor independence is the core of auditing profession when establishing its objectivity and integrity. Auditor independence, in particular, indicates the ability of an auditor to disregard any influence or control when conducting an opinion (AAA, 1973). Therefore, auditor must be, and must be seen to be independent of company management. Lack of independence causes audits to be considered to have little value (Johnstone, Sutton, & Warfield, 2001). This is further supported by Elliott and Jacobson (1998) that a particular interest may trigger a risk that could weaken the outcome of the audit which in turn impairs the auditor independence. Hence, independence is fundamental to the purpose served by auditors (Moore et al., 2002). This study is limited to only four variables as to keep the task manageable. Prior years, various studies are being carried out by scholars in examining the effect and significance of the concerns. For instance, Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) studied the factors that influence auditor independence in Malaysian-owned...
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...Department of Law, Economics, Accountancy and Risk AUDITOR INDEPENDENCE Introduction The concept of independence is strongly associated with professionally standard auditing (Olagunju, 2011, pp.85). In other to maintain the utmost standard for the accounting profession, independence is seen as being free from control or pressure and not allowing situations which would tend to weaken objectivity or create personal preconceived notions (Porter and Simon et al., 1996). Audit improves the trustworthiness of the financial statements giving it sensible assertion from an independent source that the financial statements is true and fair in agreement with accounting standards (Olagunju, 2011, pp.85-86). The next section of this essay provides detailed information on how value is added to the financial statement when the auditors’ audit with independence whilst appraising how the accounting profession has or is reacting to auditor independence. While the last section will evaluate the risks or threats to independence and explain ways of mitigating identified risks. Value of Independent Auditing on Financial Statements The significance of audit services will be impaired when independence is absent (Sweeney, 1992); therefore, an uncompromised independence gives a better quality audit to the financial statements (Baber et al., 1995). In addition, if an auditor is independent, the motivation to do a better audit is not undermined as the auditor will report misstatements (Pike, 2003). Stewart...
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...Auditor independence refers to the position of the external auditor’s level of personal and financial ties to a particular organization which can sometimes be complex. When deciding whether to accept an auditing engagement, one must judge their independence and objectivity. This is why integrity is imperative in business, especially within the world of audit. Congress passed the law, The Sarbanes-Oxley Act of 2002 (SOX) that applies to publicly held companies and their auditors. It was intended to protect investors by improving accuracy within the laws of the government (SEC, 2001). In addition, it also assists in prevention of financial statement fraud and make items more transparent for protection of the organization. To achieve these parameters,...
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...Auditor Independence - Its Importance to the External Auditor's Role in Banking Regulation and Supervision Marianne Ojo Oxford Brookes University - School of Social Sciences and Law; The Institute for Business and Finance Research, LLC; Covenant University January 1, 2006 Abstract: The role of the external auditor in the supervisory process requires standards such as independence, objectivity and integrity to be achieved. Even though the regulator and external auditor perform similar functions, namely the verification of financial statements, they serve particular interests. The regulator works towards safeguarding financial stability and investor interests. On the other hand, the external auditor serves the private interests of the shareholders of a company. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The external auditor may however, have a commercial interest too. The debate surrounding the role of external auditors focuses in particular on auditor independence. A survey by the magazine Financial Director shows that the fees derived from audit clients in terms of non-audit services are significant in comparison with fees generated through auditing. Accounting firms sometimes engage in a practice called low balling whereby they set audit fees at less than the market rate and make up for the deficit by providing non audit services. As a result...
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...Case 2.1 ENRON 1. Auditor independence: the independence the internal audito,r or of the external auditor from anyone that may have a financial interest in the business which is being audited. Independence of the internal auditor means independence from parties whose interests might be harmed by the results of an audit Independence. This requires integrity and an objective approach to the audit process. The concept requires the auditor to carry out his or her work freely and in an objective manner without worry of influence from any party who is in a position to affect the auditor’s personal financial status. Independence in fact is the auditor’s actual independence of all influences that could affect the decision/work of the auditor. The auditor must be able to make independent decisions without influence. Independence in appearance: the auditor must appear (make people believe that he is in fact independent of influence) His/her actions must entrust the public that their actions are legitimate and genuine. By behaving in a particular fashion the public will perceive that the auditor is in fact credible. 2. Arthur Anderson performed outside accounting work for Enron: He also performed all of the audits for Enron. This is a conflict of interest. Anderson was auditing his/her own work. There was no possible way for this audit to be unbiased. In addition the audits cost more than the financials? Section one was needed to clarify and help distinguish what is an...
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...Case Due 2/10/05 1. What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? Auditor independence involves the auditor and the company being audited. It requires them to maintain separate business and personal relations. This is imperative because personal feelings can hinder the ability of an auditor to perform the required tasks. Expectations and assumptions can result from this as well. It is expected from an auditor that they be independent and unbiased. This is imperative when they are dealing with the financial statements because it is extremely important that they be impartial during the audit, which means that personal relations and former employees with strong relationships with there former employers would not concede to these standards. Independence in appearance is avoiding financial and managerial relationships with clients; this is necessary because this is the only portion that the public can actually see. The general public will only grant social recognition of professional status to auditors when they are perceived as independent. Independence in fact to the contrary from appearance is the ability for an auditor to remain unbiased during an audit of financials. Independence is the first aspect of an audit that the public sees. Although all stages of an audit are of equal importance, it is the independence aspect that can affect the entire...
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...the perceived importance of independence; (iii) traditionally less concern for independence as a governance characteristic in Italy. No countries within the EU, with the exception of Italy, currently have a system of mandatory audit firm rotation. In recent years, auditing of financial reports, i.e. the activity aimed at certifying “substantial reliability” of the financial statements, has been regulated both as a consequence of Europeans Union (EU) Directives, and as a consequence of domestic initiatives aimed at rebuilding public confidence in financial reports after the wellknown financial scandals. Furthermore, the reform of the Italian Company Act (Legislative Decree no.5 of 17 January 2003) requires that financial reports of all listed companies as well as limited liability companies (above a given size threshold) be audited by an independent auditor. It is required that the auditing be carried out by either an audit firm, by a Board of statutory auditors or by an individual auditor. According to art. 2409-bis of the Civil Code, the by-laws of unlisted companies which are not required to prepare consolidated financial reports can delegate the accounting audit to a Board of statutory auditors. As a consequence, under this regulation, it was required that the audit of private Italian companies’ financial reports be made by the Board of statutory auditors or by another body that may be selected among3: 1. Chartered auditors who are members of the Registro...
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...Management December, 2009 Auditor Independence: Malaysian Accountants’ Perceptions Nur Barizah Abu Bakar (Corresponding author) Department of Accounting, Faculty of Economics and Management Sciences International Islamic University Malaysia PO Box, 10, 50728, Kuala Lumpur, Malaysia Tel: 60-19-288-4540 E-mail: nur.barizah@gmail.com Maslina Ahmad Department of Accounting, Faculty of Economics and Management Sciences International Islamic University Malaysia PO Box, 10, 50728, Kuala Lumpur, Malaysia E-mail: maslina@iiu.edu.my Abstract Independence is the primary justification of the existence, and thus the hallmark of the auditing profession. It is recognized as the primary attribute to be maintained by auditors in all circumstances. This study attempts to explore the determinants of auditor independence as perceived by Malaysian accountants using a self-administered mail survey. It was evidenced from the survey that size of audit fees is the most important factor, followed by competition, size of audit firm, tenure, provision of management advisory service and finally audit committee. More specifically, the study indicates that (1) larger size of audit fees, (2) audit firms operating in a higher level of competitive environments, (3) smaller audit firms, (4) audit firms serving a given client over a longer duration, (5) audit firms providing MAS, and, (6) the non-existence of an audit committee, are perceived as having a higher risk of losing independence. This study provides a...
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...Among the ten generally accepted auditing standards is the standard that requires an auditor to have independence in mental attitude. As with so many rules and guidelines set forth by the government and numerous other organizations, the interpretations of many of these rules can be vastly subjective. During the case against Health Management’s founder Clifford Hotte, his co conspirators and the auditors at BDO Seidman the defendant’s attorney Michael Young brought forth the idea that according to the generally accepted auditing standards that requires an independence of mental attitude it never formally states that a friendship between an auditor and the client is be completely prohibited. The dilemma with deciphering the interpretation of the standard is determining where the line should be drawn between these relationships and the auditor’s ability to maintain these relationships and the independence considered necessary to give an unbiased opinion when it comes time to write a report that is unprejudiced and reliable to the public and investors at large. Let us begin with Health Management’s CEO Clifford Hotte and CFO Drew Bergman’s 1995 inventory fraud scandal by which author Michael C. Knapp’s assertion could be considered as one of the least ingenious corporate fraud scams to date. The objective was to increase inventory as well as make minor adjustments to a small number of other accounts in order to reach the companies target earnings as reported by analysts previously...
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...real reasons why institutional investors should be concerned about the independence and genuine effectiveness of the audit function? Search the findings of academic papers and other published sources to support your view.” Introduction An institutional investor is an organization that invests on behalf of the organization’s members. These investors are a part of corporate governance for companies and they have large amounts of money to invest. In Malaysia, there are five leading institutional investors; Employees Provident Fund of Malaysia (EPF), Pertubuhan Keselamatan Sosial (Social Security Organisation), Lembaga Tabung Haji (Pilgrimage Board), Khazanah Nasional, Permodalan Nasional Berhad (National Equity Corporation) and Lembaga Tabung Angkatan Tentera (Armed Forces Fund Board) have taken various measures over the years to put better governance practices in their investee companies. As they can afford to buy more shares and bonds, sometimes automatically put them as majority and proactive shareholders. They have power to influence over management decision making, conduct regular engagements with management of companies, placing new shares, demand meetings with the senior managements of companies regards to their performance, vote on key issues at general meetings and communicate on other matters affecting shareholders' interest. The institutional investor which is an external party that are independence from the management can be seen as a check and balance mechanism in enhancing...
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