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The Factors Affecting Auditor Independence Accounting Essay

The issue of hearer independency is a important component and really of import for the audit profession. This construct has been discussed widely and many definitions have been presented in literature. Independence refers to the hearer ‘s ability to show his sentiment about the dependability of fiscal statements candidly and impartially off from his involvement or the force per unit area of clients( Ahmad, 1985 ) .

Literature has contemplated two criterions for measuring hearer independency. Mautz & A ; sharaf ( 1961 ) , who are among the innovators in the survey on hearers independency have developed a construct of independency with two constituents: practitioner-independence ( independency in fact ) and profession-independence ( independency in visual aspect ) . The Public Oversight Board emphasized that the members of Certified Public Accountant houses should protect the profession by being independency both ‘in fact ‘ and in ‘appearance ‘ ( Lowe et al, 1999 ) . Independence in fact refers to the mental attitude of the hearer characterized by the unity and the nonsubjective attack to the audit procedure. Besides, the practician independency requires the hearer to be free from personal involvement and susceptibleness to inordinate force per unit area( Moizer & A ; Sutton, 1997 ) .

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However, since this mental procedure is unobservable and hearers besides have inducements to go against their independency through fulfilling their clients so as to keep the economic bonding to the client( DeAngelo, 1981 ) , there is a demand for the hearers to be perceived as independent ( named independency in visual aspect ) from the direction squad who prepares the fiscal statements. Orren ( 1997 ) states that independency in fact refers to the existent, nonsubjective relationship between scrutinizing houses and their clients whereas independency in visual aspect is the subjective stated of that relationship as perceived by the clients and the 3rd parties. Church and Zhang, ( 2002 ) argue that independency in fact is necessary to heighten the dependability of fiscal statements. On other manus, independency in visual aspect is necessary to advance public assurance such that users will trust on audited fiscal statements.

Securities and Exchange Commission, 1979 asserts:

“ The issue is both one of visual aspect and of fact ; if public assurance in the unity of fiscal coverage is to be maintained, it is of the extreme importance that public assurance in the objectiveness of independent hearers be likewise maintained ” .

American Institute of Certified Public Accountants ( Public Oversight Board, 1979 ) :

“ While it is, of class, indispensable that an hearer preserve his objectiveness and unity from his ain point of view, normally called “ independency in fact, ” it is besides of import that the hearer appear independent to all users of the fiscal information he provides. This latter construct is an indispensable ingredient to the value of the audit map because users of audit studies must be able to trust on the independent hearer. ”

The demand for Auditor ‘s independency

Independence is an of import scrutinizing criterion because the hearer adds justification and credibleness to fiscal statement even when there are no material misstatements or skips in the fiscal statements prepared by direction ( okolie 2007 ) . The writer Gupta ( 1999 ) is of sentiment that is hearer is non independent of direction ; his sentiment would intend nil to stockholders, prospective investors, bankers, authorities bureaus, and others who are concerned with the fiscal statements of a company.

The writer Ezeipe ( 2004 ) describes the construct of hearer ‘s independency in three dimensions:

Programme independency: Sometimes client director have the purpose to curtail or modify the processs that the hearer want to execute. Thus hearers should ever stay free from intervention of client directors.

Reporting Independence: The hearer should ne’er allow any feelings of trueness towards the client to impact his work. He must to the full and reasonably unwrap his duties. Management are ne’er allowed to supercharge the hearer.

Fact-finding Independence: The hearer should hold entree to all necessary stuffs required on the content of an audit. For illustration, the hearer must hold entree to books and records ; besides active co-operation from direction forces during audit scrutiny is required ( salehi 2009 ) .

Factors impacting hearer independency

In theory, there are many factors that affect independency of an hearer and these factors which have been studied can be:

The effects of gifts

The purchase of price reductions agreement

The audit house size

The proviso of direction advisory services by the audit house

The client fiscal status

The nature of struggle issue

The audit house ‘s term of office

The grade of competition in the audit services market

The size of the audit fees

The audit commission

Rehearsing non-audit services by hearers

In this survey, merely factors such as the proviso of non audit services, the audit house size, the audit house ‘s term of office, the grade of competition in the audit services market, the size of audit fees and non audit fees and the audit commission will be analysed and whether these factors will impair or heighten hearer ‘s independency.

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The proviso of non audit services by hearers

Audited account failuresreported in the yesteryear have affected the profession of hearer worldwide because the involvements of stockholders and shareholders have non been safeguarded. This job has arisen as a consequence of the proviso of non-audit services ( Salehi and Moradi 2010 ) .

Non- audit services can be any services other than audit that an hearer provides to an audit client. Over the late twentieth century, demand for concern expert services has increased, wattington and Pany ( 2001 ) identified the different scope of services which are offered by hearers to private and public sectors and these non-audit services include: preparation, services for paysheet, hazard direction advice, amalgamations and acquisition, revenue enhancement, public offering, portfolio monitoring, enlisting and human resources and corporate administration. An hearer needs to pay much attending when both audit and non-audit services are provided to the same client, because these non-audit services may endanger the independency of hearer.

Although there are market-based inducements for hearers to stay independent, there are besides forces that potentially threaten auditor independency. Specifically, the SEC is concerned about two effects of non-audit services. One is a fright that non-audit service fees make hearers financially dependent on their clients, and therefore less willing to stand up to direction force per unit area for fright of losing their concern. The other is that the confer withing nature of many non-audit services puts hearers in managerial functions, potentially endangering their objectiveness about the minutess they audit.

Auditor ‘s services relationship raises two types of independency concerns. First, the more the hearer has at interest in its dealing with the audit client, peculiarly when the non-audit services relationship has the possible to bring forth important grosss on top of the audit relationship. Second, certain types of non-audit services, when provided by the hearer, create built-in struggles that are incompatible with objectiveness.

In the United States, the Sarbanes Oxley Act of 2002 implemented a prohibition on nine non-audit services which include:

Bookkeeping and other services related to the audit client ‘s accounting records or fiscal statements.

Fiscal information systems design and execution

Appraisal or rating services and fairness sentiments

Actuarial services

Internal audit services

Management maps

Human resources

Broker-dealer services

Legal services

Ojo ( 2009 ) suggested that the proviso of non- audit services by audit houses does non needfully impact hearer independency. However, where the fees generated from non-audit services are comparatively high ( in proportion to the audit fees earned by such accounting houses ) , this creates a state of affairs whereby the hearer ‘s independency is likely to be compromised since the hearer may be denied profitable contractswhere he gives a qualified sentiment on the fiscal statement being audited.

Advocates of the proviso of audit services argue that synergisms of cognition spill over and audit efficiency arise from supplying both audit and non- audit services. Nevertheless, following the prostrations, scrutinizing profession as a whole has been affected and alterations were proposed to guarantee that audit houses cut down their over-reliance on NAS ( The Star, 2002 ) . In order to guarantee the independency of hearers and to protect the involvement of investors, the accounting profession in most states has come up with a codification of moralss that spells out guidelines for hearers ‘ competence and independency.

Audit commission

An audit commission consists of a selected figure of members of a company ‘s board of managers whose chief responsibilities are to assist hearers remain independent of direction ( Arens at Al, 1999 ) , that is, commission should back up the hearer alternatively of direction in different audit differences.

Braiotta ( 1999 ) and Goldman ( 1974 ) maintained that audit commissions could supervise the fiscal coverage procedure and supply recommendations in the choice of hearers, dialogue of fees and expiration of external hearers, which would finally decrease direction ‘s power over the hearer. Therefore, the audit commission is anticipated to guarantee that the house has sufficient internal controls, proper accounting policies, and independent external hearers that will forestall the incidence of fraud and promote high quality and timely fiscal statements.

The members who participate in the audit commission can be non-executive managers, corporate directors, academicians and retired spouses of CPA houses ( Knapp, 1987 ) . In the U.S. , the Securities and Exchange Commission ( SEC ) president, Levitt ( 2000 ) pointed out that, “ aˆ¦qualified, committed, independent and unsentimental audit commissions represent the most dependable defenders of the public involvement ”

SEC requires Audit Committees to measure the independency of the company ‘s external hearer when make up one’s minding whether or non to engage the hearer for supplying non-audit services. In so making, Audit Committees besides are encouraged to see how the hearer provided non-audit services may better audit quality and enhance hearer independency.

Size of audit house

The size of audit house is an indispensable feature that reflects auditor independency. Auditor repute is straight associated with audit quality. Large audit houses will do certain to supply an independent quality audit service as the larger audit houses tend to hold better research installations and efficient fiscal resources, more advanced engineering and more skilled employees who will be able to set about big company audits comparison to smaller audit houses. Large audit houses have larger client portfolios which enable them to defy direction force per unit areas whereas little houses provide individualized services as their client portfolios are limited and they have to yield to direction demands ( Lys and Watts, 1994 ) .

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The issue of keeping hearer independency is more important for smaller houses than larger houses. Pearson ( 1980 ) found the larger size of audit houses will heighten hearer ‘s independency, because, smaller houses would see more trouble in defying client force per unit areas in state of affairss of struggle. As a consequence, the information content of audit studies certified by big houses is considered to be more and dependable than those of smaller audit houses( Titman and Trueman, 1986 ) .

However, as pointed out by Goldman & A ; Barlev ( 1974 ) , it can non be concluded that big CPA houses are more immune to force per unit areas from their clients. This is so because the few tribunal instances which challenge the premise that CPA houses acted independently indicate that there is no warrant that big CPA house has the ability to defy force per unit areas from clients, as happened with Arthur Andersen and Enron.

Degree of competition in audit service industry

Competitionhas been identified as an external factor impacting hearer independency ( Shockley 1981 ) . Many houses which operate in an intensely competitory environment may hold trouble staying independent as the client can easy get services of another hearer. TheAICP Cohen Commission ( 1978 ) in its study affirms that there are inordinate competitions among public accounting houses and this inordinate competition among different houses has been systematically identified as a factor endangering hearer independency( Farmer et al. , 1987 ) . .

Shockley ( 1981 ) had found that audit houses runing in an environment characterized by a high degree of competition for audit clients would hold a greater hazard of diminishing their audit independency than where audit houses operated in a low-competition environment. However as suggested by Linberg and Beck ( 2004 ) , Competition in the audit market makes the hearer more careful and concerned with the audit confidence degree in their services.

Tenure of an audit house functioning the demands of a given client

An audit house ‘s term of office refers to the length of clip required to make full the audit demands of a given client. A drawn-out association between a company and an accounting house is likely to ensue a close designation of the house with the involvements of its clients, therefore an independent action by the accounting house become hard. ( U.S. Senate 1976 ) .

The writer Mautz & A ; Sharaf ( 1961 ) added that after a long association, less strict audit actions, complacence and assurance in the client may originate. However, long hearer term of office may take to a cosy relationship between the client and the hearer ad this may impair hearer independency due to a lessening in the hearer ‘s due-diligence and besides becomes more prepared to “ turn a blind oculus ” to inappropriate managerial actions. On the other manus, long hearer term of office is good as hearers gain expertness in the field they audit and may cut down the hearer ‘s ability to observe abnormalities or material misstatements ( Gul et al. , 2009 )

Size of audit and non audit fees

The IFAC ‘s Code of Ethics for Professional Accountants ( 1996, para 8.7 ) propose that client size which is measured from size of fees could raise uncertainties as independency of hearer is concerned. The EFAA ( October, 1998, p.4 ) clearly states that, ” the ( entire ) fee from one client should non transcend a certain per centum of the entire turnover of the audit house ” . In instances of accounting dirts ( for illustration Enron and WorldCom ) , the audit house appeared to be in collusion with the direction in concealing deceitful activities. The major factor behind such reserve was the sum that the hearers received as non-audit fees from these clients. Anderson, the hearer for Enron, received US dollar 27 million as non audit fees in add-on to US dollar 23 million as audit fees. The fact that the accounting house received more than half of its Enron gross from NAS gives an visual aspect of a deficiency of independency in the audit ( Flaring 2002 ) .

In add-on, the fees for non-audit services has besides increased well and are more profitable than fees from audit services, therefore beef uping the economic bond and well take to impairment of AI. The regulative organic structures in the U.S. like the SEC, the POB and the AICPA emphasized that important high non audit fees can negatively impact hearer independency and besides impair hearer decision-making, when those determinations involve a significant sum of professional judgement.

In Malaysia the MIA By-Law ( Section B-1.98 on Professional Independence ) has emphasized that “ if the sum fees ( originating from confidence and non-assurance services ) generated by one confidence client or its related entities exceed 15 % of the house ‘s entire fees in each twelvemonth over two back-to-back fiscal periods, fiscal dependence shall be considered to be, in which instance, a self-interest menace to independency is created. In such event, the lone class of action is to decline to execute or retreat from the confidence battle ” . This 15 % standard has besides been the degree by and large used by the ICAEW and Australia at which hearers have to see their independent place.

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The Factors Affecting Auditor Independence Accounting Essay
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The issue of hearer independency is a important component and really of import for the audit profession. This construct has been discussed widely and many definitions have been presented in literature. Independence refers to the hearer 's ability to show his sentiment about the dependability of fiscal statements candidly and impartially off from his involvement or the force per unit area of clients[ 1 ]( Ahmad, 1985 ) .

Literature has con

2018-10-23 18:50:02
The Factors Affecting Auditor Independence Accounting Essay
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