In Esanda Finance Corporation Ltd v. Peat Marwick Hungerfords (1994) case, Esanda sued the auditor claiming they relied on the financial report of Excel Finance Corporation which was negligently audited, in granting finance to the company but the judge made the decision in favour of the auditors which was against the finding in the Columbia Coffee and Tea case. It is critical for an auditor to be independent of the firms they audit due to many reasons. The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. The major claim in BGJ was that the auditors had not alerted the directors to the foreign currency losses of $4 million. This section also prohibits an auditor from being an employee, director or officer of a client company. Justice Moffitt acknowledge that auditor is not an insurer and their duty is verification not detection of all errors that may occur in company’s financial statement (Tom Campbell, 2005). Copyright © 2003 - 2021 - All Answers Ltd is a company registered in England and Wales. There are infinite of ethical issue that can be faced by professional auditor and thus it is impossible for the code to cover all these situations. Conceptual framework approach describes the audit team or review team to achieving mind maintaining independence which comprise of independence of Mind and independence of appearance. When the other services are provided by the audit firm to the client which create the self-interest threat and it will be major self-review threat and to safeguard it, we can create an invisible wall which means that the different team are created for audit service and for non-audit service. The opinion itself shall be credible and for that the auditor’s objectivity shall be beyond question. The recent cases include: Tesco dropping its auditor after 32 years after a massive accounting scandal was discovered resulting in the dismal and resignation of key board members in the group. There are various regulations and guidelines as lay down by New Zealand to protect audit independence. When company was reluctant to increase the audit fee, Anderson decided to reduce the amount of work performed for the company. 4. Auditor independence simply means the ability of the auditor to adopt an approach with integrity and objectivity within the audit process. Registered Data Controller No: Z1821391. Remember !! Investors could lose money which would affect pension funds, the economy could therefore suffer leading to a financial crisis (especially if huge corporations collapse) and this would lead to a reduction in the welfare of the public. Code of Ethics requires the auditor preforming audit must maintain independence of mind and appearance both. This audit rotation is the rotation of the audit firm and from the client point of view when you rotate the audit firm, it involves huge cost implication to the client. The debate surrounding the role of external auditors focuses in particular on auditor independence. Enron is the another classic case for the corporate collapse due to the lack of audit independence as one of the major reason along with the objectivity by the auditors, series of accounting fraud, failure of the board and poor corporate ethics (Tom Campbell, 2005). Arthur Anderson was playing the role of external auditor and at the same time consultant on accounting, internal auditor, tax advisor and reviewer of financial disclosure due to which they earned US$25 million as an audit fees and US$27 million as other service fees from Enron. There is and was always an expectation gap between auditors and user of the audit report regarding the perception of issue that affect independence and liabilities. But if the company is the public entity, the Auditor-General is its auditor in accordance with that Act (Companies Act 1993, 2018). In addition to technical competence, auditor independence is the most important factor in establishing the credibility of the audit opinion. The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of non-audit services: Self-interest threat: Where an auditor is financially dependent on the audit client or where an auditor or someone closely associated with him has a financial or other interest in the audit client. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. • Independence involves appearing independent and actually being independent. For example, stock options give upper management incentives to boost short-term stock prices at the expense of a company’s long-term viability. As per the principle 3 of FMA and Listing Rule 3.6.1 of NZX, each publicly owned company should establish an audit committee of the board with responsibilities to recommend the appointment of external auditors; oversee all aspects of the entity-audit firm relationship; and to promote integrity and transparency in financial reporting. Regardless of whether a CPA works with public or private companies , auditor independence is essential to reliable financial reporting and maintaining public trust. The partner who are not involved in the audit engagement can always review to check that the independence is not compromised and to conduct another review to find out that the quality of the audit is up to the required standard. The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. If internal audit is to retain its necessary independence in practice, it must take the time to invest in its relationships with the board, audit committee, key business stakeholders and senior management, sustaining a steady and robust dialogue with each party in order to perpetuate its own functional success. The auditors are professionals who receive a fee from client for his service so the threats to independence of judgement is unavoidable (Siegel, 2002). VAT Registration No: 842417633. The apparent conflict of interest for audit firms in the provision of non-audit services to clients has been an enduring concern to many regulators and commentators. An n auditor must ensure that his judgement is not impaired by reason of any relationship with or interest in the company (Company Act 1993, 2018). It is critical for an auditor to be independent of the firms they audit due to many reasons. The Need For Auditor Independence. This article is purely for educational purposes, with information collated from multiple news reports, journals and interviews with my CA friends. Doubts are sometimes expressed regarding the independence of external auditors. There was a similar case known as collapse of the merchant bank Rothwells Limited, where the point was emerging about the need for auditors to resist pressure from the client and maintain a healthy scepticism in dealing with them which require an evaluation of the auditor independence and conflicts of interest of people involved in it (Mills, 1990). So, in contrast to the approach taken in Kingston Cotton Mill case, In Pacific Acceptance case, judge held an auditor responsible for the losses occurring since they should reasonably have communicated their suspicions to management and was negligent in not reporting suspicions (Mills, 1990). The extent of reasonable care and skill and caution is based on the circumstances of each cases (Academic Dictionaries and Encyclopedias, 2014). *You can also browse our support articles here >. Familiarity—when an auditor becomes too sympathetic to the interests of another party because of a close relationship. This create the risk of self-review threat on the audit independence and self-interest threat as there was a fear of losing a large client which lead to failure to inform investors on Enron’s non-disclosures (Tom Campbell, 2005). The firm was convicted in March 2002 which resulted in its ability to audit companies being withdrawn and in June 2002, the “Big Five” became “Big Four” (Tom Campbell, 2005). Independent auditing has been an important part of the corporate monitoring system since the mid-1930s, when it became a legislation requirement after the Great Depression. The auditors are in dilemma regarding the term as the court may conclude the auditor’s judgement on the degree of inquiry to be made fell short of the “reasonable care and skill” expected at that time despite compliance with the usual auditing standards and practices (Mills, 1990). Self-interest—when the financial interests of the auditor or relative are involved. The auditor also depends on the management of the company to secure its re-appointment as auditor. The fundamental importance of auditor independence. Leadership that stresses the importance of ethical behaviour, Resignation from engagement can be extreme safeguard but in come circumstances the only option available. The authority to choose an auditor was in the hand of shareholders instead of the directors to avoid the scenario where directors can intimidate auditors or bribe them by assuring reappointment. These threats can either eliminate or reduced to the acceptable level using the safeguards (Professional and Ethical Standard 1, 2016). The term “reasonable care and skill” is consistently increasing with time and cases. So, if the directors are failed to involve the auditor in the shareholders meeting, they may liable on conviction to the penalty (Company Act 1993, 2018). Sometimes the problem is not about the member being unethical, but it was about the situation where members were not informed or properly trained about the policies and procedures. A high profile example would be the relationship between Enron and their auditors, Arthur Andersen. Specifically, a suitably experienced and objective professional with sufficient stature should evaluate the next audit engagement to determine whether the team maintained its independence. Independence in auditing 1. auditor independence is directly related to client importance. In the aftermath of Enron’s demise, the accounting firm was accused of not acting independently and suggestions were made that they had gone along with the accounting practices in Enron in order to retain their work. Accounting firms sometimes engage set audit fees at less than the market rate and make up for the deficit by providing non-audit services, such as management consultancy and tax advice. Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here. Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting (Rutgers Accounting Web, 2015). Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner. These threats are: self-interest threat, self-review threat, advocacy threat, familiarity threat and intimidation threat (Malane, 2005). The issue related with the audit independence was not the recent one but was existed when the public start noted that the fees for non-audit service were growing rapidly and auditor were more interested toward the non-audit service than the audit service. This is quite popular one when we look for the safeguards for threats to independence specially when familiarity threats come up. •Investigative independence: no legitimate source of information is closed to auditors, requiring that auditors have freedom to examine information that auditors The auditor independence is measured by how honest an auditor … The main purpose behind providing licence and proper ongoing competence programmes to the overseas qualified and experience auditor is to protect the quality of audits which support the independence. Most of the users of financial statements such as public, stakeholders and sometimes professionals also believe that it is auditor’s responsibility to give a warning if the company is in trouble. Dissertation Independence is an essential attribute for audits because it determines how credible and reliable financial statements will be to investors. The auditor should always maintain an appropriate level of independence from the client to balance the duty to provide quality audit report to the shareholders and public too. > Disclaimer: I am not a CA, or involved in this profession. Free resources to assist you with your university studies! The auditors must opine on financial statements as per his capability and within the boundaries of the code of conduct which protects his independent state of mind. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. Basing any fees on the outcome of an audit engagement (contingent fees) is prohibited by the subs. These are safeguards attributable to: (a) Safeguards created by the assurance practitioner’s profession, legislation or regulation; and. If this happens, the auditors can no longer be said to be independent and the shareholders cannot rely on their opinion. Self-review—when an auditor evaluates a situation that is a consequence of a previous judgment or advice by the auditor or the auditor’s firm. There are occasions where independence of the auditors may be threatened or appear to be threated so the frameworks identify five threats to independence. Independence Requirements. Safeguarding independence is a key component requirement of the regulatory framework which supports capital markets. It is suggested that an auditor can demonstrate that undue economic dependence doesn’t place independence at risk by ensuring that the fees from one audit client or group of audit clients don’t exceed an appropriate limit. Self-review threat: A judgment is required of the auditor which demands that previous work of the firm (whether audit or non-audit) be challenged or re-evaluated. The recent developments have imposed higher responsibilities on auditors and wider the applicable standard of care, wider the definition of negligence and duty of care to owed to third party or in another word, we can say that the auditor’s responsibility has been increased with time and cases which demand for higher independence level in auditing. The independence of CPAsis an integral part of the framework of the profession – requirements relate to everything a CPA does – business and employment relationships as well as the services delivered to clients. 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