Definition and Significance of Auditor Independence in External Audits
The independence as well as objectivity of particularly internal as well as external assessors can be observed both in auditing as specific attributes of strong corporate governance along with public sector financial management. Auditor independence indicates towards independence of specifically internal assessor else wise that of external auditor from specific parties that might have financial interest in the operations of the business.
The current study intends to elucidate illustratively the definition and significance of independence of auditors in the role of external auditors. In addition to this, the study also explains in detail the areas of risk to objectivity of external auditor and practical implications for the external auditor in satisfying the demands of this specific aspect of the role of auditor. Moving further, the current section also presents exhaustively two real world instances of specific situations where the assessors of public corporations can be found to have breached ethical responsibilities.
The external auditor independence indicates towards independence of specific external assessor that is necessary to the provision of an objective opinion on specifically truth and fairness of financial assertions. The assessors also have the need to be independent from the client corporation so that the audit opinion will not be influenced by association between them (Arens et al. 2012). The assessors are anticipated to provide an unbiased along with honest expert opinion on financial declarations to the shareholders.
The assessor have the need to be independent from mainly the client corporation in order to ensure that audit opinion can be properly influenced by any kind of association between the two. In addition to this, the assessors are also expected to provide an unbiased along with honest professional viewpoint on the financial assertions to all the shareholders. However, doubts are sometimes expressed as regards the independence of different external assessors (William Jr et al. 2016). Thus, it can hereby be argued that until and unless proper corporate governance dimensions are instituted, a firm of assessors might arrive at audit opinions as well as judgements that are deeply influenced by the aspiration to maintain good associations with the client corporation. Essentially, if this happens, the assessor can no longer be regarded to be independent and the shareholders might fail to depend on their role. Arens et al. (2016) asserts that accounting corporations might participate in the process of setting fees for audit at a rate lower than the market rate and make for the insufficiency by delivering non-audit services, for example, management consultancy along with tax guidance. Accordingly, some audit corporations also have commercial interests that have the need to be protected as well. Essentially, this raises concerns that the assessor’s interests to shield shareholders of a corporation and conflict interests might conflict with one another.
Risks to Objectivity of External Auditors
According to Arens et al. (2015), an assessor is a scrutiny of the specific accounts by a qualified assessor that undertakes the operation of reviewing the figures. This activity can help in establishing the fact whether specific accounts reflect a true as well as fair view of the outcomes together with the financial position of the corporation. As per the views of Toy and Hay (2014), auditor independence indicates towards the attitude of the mind that is chiefly characterised by factors of integrity and an objective approach to the entire audit procedure. Ge et al. (2016) mention that independent auditing can be considered to be a significant part of the corporate monitoring process since the period of 1930s. Council (2013) put forward he view that lack of independence of the external auditor might adversely affect the entire process of audit in several ways. Essentially, the independence of specifically external assessors is hereby brought into light owing to bad accounting exercises and the lack of independences of the assessor. As rightly indicated by Castelo Branco et al. (2014), the independence of particularly external assessors is brought under consideration due to the potential influence of the corporations on the assessors. This is mainly used to be the liability of the chief financial officer of the corporations to hire and employ an external assessor. Thus, in case if the assessor’s report was not specifically favourable for the CFO, then the CFO could also take a decision to terminate them and instead select an auditor who would rather present a desirable view of the financial condition of the firm.
There are situations in which several categories of threats to objectivity are extant. For instance, there are several internal auditors that deliver control self-assessment services that include proper working with the audit client representatives and assisting the process of assessment of risks and controls. Again, there are also numbers of threats that can crop up from the circumstances, namely self-review intimidation in case if an assessor acts as a catalyst and consequently can be assigned to assess the controls that was the subject of assessment practice (Sonnerfeldt and Pontoppidan 2017). In addition to this, there are also social pressure threats that might take place in case if the facilitating assessor feels the stress to not violate the trust placed in the procedure of self-assessment by diverse partakers who can bluntly reveals system faults. Particularly, in this particular context, an assessor might remain concerned about the fact that future self-evaluation procedures can necessarily undermine by the negative audit observations. Moreover, at the time when a specific auditor assumes the role of a facilitator and is consequently assigned the role of reviewing risks as well as controls that were necessarily subject of the assessment practice. In addition to this, social pressure threats might also arise in case if the aiding assessor feels pressure to not violate the trust placed in the procedure of self-assessment by the participants who openly reveal weakness (Dewing and Russell 2014). In case if an assessor might be dealing with individual threats, there might be multiple threats, mitigating facets in diverse situations.
Real-world Instances of Ethical Breaches by Auditors
Social Pressure can be considered to be an important factor of threat that an auditor might encounter at time when they are exposed to pressures from diverse external parties. Also, pressure from clients can drive the assessor to overlook different suspicious items. Again, social pressure can also take place when a team member of the assessment process becomes reluctant to counter a normally held view on the part of the team of audit else wise from the clients (Curtis et al. 2016).
Threats might also crop up at the time when assessor possesses an economic stake in the overall performance of the business concern. However, an assessor might fear that considerable negative observations, namely discovery of illegal actions can endanger the overall future, therefore, the assessor’s own interests as a member of the staff of the business concern (DeFond and Zhang 2014).
The threats might arise at the time when an assessor happens to be a close friend or else close relative of the manager else wise a member of the staff of the audit client. In this case, the assessor might fail to notice, soften, or else delay reporting negative audit observations to avert embarrassing the friend else wise relative (DeFond and Zhang 2014).
The threat might crop up owing to long term association with the assessor with the client of the audit. Essentially, familiarity might perhaps direct the way towards losing objectivity of auditor during an assessment van (Twist et al. 2015). This can be carried out by making the assessor exceedingly understanding to the client.
The threat might possibly stem from cultural, racial else wise gender unfairness. For instance, in a multidivisional corporation, a regionally based assessor might be biased or else prejudiced against audit clients situated in different foreign locations (Mio 2016).
The threat might also stem from unconscious and unintended psychological bias in the process of inferring information depending on role of a person in a specific situation (Mio 2016). For instance, in case if someone undertakes a critical audit viewpoint, they might fail to notice positive information.
Self-review threats might occur at the time when the assessor reviews their own work undertaken during a prior audit else wise consulting engagement. For instance, an assessor might assess a specific department continually else wise in consecutive years. However, the assessor might deliver consulting services in association with system execution (Curtis et al. 2016).
Intimidation threat occurs at the time when assessors is deterred from acting objectively by means of threats that can be actual or else perceived else wise overtly coerced by clients of the audit and other concerned parties.
Practical Implications of External Audits
Advocacy threat arise at the when assessors act in a biased manner to promote or advocate in favour or else against the audit client in a way that can compromise the overall objectivity of the client (Curtis et al. 2016).
Auditors necessarily play a very important role in making certain that the investors can become confident, aware and informed at time of arriving at investment decisions. Superior quality audit can help in maintaining higher quality financial statements and facilitate financiers to depend on the independent assessment of financial statements by the auditors.
The practical implications for the external audit include that it shields the interest particularly financial interest of individuals who are related to management of business entity irrespective of whether they are partners else shareholders. In itself, external audit acts as a process of investigation process on the members of the staff from undertaking misappropriation. In addition to this, audited pecuniary assertions of accounts can also help in settling tax liability, negotiating borrowed loans and for the purpose of determining the purchase considerations for a corporation (Curtis et al. 2016). Furthermore, the audit process can prove to be effective for settling different disputes of trade for higher amounts of wages else bonuses along with claims with regard to damage suffered by property, fire else wise certain other disaster. Moreover, the external audit process might also help in the process of identification of wastages along with losses to reflect the variant ways by which these factors might be examined.
In itself, the external audit procedure also helps in ascertaining whether the obligatory books of accounts along with allied records have been appropriately maintained and aids clients in making good deficiencies else wise inadequacies in this regard. Nevertheless, as an appraisal function, audit assists in reviewing the overall existence as well as operations of different controls in the business concern and registers weaknesses as well as insufficiencies. Again, audited items and accounts are of immense help in the process of settlement of accounts at the time of admittance or demise of partner (DeFond and Zhang 2014). Yet again, government might possibly require assessed and certified pronouncements before it provides assistance or else issues a business license for a specific trade.
Ethical standards particularly at British audit firms are said to be under examination after the Financial Reporting Council (FRC) mentioned that it had observed substantiation that the violations it exposed at KPMG might be more widespread. In essence, FRC also declared a double assessment into KPMG and whether the same had violated the ethical standards of the profession. A specific part of the probe was mainly founded on the appointment of the chairman of Pendragon that is one of the clients of the big four firms. Again, the other part of the probe wanted to understand whether KPMG has committed an ethical violation in association to the non-timely disposal of the shareholding in a client concern. Again, FRC also ordered an overall enhancement in ethical standards mentioning that it was asking for recognition of further instances of events that explains violation of the ethical standards. In this connection it was mentioned that FRC also discovered violations counting efforts for cross selling different non-audit services to specific audit clients (DeFond and Zhang 2014). This also indicated the failure to acquire proper clearance for specific contingent fee arrangement and examples of incidents where details of shareholding in audited business entities were not predisposed on a timely manner.
Another case that indicates towards the breach of the ethical standards by the auditors include the “Fraud and Loss at Adelphia: A Wall Street Story”. The company presented further misrepresentations in company’s public declarations and filings in a bid to maintain appearance and create transactions along with fictitious documents to prove that the debts are necessarily repaid. In this, Deloitte is the external assessor of the firm Adelphia that suspended their work of audit during the year 200. This is because they necessarily made claims that practically could not depend on the information delivered by the management. They also needed an overall expansion of the audit scope (DeFond and Zhang 2014). Thereafter, the auditor Deloitte was necessarily dismissed by the firm Adelphia. In addition to this, SEC also charged the accounting firm Deloitte for undertaking professional negligence, violation of the contract, acts of fraud and failure to identify the massive acts of fraud at the corporation Adelphia during the financial year 1999-2000.
Conclusion
In conclusion, it can be hereby mentioned that the current study helps in gaining comprehensive understanding as regards the meaning and significance of independence of external auditor. In addition to this, the current segment also highlights and elucidates illustratively specific factors such as social pressure, economic interest, personal association, familiarity, cultural, racial as well as gender biases, cognitive biases, self review and intimidation threat. Thereafter, the present segment also aids in understanding specific implications for the external auditor in satisfying various demands of this particular aspect of the audit role. Furthermore, the current paper also illuminates the cases of violation of ethical responsibilities by KPMG for Pendragon and Deloitte for Adelphia.
References
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