Auditor’s role
If all the elements and transaction of financial nature were properly and accurately recorded in the books, and if both managers and owners of businesses enterprise were completely honest and sufficiently conduct the matters related to accounting then there is no need or very less need of independent auditing. However, human nature is different and it is not possible that everyone conduct their operations skillfully and honestly, therefore there is always a need for the auditor.
There are number of businesses which appoint internal auditor on the basis of their size and nature. Responsibilities and functions of internal auditors are similar from the independent auditors, but these functions and responsibilities are completely different from independent auditors in context of impartiality and independence (Crfonline, n.d.). In this essay we discuss and critically evaluate the duties and responsibilities of independent auditors towards their clients and general public. Subsequently, this essay is concluded with brief conclusion.
There are number of decisions which are based on the financial information provided by the organization or person such as purchase and sell of securities, grant of credit, decision of bank for providing loan, filing income tax returns and tax imposed on income, all these decisions are directly or indirectly based on the `financial information. In many of these situations goals of information provider counter the goals of information users. These reasons increase the need of independent auditors in the society because independent auditor is the person who with his professional competency and integrity can tell us whether financial information on which user rely shows real and fair picture or not.
Good and fair accounting and financial reporting help the society in allocating its resources efficiently, and its main aim is allocating the limited capital resources to the production of those goods which demands are higher. Generally, economic resources are allocated to those organizations which ensure that they are capable of using that resource to the best. If reporting is not independent and accurate then it prevents the economic resources to allocate at those organizations which make best use of it (Kueppers & Sullivan, 2010).
However, it is the duty of independent auditor that it contributes credibility to financial statements. In this context, credibility means users of financial statements can believe those statements. In other words, outsiders such as trade creditors, bankers, stockholders, government, and other interested parties can rely on them. It must be noted that audited financial statements are now the accepted means through which organizations report their operating results and financial positions. Audit is the word which relates directly with the financial statements such as balance sheet, income and retained earnings, and statement of cash flows which are accompanied with the auditor reports prepared by independent auditor who express their professional opinion in context of fairness of the financial statement of the company.
In short, the main purpose of auditor is to determine whether these are prepared according to the generally accepted accounting principles (GAAP). Usually, these audits are performed by firms in which certified public accountants conduct these actions (ACCA, n.d.; ICAEW, n.d.).
Importance of auditor’s independence
In recent years, importance of auditor independence has been recognized at national level because of issues raised in Enron, WorldCom, and other scandals. For the purpose of gaining the trust of public back, Sarbanes-Oxley Act was passed by congress. This Act allows the non- accountant personals to oversee the activities of auditors. The main aim of this Act is to restore the confidence of general public in security market. Throughout the 20th century, issue of auditor independence is an issue of concern.
Paper written by Sara An Reiter and Paul F. Williams mainly analyze the rhetoric surrounding of auditor’s profession in context of independence. This paper traces the evolution of role of auditor from professional man to Judicial Man and Economic Man (Reiter & Williams, 20004).
Average employee of the company does not have any obligation to prevent corrupt influence in working, but it is the obligation of the auditor to prevent corrupt influence in company’s working. It is the duty of auditor that he resists the pressure related to practice of firm or client, if such practice is against the professional rules of auditor in context of social responsibility. Social responsibility of auditor involves role of auditor as trustworthy evaluators of accounting reports and financial statements because security markets are depend on these accounting reports and financial statements. Therefore, auditor’s independence is necessary for society and it plays important role in the current economic system.
However, it must be noted that these general responsibilities of auditor to act with due care and competency is arises from their professional roles. Some obligations on auditor are imposed by contract law, and others are imposed by professional bodies and general social norms. These obligations ensure quality maintenance while making decision and it also impose other professional responsibilities (Lexis-Nexis, n.d.).
Therefore, on the basis of past approaches it is clear that the main aim of auditor independence is to give objective decisions related to professional obligations to general public. These decisions usually involve objective and reliable evaluation of financial statements and accounting reports, and also to meet social expectations. For understanding the lack of correlation between the decision made by auditor and social norms, it is necessary to evaluate the general norms and some other social norms (Warren & Alzola, 2008).
Auditor may be liable for negligence not only under contract law but also under tort law, if any person suffered loss because of auditor’s negligence to which auditor owns duty of care. An accountant always own duty of care towards its client but this duty is also correlated with the social duties of accountant. In usual practice, tort liabilities are introduced in context of claims related to third parties, and it must be noted it is necessary to evaluate whether these claim are barred by limitation act because in some cases tort claim are filed under the contract law.
Recent decision made by court are related to negligence, and it also includes some important decision such as decision made by House of Lords, in which they expand the classes of case in which accountant profess some special skills towards their client. Some examples of these cases are Hedley Byrne and Co Ltd v Heller and Partners (1964) AC 465, Smith v Eric S Bush (1990) 1 AC 831 and Caparo Industries plc v Dickman and others (1990) 2 AC 605. This type of liability of accountant arises when accountant work for his client in those situations when he or she clearly knows that work is of such nature that third person relied on it and third party who relied on such work suffers loss or damage because of negligence of auditor.
Liability of accountant will arise when work which is in question was reasonable in nature for the purpose of third party relying on it for specific purpose. If all these stated conditions are satisfied then only accountant is liable towards the third party for any negligence otherwise not. Case law Law Society v KPMG Peat Marwick (2000) 4 All ER 540 states that accountant is liable towards the third party and owns duty of care only when all stated conditions are satisfied (Corplaw, 2014).
Conclusion:
After analyzing all the above facts, it is clear that it is not possible for auditor to guard every situation in which auditor owns duty of care or can incur liability for professional negligence. Therefore, it is necessary that before carrying out any work for client, an auditor must ensure that he performed all duties imposed on him and also exclude the matter stated by client on written. However, if any additional duties are expected by client from auditor then it must be provide in written form.
It is necessary that while performing the professional duties, auditor also fulfill its obligations towards society and ensures that they does not breach any social duty imposed on them. Liability of auditor towards third party is not only recognized by the social norms but it also recognized by tort law and contract law. As per this liability auditor is liable towards the person also who rely on the information provided by the auditor and suffers loss because of auditors negligence. Therefore, it is concluded that liability of auditors is not only towards its client only but it also towards the person who rely on their decisions and information.
References:
ACCA. Auditor Liability. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditor-liability.html. Accessed on 4th May 2017.
ACCA. Professional liability of accountants and auditors. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-members/2012/2012p/Prof_liability.pdf. Accessed on 4th May 2017.
Caparo Industries plc v Dickman and others (1990) 2 AC 605.
Corplawadmin, (2014). Importance Of Auditor Independence. Available at: https://www.corplaw.ie/blog/bid/369348/Importance-Of-Auditor-Independence. Accessed on 4th May 2017.
Crfonline. Understanding the Auditor’s Report. Available at: https://www.crfonline.org/orc/cro/cro-11.html. Accessed on 4th May 2017.
Hedley Byrne and Co Ltd v Heller and Partners (1964) AC 465.
ICAEW, (2003). Reviewing auditor independence. Available at: https://www.icaew.com/-/media/corporate/files/technical/audit-and-assurance/audit/guidance-for-audit-committees/reviewing-auditor-independence.ashx. Accessed on 4th May 2017.
Kueppers, J. R. & Sullivian, B. K. (2010). How and why an independent audit matters. International Journal of Disclosure and Governance, Volume 7(4), Pp 286–293.
Law Society v KPMG Peat Marwick (2000) 4 All ER 540.
Lexis-nexis. An auditor’s duties, rights and liabilities—overview. Available at: https://www.lexisnexis.com/uk/lexispsl/corporate/document/391387/55YB-2GF1-F186-H11P-00000-00/An+auditor%27s+duties,+rights+and+liabilities%E2%80%94overview. Accessed on 4th May 2017.
Reiter, A. S. & Williams, F. P. (2004). The Philosophy and Rhetoric of Auditor Independence Concepts. Business Ethics Quarterly, Volume 14(3), Pp- 355-376.
Smith v Eric S Bush (1990) 1 AC 83.
Warren, E. D. & Alzola, M. (2008). Ensuring Independent Auditors: Increasing the Saliency of the Professional Identity. Available at: https://www.fordham.edu/download/downloads/id/2061/ensuring_independent_auditors_-_increasing_the_saliency_of_the_professional_identity.pdf. Accessed on 4th May 2017.
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