Legal Requirements In Relation To Auditor Accounting Essay

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Independence is the cornerstone of the accounting profession and one of its most precious assets. Robert Mednick, Chair, American Institute of Certified Public Accountants (AICPA) Board of Directors, 1997.

Audits serve a fundamental economic purpose and play an essential role in serving the public interest to fortify accountability and increase confidence in financial reporting. As audits help enhance economic prosperity it should be carried out by someone who is completely independent with the firm. The auditor is the independent link between management and those who rely on the financial statements for the decision-making. In that role, the auditor assesses the judgments made by management in applying standards for the presentation of the financial information.

Auditor independence from the point of view of board of directors is considered vital to stakeholders as it acts as a key factor in helping to furnish audit quality. The auditors present an impartial report to the stakeholders on the certainty and fairness of the financial statements which are set up by the board of directors or management. The UK audit as a result plays an essential stewardship role. Limited companies are owned by shareholders but managed by directors who report to the shareholders and the auditors act as a watchdog to see whether the directors show a true & fair view of the business while reporting to shareholders.

Nevertheless, as a result of the separation of ownership and regulation, the difficulties with information asymmetries and differing motives may lead to conflicts in the shareholder-director relationship. Usually, as shareholders have limited access to information, they believe that they are not getting accurate information they require to make informed decisions about the financial statements is biased. Thus, shareholders are not likely to trust directors and in such case the benefits of an audit in maintaining confidence and reinforcing trust are likely to be perceived as outweighing the costs. The independence between directors and auditors is the basis of the profession. We shall see in this study about the factors affecting this very independence.

In order to maintain independence and impartiality, auditors should always be conscious of threats and apply appropriate safeguards where necessary. Reputation is considered to be a fundamental factor in increasing confidence and auditor independence is an important quality that shareholders search for. Auditors are likely to maintain their independence to safeguard their reputation and through which help them retain and win audits.

Independence has both the element of Legal and Ethical requirement. Legal requirement in the sense that it is laid out in the Companies Act 2001 under Section 198, who can be an auditor and who can't. In fact Companies Act 2001 tries to bring a professional remoteness of the auditor with his client and also to secure auditor's independence by disqualifying certain people from eligibility for appointment and by controlling his removal or resignation.

Legal requirements in relation to auditor

The general purpose of law is to secure that only persons can be appointed as auditors who are well qualified, properly supervised and can carry out the audits properly and with integrity and proper independence.

Section 198(1) of the companies ACT 2001 provides that a person shall not be appointed or act as auditor of a company other than a small private company unless the person is-

a member of-

the Institute Accountants in England and Wales;

the Association of Chartered Certified Accountants;

the Institute of Chartered Accountants of Ireland;

the Institute of Chartered Accountants of India; or

the South African Institute of Chartered Accountants;

Section 198(2) of the companies ACT 2001 holds that a person will be ineligible for appointment or to act as an auditor of a company if he or she is

(a) a director or employee of the company;


(b) a person who is a partner, or in the employment, of a director or employee of the company;


(c) a liquidator or a person who is a receiver in respect of the property of the company;


(d) a body corporate;


(e) a person who is not ordinarily resident in Mauritius;


(f) a person who is indebted in an amount exceeding 10,000 rupees

to the company, or to a related company unless the debt is in the ordinary course of business; or


(g) a person who, by virtue of paragraph (a) or (b), may not be appointed or act as auditor of a related company.

Objectives of the study

The purpose of the independent audit process is to have a third party examine an organization's financial statements to see if they are accurate and reliable. Thus, auditor independence is essential to that contribution. It is not only of great importance that auditors should maintain their independence but also they should provide high quality auditing. Thus, without auditor independence, the credibility and reliability of financial information will be reduced and may cause problem to the auditing profession.

The impairment of auditor independence is the principal cause of many corporate collapses and scandals (example Enron and WorldCom) and this have cast a shadow of doubt over the performance of the auditors.

The principle objective of this research seeks to identify the potential factors which could affect auditor independence. Furthermore, these factors will be analysed both positively and negatively that is, whether they will enhance or impair auditor independence when giving an audit opinion on financial statements. Additionally, a few suggestions will be put forward how the factors will contribute towards a better understanding on the ways to increase confidence in financial reporting and credibility of the auditing profession. The auditor's and shareholders' perceptions will be considered in Mauritius as they are preparers and users of financial statements.

The benefits of this study is that the factors which mostly put pressure on the auditor independence will be identified and plausible solutions will be sought from academics and professionals about how these issue can be addressed and resolved.

Organization of the study

This study is organized into six chapters. Chapter 2 comprises a detailed literature review surrounding both the theoretical and empirical views regarding the stock market development and economic growth. Chapter 3 provides an overview of the individual SADC stock exchanges. Chapter 4 presents the method and variables employed in the study. The analysis and results of the study are presented in Chapter 5. Chapter 6 concludes the study while also highlighting its limitations and areas for further research.