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The auditing profession is surrounded by several conflicts. The client firm hires the auditor who is supposed to conduct the audit in an independent manner and any factor impairing the auditor independence should be eliminated. The factors which have been analyzed and are considered to impair auditor independence are larger size of audit fees, extensive level of competition among audit firms, longer tenure of an audit firm fulfilling the needs of a given client. However, the existence of audit committee has been considered to enhance auditor independence and the provision of NAS and size of audit firm has produced mixed results.
The study reveals that majority of the respondents, that is, both shareholders and auditors are in the opinion that independence will be safeguarded by the existence of an active audit committee, if the majority members were impartial and non-executive directors as their independent status would neutralize any conflict between management and the auditor. Moreover, the audit committee shall get the responsibility for approving and reviewing audit fees and also the audit committee report which includes the activities undertaken during the financial year to ensure adequate internal control must be included in the annual report.
Provision of non-audit services
Auditors possess market based incentives to stay independent; nevertheless this independence may be impaired when NAS are provided to their clients. However, as analyzed in this study, NAS should not be disallowed by audit firms. This case has produced mixed reactions on this topic. The importance of the issue is that prohibiting the provision of NAS by the same auditor does not really solve the problem of corporate failures. The provision of NAS by auditors should not be completely banned, rather there is need for improvement in disclosure, governance and transparency as far as non-audit fees, procedures and policies are concerned. Additionally, the auditors should enhance their moral capacity in the conduct of professional engagements with clients. Additionally, there can be a proper segregation of duties between staff that perform audit services and NAS. This segregation of duties should be in the form of separate departments or entities, where different partners and team provide the two services.
Size of audit firm
As described by the empirical evidence, large firms are perceived to provide better quality audit compare to small firms. Large firms have greater resources, technical knowledge and global reach allows them to deal with clients more objectively without the fear of termination. In fact, large firmâ€™s auditors may exhibit higher levels of ethical reasoning (Tsui and Gul, 1996), and hence would be better able to resist management pressure. However, the findings in this study suggests that majority of auditors and shareholders opinions are rather neutral and some of them disagree that only large firms can provide better quality audit service. Small firms also have been able to gain the expertise and financial resources to deliver an independent audit services that lends credibility and reliability to the information content of the audited financial statements.
The lengthy tenure of an audit firm has been considered to impair auditor independence because auditors may involve in a friendly relationship with the clientsâ€™ management thus causing the auditor to involve with managements problems and lose professional skepticism. Shorter auditor tenure also may lead to audit risk as auditors will not gain specific knowledge to understand the clientâ€™s business. Thus, the Sarbanes-Oxley Act requires that audit partners can change client after a minimum of five years known as auditor rotation thus improving auditor independence.
Competition in the audit services market
In this study, firms operating in an intensely competitive environment have been considered to have difficulty in remaining independent as the client firm can easily acquire the services of another auditor. However, extensive competition can also encourage auditors to work harder and provide better quality audit service, thus enhancing auditor independence in the long term. Competition can be a challenge to the auditors for them to remain independent.
Size of audit fees
Furthermore, the greater size of audit fees obtained by audit firm from the client company has been considered the most important to impair auditor independence in this study. The audit firm will not be able to provide a reliable and independent audit due to a greater amount of audit fees received by the client company. Thus, audit fees should be reviewed by the independent body, that is, audit committee and the audit firm should avoid high audit fees (in relation to the total % of audit revenue) as this may affect the integrity of auditors.
It was also observed that existing laws need to be reviewed to become relevant in the prevailing business world. In addition, existing ethical codes and laws need to be reviewed to address the contemporary challenges of engendering greater level of confidence in financial reporting and auditing. Accounting standards and Auditing and Assurance have a salutary effect on auditorâ€™s independence by prescribing precise treatment and audit procedure to be followed under particular circumstances. Both company management and auditors would realize that any other audit firm would have to abide by the same standards and reach similar conclusions.
Another internationally accepted norm is peer review which is essentially a quality control procedure designed to ensure that overall quality of audit is maintained throughout the profession. Under this system, audit working papers of a firm are reviewed either by a panel of experts set up by the professional institute or by another independent audit firm.
Ethics also plays an important in the auditing profession. If the auditor is honest and straightforward in his professional work and does not allow prejudice to override his objectivity. Moreover, he always maintains an impartial attitude and frees himself from any interest which is incompatible with his integrity and objectivity. Such an auditor will always provide an independent and reliable audit service.
5.3 Areas for further research
This study is not complete because it takes into consideration only six factors; however, there are other factors such as gifts, client financial interest, the nature of conflict issue and other factors which can be analyzed. Additionally, the threats which are Self-interest threat, Familiarity threat, Intimidation threat, Self-review threat and Advocacy threat affecting auditor independence also can be reviewed.