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Auditor independence even though is a mindset includes the prevention of certain details and state of affairs which are very significant and reasonable to third parties. The well informed third party has knowledge of all the appropriate info which might include any precautions enforced and this would entail him/her to fairly reason out a firm's or a member's unity, detachment or professional independence had been endangered. Thus it is the duty of a member to prepare his mind to key out several threats and to utilise the precautions to nullify the same.
Auditor independence for the major part of the past three years had a lot of issues. These issues cropped up even before the Securities and Exchange Commission, the Enron Corp. and the WorldCom Inc., took up the issues and took efforts to chart rules in this area. The result was that considerable changes were brought about in the rules of auditor independence. Severe restrictions on several non-audit services provided by audit firms to its clients were also the results of the efforts taken up by Securities and Exchange Commission, the Enron Corp. and the WorldCom Inc. But still these rules were not sufficient as was proved by the needs of the Sarbanes-Oxley Act of 2002.
New risks keep on appearing in this globalised world endangering the independence of auditors especially in the post-Enron scenario, their independence has become a very important issue for the smooth operation and success of economic order. Thus it is left to the auditors to take care and to avoid landing themselves in such a position where conflict of interest and duty might arise.
The perception of independence is also a forceful fact. To understand that fact, the committee on Ethical Standards and Unjustified Removal of Auditors (CESURA) has deliberately researched all the potential vistas of the issue.
Meaning of Auditor Independence
Independence is basic to the dependability of auditors' reports. The reports of companies drawn up by these auditors would not be trusted by the investors and creditors and they would have lesser confidence in auditors if there was no independence of auditors in both concept and form. In reality the opinion of an auditor has to be based on an intended and impartial judgment. The judgment is with regard to the true and fair view of the financial statements which are prepared in conformity with the normally recognised accounting principles.
a)The conception from the controller the independence at the duration of 19th century of
[etheorise] controllers as advisers for the checked entities. British investors that are
prohibited of course controllers from the investment or the operation in the operational
concerns that they checked. Simultaneously if auditors proved that they were primarily
loyal to the capitalists the reach of professional accounting services were practically
liberal. For instance the controllers had the authorisation in order to they keep the books
and they develop the economic statements on the operational concerns that they checked
(Richard Baker, 2005).
Really at duration 5the of first parts of 20th century, the terms /concepts as the integrity, the objectivity and the honesty were acquaintances and deep rooted. It waany other kind of formal independence rules.
c)The AICPA Council in the year 1932 believed that limitations against auditors who
served as officers/directors of clients were not necessary and so disapproved them. But as
soon as the Securities Act of 1933 was ordained the sary to have.
d)Nevertheless, the proposal showed the first concerns with regard to a need is maintained
the appearance to maintain the objectivity, as well as the existence independent actually.
After the titles the law 1933 was established, the federal commercial Committee released
ordinances expressing that it would not conceive auditors who serve as officers or
directors as independent Even those 5 officers or directors who had any direct or indirect interests in, public audit clients were also not considered independent. The reason was that the relationship between clients and the auditors might subconsciously mar the auditor's impartiality.
e). The good developed models of mix 21of of accountancy and independent accountant controls have served and have made capital markets 5U.S a national virtue. The detachment of controller of is vital importance in the confidence of shareholders.But when any energies weakening or is presented to weaken the regulators of independence and other they become worried
Definition of Auditor Independence
The IFAC rules of thumb on auditor independence states that- "When in public practice an accountant should both be and appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity".
According to the Council of the American Institute of Certified Public Accountants (AICPA), "Independence, both historically and philosophically, is the foundation of the public accounting profession and upon its maintenance depend the profession's strength and its stature" (Carey, 1970, p 182).
Auditor independence is the foundation to the auditing profession, as it is the basis for the public's trust in the evidence function (Caswell & Allen 2001). McGrath et al. (2001, p 40) indicate that "when independent auditors render unbiased audit decisions, the broader goal of auditor independence, namely to support user reliance on the financial reporting According to the annual report of Berkshire Hathaway Inc. in shareholders 6 "the controllers certify annually the numbers that are given in their by the management and at the opinion unqualifiedly declare that these calculate present fairly `the economic place of their customers. The controllers use appeasing their language even if they know from the long-lasting and laborious experience that the numbers ratified thus it is likely they differ impressively from the genuine acceptances for the period." (Berkshire Hathaway Inc. Annual Report to Shareholders 1985)
j)Is the independence of controllers useful it checks the qualitative accountant controls and it adds in the economic statement users'? confidence in the economic process of cover Enough important cases of erroneously declared acceptances prompted SEC in 2000 in order to they suppose the rules that prohibit the services of not-accountant control incoherent in the independence of controllers These erroneous formulations opened the street for many is examined the efficiency of different opinions of operation of accountant control, particularly auditor independence. Further, the SEC conceives the additional metres in order to is strengthened the real and obvious independence of controllers, particularly taking into consideration the destruction Enron.
Since auditor independence is in reality a mental state, capitalists and other users of financial statements will not be in a position to precisely consider actual auditor independence. They can only measure the appearance of the auditor's independence. Thus even if an auditor acts independently and issues in fact a balanced audit judgment, capitalist assurance is eroded if they feel that the auditor was not independent (Deborah, 2004).
Types of auditor independence
Auditor independence is the basis of the auditing profession as it is the base of the public's faith in the accounting profession (Deborah, 2004). Since 2000, a wave of high profile accounting scandals has cast the profession into the limelight, negatively affecting the public perception of auditor independence.
The manifestation of the auditor's independence can be done in three main ways. They are according to Mautz & Sharaf (1961) as follows:
Programming independence fundamentally defends the auditor's power to pick the most suitable strategy when carrying on an audit. Auditors must be given the freedom to set about a piece of work in whatsoever manner they believe to be the best. The auditor may have to adapt to the situation when his client company develops and carries on new activities as he/she will have to account for these. Apart from this the profession of auditing is dynamic as there is constant development and up gradation of new techniques which the auditor may choose to implement. The strategy or even the purported means which the auditor specifies to enforce cannot be suppressed in any way (Mautz & Sharaf 1961).
Investigative independence safe guards the auditor's capability to put into operation the schemes in whatever manner they regard necessary. Essentially, auditors must have infinite access to all company info. Any queries with regard to a company's business or its treatment of accounting have to be responded by the company. The compilation of audit proof is a crucial procedure, and cannot be controlled by the client company (Mautz & Sharaf 1961).
Finally reporting independence defends the auditors' aptitude to disclose to the public any info they think should be revealed. If the directors of a company have been misinforming shareholders by distorting accounting info then they will surely prevent the auditors from reporting such information. Under such circumstances the auditor can make use of his independence and according to his conscious (Mautz & Sharaf 1961).
Market Changes Affecting Auditor Independence
Jonathan Weil, (2004), proposes that during the 1970s and 1980s the demand for audit services and the mode of conducting audits changed. This change contributed to the fall in auditor independence. The first factor of alteration was price competition. Before the 1970s, the American Institute of Certified Public Accountants (AICPA) Code of Conduct disallowed auditors from advertising in public about their services, from constituting unwelcome appeals to competitor firms' clients, and from taking part in competitor calling for audits. But due to threats of antitrust action from the federal government, the AICPA was forced to get rid of these bans against competitive practices.
5 Consequently, competitive submission of offers in the control that is changed in common and produced force in order to it decreases the hours of employment of accountant control. This made the accountant controls in a product of products. In order to they maintain in general incomes and constant gainfulness, the accountant companies began to underline in the services of not-accountant control. The proportional reduction in the incomes of wage of accountant control and the proportional increase in the dependence in the incomes by the services of not-accountant control should they have maintained constant atmospheric pressure the independence of controllers(Richard Baker, 2005).
The second change is with regard to conducting an audit with an altered stress on "risk-based auditing." This type of risk based auditing is reasonable because the greatest amount of effort on audit is place on the largest areas of audit risk. This concept presumes that auditors are experts who can determine the most hazardous fields of a company's operations. Regrettably, as Enron and other business collapses have evidenced, some auditors are not adequately talented to decide risky areas of a company's operations. Additionally, auditors applying a risk-based approach may not be in a position to find out deceitful activities (Richard Baker, 2005).
3 After the account of also control scandals at the duration of premature 2000s, and establishment of law sarbanes-Oxley 2002, the thought of controllers as confidential advisers appears to become more and more invalid. The arguments of likely new significance of independence of controllers open still, but the public enterprises that calculate the table of omission are presented a fabrication of independence of controllers that underlines a bigger level of detachment between the [diagonios]-[archeiothetimenis] management of controllers and customers.(Richard Baker, 2005).
Does independence matter?
Based on the Code of Conduct of ICAI, "Human nature as it is, a man often places his personal gain above service. Therefore, persons who as individuals and as a class are willing to place public good above their personal gain have enjoyed respect and honour."
The above idea is no doubt lofty but the question is that will such words suffice to stimulate auditors to better their ethical standards? The answer can be hardly given and so in order that an auditor practices independence it is we who must be able to prove that it is only in their best interest. This issue can be considered from both economic and ethical perspectives (Swapan Bakshi, 2004).
According to Stella Fearnley and Viven Beattie, (2004), it is not possible to well inform an investor as to what auditor independence in appearance actually demands. The Review Board states that audit firms must disclose the following, Management structures; management of economic dependence at firm and partner level, quality control procedures for audit and maintenance of independence, and financial information with regard to the relative profitability of audit. This would in the end increase auditor independence.
Threats to independence (Swapan Bakshi, 2004)
The current debacles underline the need to beef up the independence system. Quiet a lot of ways can have an impact of auditor independence and since it is not possible to list all areas of risk a few are as follows (Swapan Bakshi, 2004):
1 Financial interest with or in the matters of the client
2. Designation in companies as officer, member of the Board or even employee etc.
3. Involved in a family liaison with a client
4. Providing other services in addition to auditing to their audit clients
5. Depending solely on a client for fees
6. Contingent fees for professional service which depends on some particular info or results.
7. Accepting hospitality or any other welfare from client (Swapan Bakshi, 2004).
Auditor independence has thus been the field of study for a substantial number of research papers and debates out of which some have developed many suggestions for progress. Thus it can be seen that the present need is for a complete afterthought of the conception of auditor independence. Such reconsideration may sometimes lead to a new construct in which auditor independence could be instituted on confirming the accounting profession's previous ethic of being an objective and unbiased exponent of accounting standards, instead of being an advocate for client positions. Because of the recent and in progress accounting and auditing outrages, it seems apparent that independent auditors cannot be advocates for client positions. Neither the Sarbanes-Oxley Act (SOA) nor the Public Companies Accounting Oversight Board (PCAOB) independence standards distinctively cover this issue.
2)A second question with regard to the independence of controllers that has not been
examined enough from SOA and rules PCAOB is the field of influence from the
management of customers with regard to the wage of accountant control and the line of
obligation of accountant control.
SOA section 301 defines the following:
"The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee".
According to Richard Baker, (2005) "A new concept of auditor independence is required that specifically incorporates the propositions that 1) auditors should not be advocates for their clients, and 2) management should not be able to influence the audit fee and the scope of the audit. Without a transition to this concept, auditor independence standards will most likely be primarily cosmetic and will not provide sufficient assurance that auditors are in fact independent from client management".
Therefore it is time that some decision on which auditor independence has to be based should be taken and such independence should not hinder shareholder confidence. Shareholders are the most important elements of a corporation, since it is their money with which the company runs and so they will have to be taken into confidence. Their morale should not be marred. This will surely require auditor independence but with the limitations discussed in this paper.