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The Role of Safeguards in Strengthening Independence - Term Paper Example

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Independent auditing is encouraged in organizations in order to protect the potential investors and shareholders from any mis-representation of the financial statement or fraudulent claims that are often made in the public companies (Gray and Manson, 2008: 98). Moreover, after the Sarbanes-Oxley Act (SOX) introduced in 2002, the appointment of independent auditor becomes mandatory for improving the auditing and accounting procedure. Many organizations are seen to appoint independent auditors, who are certified public accountants, responsible for checking their business transactions and financial records, yet not being affiliated with it (Singleton, T.W. and Singleton, A.J., 2010: 13). However, independent auditing is seen to suffer from a large number of threats such as, intimidation threat, trust or familiarity threat, advocacy threat, management threat, self-review threat and self-interest threat. Therefore, safeguarding the independence of the auditors becomes a major area of concern. This report focuses on the safeguards for the independence of auditors. Safeguards to save the Independence of the Auditors On recognizing the significant threat in dependence in the auditing process, the organization must decide on some safeguards in order to save the auditors. Some of the approaches that are considered by organizations are as follows: Mandatory rotation in the auditor: In a case where an external auditor is serving a particular client for many years, they often end up building relationships with their clients, which make them less skeptical about their work than that they would have been otherwise. The SOX Act has made it mandatory for the public company, who is the partner-in-charge, to rotate their auditors, at least every five years. However, for non-public companies, there are no such requirements for rotation of auditors. It has been argued that many of the public companies opt for periodical rotations of their auditors in order to bring in a fresh approach and assure objectivity in their auditing. A recent study released by GAO, on the cost incurred by organizations due to the mandatory rotation, suggests that the cost of rotation is quite high and certain safeguard measures can be used in this process (Rittenberg, Schwieger and Johnstone, 2008: 67). Peer review: Given that the work conducted by the auditor would be reviewed during, before and even after the completion, then it automatically reinforces the need for high-quality performance delivery and decision making. The Certified Public Accountants firms have managers and audit partners who review the work of the staff auditors. Furthermore, the audits of the public companies and other engagements are checked by independent audit partners, who provide the second review of the information, before the audit opinion is finally released. Apart from this, in many large organizations, there are separate programs for conducting internal quality review, where the managers and other independent groups perform the review and documentation of selected audits to ensure that work has been conducted objectively and meets professional standards (Rittenberg, Schwieger and Johnstone, 2008: 67). Appointing of Independent auditor and proper fee-setting body such as, the State or a State agency? or a shareholder/stakeholder panel: Independent audito ...Show more


The Role of Safeguards in Strengthening Independence Name of the Student Student’s ID University Date Table of Contents Safeguards to save the Independence of the Auditors 3 Conclusion 5 References 6 Introduction Financial auditing refers to the process of evaluating the financial information and determining whether they comply with the regulations and standards laid down for the public companies (Basu, 2010: 1.4; Kumar and Sharma, 2006: 2)…
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