Introduction The value of an audited financial statement depends on the auditor’s independence. Accounting scandals such as Enron of the United States as well as HIH Insurance of Australia have created doubts regarding auditor’s independence and the value of their audit. The familiarity that is developed from the long audit tenure and the economic dependence arising from the non audit services and social bond developed between the auditor and the auditor’s client through long-term association have raised questions regarding auditor independence (Carson & Simnett, 2006). Non Audit Services (NAS) are also identified as ‘management advisory services’. Regulators believe that non audit services provided to audit clients is a serious threat to the auditors’ independence. Regulators believe that conflicts of interest occur and fee dependence has a damaging affect on auditor independence. Audit firms often defend themselves by saying that fee dependence does not influence them and audit and non audit services are performed independently by separate staff (Houghton & Ikin, 2001). It is also opined that non auditing services help in reduction of total costs, improve technical competence and intensify competition. The audit firms, the audit clients and regulatory bodies can bring about efficient services mix through market interaction (Arrunada, 1999). 2. Literature Review 2.1 Non Audit Services of Auditors The services that external auditors provide to their clients can be categorised into consulting, tax and audit. Consulting and tax are often referred as non audit services. Section 201 of the Sarbanes Oxley Act lays down the services which the external audit firm should not perform. They cannot perform bookkeeping services related to financial statements and accounting records. They cannot design or implement financial information systems. They cannot perform valuation or appraisal services, actuarial services, management functions, legal services, litigation or administration related expert services. The auditor is also prohibited from providing marketing and planning related non audit services to the audit client and tax services to the management team or the family members of the team (Burke & et. al., 2008). 2.2 Threat to Auditor’s Independence It is believed that NAS services of auditors change their role from that of an outsider who can take a transparent view to that of an insider who actively participates in the decision making and acts as an advisor. The economic bond that is created between the audit client and the auditor through their contract hampers the auditor’s independence. In order to carry out a comprehensive analysis of the independence of auditors, it is essential to examine the marginal fee dependence that results from the NAS services in addition to the total fee dependence. It has been stated that auditors should factually as well as in terms of appearance, be independent. NAS has an impact on the perception regarding the independence of auditors and it creates doubt regarding the authenticity of the auditor’s information (Francis, 2006). Legislations have banned the provision of several NAS by auditors for preserving the auditor’s independence. Regulators believed that auditors could go to the extent of sacrificing their independence in order to retain clients who pay large non audit fees (Defond & et. al., 2002) The various threats
Provision of Non Audit Services by the Auditor to the Audit Client is a Threat to Auditors' Independence. Evaluate the Seriousness of this Threat Compared With Other Threats to Auditors' Independence and Identify the Effective Means of Strengthening Auditors' Independence Table of Contents Table of Contents 2 1.Introduction 3 2…
However, the fact that the underlying principle in auditing is the concept of ‘opinion’, leaves the process of auditing with much to be desired, considering that conflict of interests or biased opinions have arisen from the auditing firms in relation to the truthfulness and accuracy of the transactions and financial reporting of their clients, eventually resulting to financial crisis, scandals and company failures that could eminently have been avoided, should the auditing reporting and opinion have been fair and balanced (Deloitte, 2012 p2).
The rotation of auditors is one of the criteria that propose towards the quality of audit in most of the cases.The integrity of the financial statements is contingent upon the audit. Audit of the financial statements elaborates the dependability of the users of the financial statements upon the reliability of the information provided in the financial statement.
The audit, which is mandatory and is required as per the legal obligations, is some times referred to as statutory audit. The statutory audit is going through a period of criticism and change. This is partly because of the failure of
The decision as to whether audit rotation should be made compulsory has become a ground for discussion in the U.S. and the world in general for over half a decade (Chi et al 2009). While the proponents of mandatory audit firm rotation boast of the
scandals of Enron and World Call in the early 20th century which involved the audit firms as accomplices of corruption and frauds the audit firms’ role and responsibilities have come under huge question.
People all over the globe have started to ponder on the pros and cons of
The professional bodies have been working on the ethical standards for a long time. Consequently, they enlist principles and threats to them. Moreover, the professional bodies also provide examples explaining
In April 2014 the European Parliament has voted for bringing mandatory auditor rotation into the EU region. European-listed companies, financial institutions, and banks will have to hire new auditors every 10 to 24 years. Appointment of a new auditor every decade can be extended in cases when companies appoint another audit firm.
ve focused on the status of audit quality, the factors that influence the audit quality as well as the consequences of audit quality on a number of variables. Some of the studies are reviewed in this section.
One study that focused on the status of audit quality is a
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