Why auditor must to be objective and independent - Essay Example

?Why auditor must be objective and independent? Issues such as fraud, misappropriation of company funds and misrepresentation of organizational financial statements are common in different types of the media across the globe. Both private and public companies significantly contribute to the growth and development of the economy in any country, hence; their financial statements ought to be closely audited in order to make sure that they are not characterised by falsehoods. In order to successfully carryout this feat, it can be seen that independent auditors play a significant role in the functioning of global capital markets. As such, this paper has been designed to evaluate the main reasons why auditors must be independent and objective in their operations. The main part of the paper will focus on why focus in terms of auditing financial statements of different companies is put on aspects such as objectivity as well as independence of the auditors who carry out different tasks related to financial reporting in the company. According to Kueppers & Sullivan (2010), the audit profession plays a very significant role in the functioning of the global capital markets and it also adds value to various roles played by different stakeholders in financial reporting in an organization. However, the effectiveness of an audit is reflected by the absence of failure of business or fraud after it has been completed. This can be achieved if an independent auditor is hired to perform such a task in the organization. Ussahawanitchakit (2012, p.1) posits to the effect that during the recent years, “auditors have become important professions for directly and indirectly promoting the growth of economics in the countries.” These professionals significantly help the stakeholders and other people to assess the value of the firm’s financial information in all aspects of business. This can be achieved through the implementation of accounting and auditing standards that are within the dictates of the financial rules and regulations in a given country (Intakhan and Ussahawanitchakit, 2010). In most cases, independent auditors are more appropriate in carrying out this particular task. In as far as auditing is concerned, it is imperative for the auditors to have some form of independence so that they can impartially dispense their duties. Basically, “audit independence is defined as an objective and trustworthy arbiter of the fair presentation of financial results,” (Falk et al., 1999 as cited in Ussahawanitchakit (2012, p.12). This is a critical factor in the audit profession given that it is comprised of objectivity and is often free from bias. Audit independence is very important in the preparation of financial statements since it helps to generate investor confidence if the financial statement has been carried out by an outsider or independent person. Beattie et al (1999), suggest that in general, audit independence includes independence in fact, which is an unbiased mental attitude of an auditor, and independence in appearance, which is the perception by a reasonable observer that an auditor has no relationship with an audit client which would suggest a conflict of interest audit independence can be achieved if there are no conflicts of interests among the parties involved. It can also be noted that independent auditors are mainly concerned with upholding the principles of ethics, fairness and other practices and operations for presenting audit quality which plays a role in improving the quality of auditing that would done. Independent audits are also important since they help to promote fairness in the creation of financial statements and are likely to go a long way in sustaining integrity in terms of financial reporting. Georgiade (2011), states that the responsibilities of the independent auditor when conducting an audit of financial statements in accordance with GAAS include the following: “Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, due to either fraud or error.” This significantly helps the auditor to make objective reports about the financial statement whereby he or she will be in a position to express an opinion about them. Such reports are unbiased, objective and they also help to promote transparency in the operations of the organization. The other main reason why objective and independent audits are important is that they are based on sound auditing standards and ethical principles are upheld when carrying out such tasks. Roberts (2010) also posits to the effect that independent audits are characterised by fairness given that they are impartial especially when dealing with stakeholders such as creditors, owners of the business as well as the management. In most cases, independent auditors are not swayed their opinion by any of the above mentioned stakeholders which makes their work credible and authentic. There are less chances of bias in the financial statements that are drawn by independent auditors in carrying out their work. The company involved will also be assured of preparing unbiased financial statements that will go a long way in generating confidence among different stakeholders involved in the operations of the organization. ­ Objective financial statements are advantageous in that they to create confidence among the investors particularly in public companies where different stakeholders have shares in the company. Cases of fraud are quite common in different financial institutions and these cases scare away investors. However, independent and objective audits are very important in as far as success of the organization is concerned since they help to restore investor confidence in the sector. Investors significantly contribute in the growth and development of a particular economy and this is the reason why fairness and objectivity should be given prominence in the operations of the company. If investors doubt the authenticity of the company’s financial statements, they can withdraw their shares which may negatively impact on the viability of the company. In some cases, the affected business may be forced to close shop if its way of financial reporting is viewed as negative by the investors. The members of the public as well as the customers in a certain organization can also be negatively impacted if the financial statements of a certain organizations are not independent. In most cases, stakeholders often do not like to associate with organizations that engage in unorthodox business. Georgiade (2011) suggests that ethical practices should be implemented each time a financial audit is carried out by a company. Failure to observe ethical requirements in the operations of the company will certainly result in the company losing the trust of the stakeholders who will think that the company thrives on scandals such as fraud or misappropriation of public funds. A lot of businesses have been affected by their bias in terms of their financial reporting if it is seen as biased. The other most important aspect that should be taken into consideration when carrying out independent audits is related to the issue of objectivity. Objective financial statements are likely to appeal to the interests of many stakeholders who may have interests in the organization. Members of the public should have access to the company’s financial statements whenever they feel they like them. A company that is confident about its financial statement has nothing to hide if members of the public have asked to see the financial statements. This is also important since it will help the organization to create mutual understanding with the stakeholders who may be interested in its operations. This will go a long way in promoting viability as well as sustainability in the operations of the organization in the long run. When auditors are objective and independent, they also become confident in their opinions which also help to increase the perceived reliability and quality of reported accounting numbers (Ghosh and Moon, 2005). This is very important since the financial statements that are drawn by people who are confident about their work are reliable. Reliability is essential in the operations of the organization since it helps to be in a position to achieve its desired goals. Reliable financial reports are also essential since they help the management to identify the areas that may need some changes for the betterment of the organization. It is also easy to identify new areas that may require capital injection if the financial statements done by independent auditors are objective. The vision of the organization is likely to be achieved if it bases its operations on objectivity and independence of the auditing functions in the organization. This will help the managers to remain focused towards the attainment of the desired goals in the company. In some instances, necessary changes on the basis of the advice given by the auditors after carrying out their duty of auditing the company’s financial statements. Accountability in the organization is also likely to be promoted if independent auditors are given the task to carry out the tasks related to preparing and reporting financial statements in the company as stated by (GAAS, 2011. In some cases, biased financial statements may cause the managers in the organization to engage in underhand dealings that may compromise the viability of the organization. Fraud may be deliberate and this is the reason why independent auditors are effective in drafting the financial statements of the organization. In some cases, misappropriation of company funds can be a result of error. However, in order to deal with these issues, independent auditors will be ideal to carry out the task. As noted, these independent auditors are objective and they are likely to report any disparities that can be found in the financial statements of the organization. Errors can be rectified if they have been identified by the independent auditors when they audit the company’s financial statements. This helps to make the leaders in the company accountable in their operations. It can be seen that many organizations are mainly concerned about generating profits from their operations. However, where there is lack of transparency and accountability in the operations of the company, it can be seen that difficulties may be encountered in as far as the attainment of the profit goals is concerned. In some cases, there is a tendency by the financial managers in particular to temper with figures such that they can be in a position to reap where they have not sown. This will be deliberate in most cases and this practice should be eradicated in order for the company to achieve its profit oriented goals. This can be achieved through the engagement of independent and objective auditors who are likely to produce financial statements that are free from bias. This can also help the company to be in a position to identify the problems that may negatively impact on its endeavour to achieve its profit oriented goals. Independent audits are also factual and correct such that they can be published in the press for the benefit of the stakeholders as well as other members of the public who may have interests in the operations of the company. The integrity of the organization is enhanced if its financial statements are published in the mass media. The media such as newspapers are accessible to a large number of readers and these are likely to convince them that a certain company is operating in an ethical way. In most cases, trust between the organization and its stakeholders is created if the later group is happy about the way an organization carries out its business. Over and above, it can be noted that the mainstay of the economy at large can be attributed to the activities of both private and public companies that are involved in various activities that are meant to generate income. However, there are often some problems that are often encountered in these sectors particularly those related to fraud and misappropriation of company funds by some unscrupulous managers. These activities are detrimental to the survival of the company and they should not be allowed to take place. As discussed above, it has been noted that transparency and accountability in the financial sector can be achieved through the engagement of independent and objective auditors. These are fair and impartial when they carry out financial reporting and this is very important in the operations of the company. Impartiality in financial reporting is likely to restore investor confidence which helps the company to operate viably. There are also likely chances of creating mutual understanding with the company’s stakeholders which can contribute to its success. Independent auditors are not influenced by foreign forces in their operations and this is the reason why their financial statements are often regarded as reliable when carrying out business in different sectors. The financial reports they often produce are impartial and are free from bias. Objectivity is given priority by these independent auditors since they are often hired by different organizations to carry out their financial audits. The other reason why these independent auditors are objective is that that they are also concerned with creating mutual understanding with various stakeholders so that they can meaningfully perform their tasks. Objectivity and independence are essential elements in the auditing profession since they are likely to promote transparency and accountability among different managers in different organizations. References Beattie, V., Brandt, R. & Fearnley, S. (1999). Perceptions of Auditor Independence. Journal of International Accounting, Auditing and Taxation, 8(1): 67-107. Kueppers, B.J. & Sullivan, K.B. (2010). ‘How and why an independent audit matters.’ 2010Macmillan Publishers Ltd. 1741-3591 International Journal of Disclosure and GovernanceVol. 7, 4, 286–293 GAAS, (2011). ‘Update service,’ Volume 11, Issue 8. Georgiades, G. (2012). ‘AICPA Statement on Auditing Standards, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.’ Volume 11, Issue 8. Ghosh, A. and Moon, D. (2005). Auditor tenure and Perceptions of Audit Quality. The Accounting Review, 80(2): 585-612. Intakhan, P. and Ussahawanitchakit, P. (2010). Role of Audit Experience and Ethical Reasoning in Audit Professionalism and Audit Effectiveness through a Moderator of Stakeholder Pressure: An Empirical Study of Tax Auditors in Thailand. Journal of Academy of Business and Economics, 10(5): 1-14. Roberts, M.L. (2010). Independence, Impartially, and Advocacy in Client Conflicts. Research in Accounting Regulation: 1-11. Ussahawanitchakit , P. (2012). ‘Audit independence of tax auditors in Thailand: Roles of ethical orientation, professional responsibility, stakeholder pressure, and audit experience.’ Journal Of Academy Of Business And Economics, Volume 10. Read More