Auditors Independence - Essay Example

Auditing Auditing Auditing is an incredibly important matter in the world today, and if you want to learn about a matter such as this, then there are several embedded matters that you will need to inform yourself on first; such as the fact that an auditor's objective is basically defined as that of "to provide a high level of assurance through the issue of a positive expression of opinion that enhances the credibility of an assertion about an accountability matter" (Gay & Simnett, 2003, p.745). However the fact of this auditor to be independent is clearly the most important factor here, and independence is defined as being the "ability to withstand pressure from management influence when conducting an audit or providing audit-related services, so that one's professional integrity is not compromised." (Gay & Simnett, 2003, p.745). In order to truly be able to understand this matter even further, there are several issues in particular that will need to be discussed, and this is what will be dissertated in the following. Auditor independence is a term which truly umbrellas many different matters, and which thus must be understood fully and thoroughly in order to be understood properly altogether. Basically, in order to understand the meaning of auditor independence you must first understand the fact that basically the professional independence of auditors has truly been held responsible for that of the many corporate collapses and financial debacles that have taken place worldwide, and that this explains the essentiality of understanding the importance of the independence factor in the auditing sector. Independence is generally understood to refer to a mental state of objectivity and lack of bias. They are totally opposed against the new ruling and voiced many of the same concerns that were seen from other CPA's. He expressed concern that the regulation of the new rule cannot be sufficient by itself. It's also necessary that public investors-the users of financial reports-perceive that the numbers are right. These are basically and for some places entirely restricted because they give the appearance that when auditors provide these services to audit clients they are acting as an advocate for the audit client. Brown goes on then to even further illustrate this point by showing that in Canada we are looking at the SEC's proposal closely and extensively and "will formulate our regulatory response partly on your experience. It is truly and absolutely a key factor that the audit committee identifies independence violations, because they are on the front line and are closest to the action. The creation of these principles was due to increasing concern that auditors were not remaining totally independent when performing the audit. Other times the consulting professionals will have little or no interaction with auditors especially in large firms. If firms miss their earnings expectations even by a slim margin the result is an immediate decrease in stock prices. Furthermore, the last non-audit service that is restricted to audit clients is expert services. The initial concept of auditor independence, which arose during the 19th century, was based on the premise, primarily British in origin, that a principal duty of professional accountants and auditors was the oversight of absentee investments in the existing and former colonies of the British Empire. During this period, a relatively small number of accounting firms could perform audits for a relatively large number of entities. Professional accountants and auditors could render reports on the financial performance of different entities and could work for different investor groups. The concept of auditor independence during this era did not conceive of auditors as advocates for audited entities; British investors explicitly forbade auditors from investing or working in the businesses that they audited. At the same time, as long as auditors maintained their primary loyalty to the investors back home, the scope of professional accounting services could be reasonably broad. For example, auditors were permitted to keep the books and prepare the financial statements for the entities they audited. This initial concept of auditor independence changed during the late 19th and early 20th centuries. During this time, there was an economic shift from capital coming primarily from foreign sources to capital deriving primarily from domestic sources. This change was associated with the emergence of large American corporations in industries such as mining, railroads, energy, and telegraph and telephone. The emergence of large American corporations was accompanied by a change in the understanding of the purpose and nature of the business corporation. In the 1930s, noted economists Adolf Bearle and Gardiner Means articulated this change by advancing the proposition that large corporations were based on the separation of ownership from management and that an important role for accounting and auditing was to properly value the proprietary interest of the corporation. Periodic balance sheets were needed to determine the portion of retained profit that could be validly distributed to the proprietary interest. In the context of this new idea of the corporation, the auditor's primary duty was to serve the needs of the collective proprietary interest rather than a specific absentee-ownership interest. This collective proprietary interest essentially comprised domestic shareholders, that were often large banks or wealthy investors, but increasingly the general public has become involved in stock ownership. The passage of the federal securities acts during the New Deal era, and the creation of the SEC, led to another transition in the concept of auditor independence. The SEC's most important effect on auditor independence derived from its efforts to establish standards for financial reporting and auditing. Because of these efforts, public accountants and auditors no longer accepted that their primary responsibility was to a specific absentee owner, or to a collective proprietary interest, but rather to a set of professional standards established for the preparation and audit of financial statements. The concept of auditor independence shifted in favor of objectivity and neutrality in the reporting of the financial position and the results of operations, rather than loyalty to a particular party. As well, it should also be taken into perspective the fact that there is a certain framework which is considered as being detrimental to the matter of auditor independence overall, and so this is a matter which too must be taken fully and quite seriously into perspective; The need for a framework arose from the jumble of confusing independence rules and regulations-many in the form of interpretations issued in response to specific independence questions-that applied to public companies and their auditors. The guidance in those interpretations, issued over the years and under changing circumstances, sometimes conflicted and lacked theoretical consistency. Auditors also faced challenges in applying such guidance if the facts and circumstances of an auditor's relationship with his or her audit client did not match those in the interpretation. While the independence regulations helped to ensure quality audits and contributed to the high level of financial reporting we enjoy in the United States, in today's increasingly complex business environment the ISB believes that some revisions are in order. As well, it is this specific framework which references onto this subject matter forum and which makes it as truly stable and secure as it is; however the difference between auditor independence in regards to the United States Vs. a locale such as the UK for instance, is one of greatness, and these differences must too be taken into context properly so that the right overall view and perspective can be taken on this matter in general. In fact, in regards to this particular situation, it should first be known that much of the debate around the world has been about auditor independence, including the contribution from professors Mano, Mouritsen, and Swearingen. Auditor independence is important, of course, but it is not all-important. Auditor independence is but a means to an end. The United Kingdom is a place which truly takes this issue incredibly seriously and as well they are one which has stringent measures in place, based on some very well understood principles. But in the end, what really matters is that of the actual quality of the audit, which, above all else, is itself dependent on the quality of the people who conduct it. As well, in perfect regards to this particular discussion, it should be known that in the United Kingdom, for example, it is a fact that the ICAEW has for over many decades already in fact been working to ensure that the highest-caliber people are attracted into the accounting profession, and that they receive the best possible training to equip them to be first-class auditors. U.K. auditing firms have been immensely successful in recruiting the best graduates from our country's best schools. This has been rather easily possible primarily because of the fact that the chartered accountancy qualification is traditionally seen as a first-class business education, leading to many different career opportunities. The vast majority of publicly owned companies in the United Kingdom have at least one chartered accountant on the board, often as CFO, but also as chairman, CEO, or independent non-executive director. Many people here would take a dim view of a company where the CFO lacked a professional accountancy qualification. Everyone should truly realize that it is really and earnestly worth remembering the fact that most audit failures in general happen to arise due to the fact that there is a failure by the auditor him or herself to actually be open and be able to understand that of the wider business dimensions that are involved in that particular situation, and as well they fail to see the areas of risk that are inherent in that particular business, which thus results in causing dramatic problems for the business overall. Furthermore, it is thus just as important to understand why some audits do not fail, and for the most part, few audits fail due to the fact that detailed procedures were not followed properly or, just as well, due to a lack of independence, for example. However, there is also the matter of the recent years of scandals, which have truly and definitely undermined investor confidence, and perception is one of the most important matters of all and it is in fact a matter which is as important as that of reality, as it is something that is able to be used in order to restore the matter that confidence requires not only that the right and proper actions be taken, but as well that the right actions are seen to be taken; both of these points are crucial not only each to their own but also to one another, and so thus they must be taken seriously and radically into consideration in order to be able to fully understand the matter of auditor independence overall. However it is considered that an improvement in perception, however, will be no more than a short-term victory if the reality is a fall in the quality of auditing. Instead, I would suggest that most of the steps necessary to restore confidence have already been taken. However, overall, despite the strong criticism in the United Kingdom of the extraterritorial aspects of the Sarbanes-Oxley Act, the major provisions of the act are widely seen here as being the right and proper measures. Many would consider greater transparency by companies and auditors as the final ingredient necessary to ensure confidence in the audit process. As well, an ever-tightening definition of the role of the auditor and the work auditing firms can provide will not achieve the goal of higher-quality audits, and indeed, it will have exactly the opposite effect, and I believe the profession should do more to disseminate this message. The debate will no doubt be vigorous, but the alternative is that we accept the erosion of the profession and of our ability to continue to attract the best and the brightest entrants. The end result would undoubtedly be poorer-quality audits and potentially more business failures. References Benson*, K., P. Pope and R. Faff, "The Relevance of Investor Risk Classes in Ranking Fund Performance: An Application of the Extended Mean-Gini CAPM", Journal of Quantitative Economics, Vol.1. No.1. Gay, G.E. and R. Simnett*, Auditing and Assurance Services in Australia, 2nd edn., McGraw-Hill, Australia. Howieson*, B. and I. Langfield-Smith, "The FRC and Accounting Standards-Setting: Should I Still Call Australia Home", Australian Accounting Review, Vol.13, No.1. Read More