It seems that the term hearer independency is a sensitive subject between different public sectors in recent old ages since a figure of people concerned that whether hearers can be genuinely independent if their grosss come from offering non-audit services every bit good as traditional audits. There is strong grounds that the function of audit houses play an of import portion on companies and external investors since all company information that audited by the accounting houses should be disclosed in public with indifferent, impartial positions. If hearer is independent, investors can be protected due to the fact that they likely make investing determination based on the fiscal statements of the company. However, a phenomenon shows that in some state of affairss, some factors such as non-audit services, close relationship between clients and hearers or economic inducements seem endanger the independency of hearers because these factors may impact the hearers ‘ sentiments and opinion when they making audit plants.
Therefore, in this essay, it will ab initio give the definition of independency and explicate why the independency of hearer is of import for both company and investors. Then it will place and measure the menaces to the objectiveness and independency of hearer. Thereafter, it will explicate how accounting houses can be independent when they provide joint commissariats of audit and non-audit services. Finally, it will discourse how audit house could be compromised due to offering audit and non-audit services.
Definition and importance of independency
One the one manus, harmonizing to Flint ( 1988, cited in Gray and Manson 2011, p. 64 ) , independency refers to be ‘completely nonsubjective, impartial by old engagement in the topic of audit, uncompromised by vested involvement in the result or its effects ‘ . However, there are two types of independency. First, independency in head provinces that it non merely allows audit house to be straightforward, honest and indifferent, but besides need to exert professional agnosticism. For case, when hearers express a decision, the decision should non be affected by influences such as via media professional opinion. Second, independency in visual aspect indicates that accounting house should obey the chief rules including unity, objectiveness and professional agnosticism due to the fact that a 3rd party may measure all the elaborate facts or fortunes ( IFAC 2012, P. 46 ) . In other words, when hearers scrutinizing the fiscal statements, it is of import that hearer non merely should non be affected by struggles of involvement or other factors, but besides they should move separately. On the other manus, harmonizing to Companies Act 2006 ( p. 242-243 ) , the duty of hearer is to look into and enter equal accounting information of the company and reexamine the single histories of the company to analyze whether it is in understanding with the accounting records and returns and so on. The information audit houses record will give an of import consequence on the position of the study which they province due to the fact that if hearers are deficiency of independency, it may has great negative impact on audit quality.
On the other manus, hearer independency is of import as they assist to protect the involvements of stockholders. Recent research on BBC ( 2013 ) has showed that there is a inclination for hearers to concentrate on direction satisfactory instead than run into the involvements of stockholders as a consequence of close relationship between hearers and company direction. In add-on, one chief ground why professional comptrollers concentrate on fulfilling direction is that the senior directors are the people who make cardinal determinations in the company. Therefore, if hearers can run into the demands of direction, they may go on to function this company, otherwise, they may lose this client ( competition committee, 2013 ) . It seems that accounting houses can non be independent as their sentiments may be affected by run intoing the demands of direction and the idea of retaining the clients. Furthermore, the independency of audit houses may increase the dependability and credibleness of fiscal statements of the company and outside investors. Hence, it gives advantage on protecting investors through avoiding facing high degree of hazards when they invest in company undertakings. Furthermore, if hearers fail to be independent when scrutinizing the one-year study, it non merely amendss the reputes of themselves and the audited entity, but besides authoritiess may reprimand the hearers and enforce a all right.
Designation and appraisal menaces to auditor independency
It would look that when hearer scrutinizing its clients, there are some menaces that threaten the objectiveness and independency of accounting house, which include self-interest menace, bullying menace, acquaintance menace, self-review menace, the menace of protagonism and direction menace ( APB ES1 2011, P. 15-16 ) . However, there are some specific conditions that may make menaces to impair auditor independency, such as fiscal involvement, loans and warrants, close concern relationships between hearers and audited entity, household and personal relationships, employment with an audit client, impermanent staff assignments, recent service with an audit client, non-audit services or the audit or non-audit services that conducted on the BASIC of contingent fee ( IFAC 2012, P56-63 ) . If professional comptrollers do non pay attending on those factors when provide audit and non-audit services to their clients, it may easy to do themselves affect in independency damage.
Supplying audit and non-audit services may non go against hearer independency
It is evident that although accounting houses received a considerable audit and non-audit fees, nevertheless, it may non impair the independency of hearers. For case, it is illustrated from the one-year study of First group ( 2012 ) that it paid its hearer Deloitte 1.5 million lbs audit fees and 0.4 million lbs non-audit fees. In add-on, Deloitte ( 2012 ) reported that its entire gross in financial 2012 was 2,329 million lbs. Harmonizing to ES4 ( 2010 ) , the audit and non-audit fees received from a listed audited entity and its subordinates audited by the accounting house can non regularly exceed 10 per cent of the entire gross of the hearer. Otherwise, it may go against the independency criterions. However, it can be calculated that the entire fees for First Group in 2012 were 1.9 million, which merely accounted for about 0.08 per cent of the entire grosss of Deloitte. Thus, on the grounds of the findings, it would be seen that Deloitte did non go against the independency in footings of the criterions of fees. It seems that although hearers charge higher audit fee, it does non intend that they will go against the independency when carry oning audit and non-audit services. From Firth ‘s ( 1997, p. 512 ) sentiment, there are a figure of factors determine the audit fees. For case, the company size may be one of chief factors to make up one’s minding the audit fees because if the house has a batch assets and gross revenues grosss, hearers may necessitate to pass more clip on look intoing. Furthermore, the complexness of the audit and the peril of the client may besides impact the sum of audit work that professional comptroller do. Hence, higher audit fees may non go against hearer independency. On the other manus, despite offering non-audit services to audited entity, the accounting house still can be independent when scrutinizing the fiscal statements. It has been examined by Salehi ( 2009, p. 146 ) that it is good to heightening hearers independency if they supplying audit and non-audit services to their clients at the same clip. The grounds are that it non merely can cut down the overall costs such as bureau costs, but besides helps to better the auditing quality because audited entity which has higher non-audit fees seems can restrict the picks of unnatural accumulations. Additionally, because of the dearly-won judicial proceeding costs and loss of repute of hearers, audit houses can stay independent when supplying audit and non-audit services at the same clip ( DeFond, Raghunandan and Subramanyam, 2002, p. 1251 ) . It seems that there is no grounds that supplying commissariats of audit and non-audit services can impair their independency and Hussey ( 1999, cited in Salehi 2009, p. 146 ) besides suggested that it should non forbid professional comptrollers to offer joint proviso of audit and non-audit services to audited entity.
Auditor independency may be impaired if audit house received considerable entire fees
In contrast, it has been argued that audit and non-audit fees would be a important factor that impacting the hearer independency because entire fees may go an economic inducement that affect the entire income of hearer. In order to avoiding losing the important clients, the audit house may non act independency. On the grounds of the findings, it is possible that audit services provided by audit houses may take to auditor be deficiency of independency. Taking Enron as an illustration, Barrett ‘s ( 2005 ) article demonstrates that Enron ‘s hearer Arthur Andersen received the entire fees of 52 million dollars, included 25 million dollars of audit fees and 27 million dollars of non-audit fees during 2000. First, it can be seen that the fees for non-audit services are much higher than the audit fees. It seems that Andersen focused on the non-audit work of Enron and that could be influenced the audit work because the fiscal statements of Enron could be affected by the non-audit services and Andersen besides can non give an indifferent sentiment and opinion. In harmonizing with APB ES5 ( 2004, P.9 ) , it is likely that hearers seem to be loss of independency if non-audit fees are important greater than audit fees. In such a instance, a self-interest menace might be created to Andersen ‘s independency because the sum of non-audit fees was important to his entire income. Additionally, it is reported by Abdullah ( n.d. ) that during 2000, the non-audit fees paid to Andersen accounted for about two-third of the entire income of accounting house. Sing to the APB ES4 ( 2010, P. 10 ) that the hearer can non bear down entire fees for both audit services and non-audit services of non-listed audited company over 15 per cent ( listed audited company-10 per cent ) of the entire income of hearer. Therefore, it can be concluded that fiscal inducement is a important factor that lead to accounting steadfast violate the independency.
Furthermore, acquaintance menace to Andersen independency has been created as consequence of long continuance and close relationship with Enron. For case, Enron employed Andersen as its external hearer since 1985, which the continuance would be about 20 old ages ( Abdullah, n.d. ) . However, an audit battle spouse shall non work for the same clients for more than five old ages and if an audit battle spouse held for the function for a uninterrupted period of 10 old ages, they should be rotated ( APB ES3, 2009, P. 5-6 ) . Furthermore, It is evident that the long association between Andersen and Enron became a public involvement entity which non merely led to Andersen failed to reasonably describe the grosss of Enron as Andersen sympathized to the involvements of Enron so that he insufficiently questioned the stuffs, but besides a self-interest menace might be created because if Andersen could run into the involvements of Enron ‘s direction, he might have gifts or hospitability as wages ( IFAC 2011, P. 72 ) . In add-on, as Thomas ( 2002 ) stated that a figure of internal comptrollers, CFOs and accountants of Enron were old executives of Andersen. Harmonizing to APB ES2 ( 2010, p. 16 ) , a individual can non be employed by an accounting house to carry on audit work if he/ she is besides employed by the audited entity. It seems that those people might be familiar with the audit work, hence, their behaviors or sentiments had important impact on the audit study of Enron, which led to Andersen can non follow with its professional competency, overstated the stuff and information and had unconscious prejudice on the audit work.
On the other manus, it is claimed that hearers supplying non-audit services may besides take to them can non be genuinely independent. Recent research from the economic expert ( 2012 ) illustrated that big proportions of grosss of accounting houses come from offering non-audit services to audited entity in recent old ages. Furthermore, the development of adviser services offered by accounting houses increase quickly. Furthermore, the gross of Deloitte increased in financial 2012 due to the fact that about 14 per cent of confer withing and 15 per cent of fiscal advisory ascended. For case, the Enron instance showed that its audit house has been offered revenue enhancement services and internal audit services which violated the independency regulations ( Barrett, 2005 ) . First, offering revenue enhancement services to client may be possible to make menaces to the independency of hearer. For case, for IFAC ( 2011, p.81-82 ) , a self-review menace might be created if Andersen provided revenue enhancement advisory services or promoted revenue enhancement construction to Enron, an accounting intervention might be adopted in order to do proposed agreements and Andersen audited the one-year study for Enron but at the same clip he besides provided non-audit services to Enron, in that instance it had important impact on the opinion and sentiment on the fiscal statement. Furthermore, supplying revenue enhancement services may make protagonism menace to the independency of Andersen if Andersen acted as an advocate function to assist Enron decide a revenue enhancement affair before a tribunal and affect the sums that are material to the fiscal statements ( IFAC, 2011, P. 83-84 ) . Additionally, it might make direction menace to Andersen ‘s independency because Andersen might move a direction function for Enron and involved in doing determinations or prosecuting in the direction when turn outing revenue enhancement services, finally, it is possible that Andersen besides became coordinate and run into the involvements of direction of Enron ( APB ES5, 2011, P. 32-34 ) . Another possible menace to Andersen ‘s independency might be the self-interest menace. The ground is that 3.5 million dollars accounted by revenue enhancement services among the non-audit fees of 27 million dollars. It was a important fee to the entire income of Andersen. Therefore, it might be possible that Andersen in order to go on to offer revenue enhancement services to Enron, it tried to take some actions that violate its professionals ( APB ES5, 2011, P. 32-34 ) .
Apart from the revenue enhancement services to Enron, Andersen besides offered internal audit services to Enron ( Barrette, 2005 ) . Since Andersen was the external hearer of Enron, it seems that self-review menace and direction menace might be created to the independency of Andersen ( APB ES5, 2011, P. 23 ) . First, if the internal audit services offered by Andersen that involved in assisting Enron to better its internal audit activities, or purposed to better the effectivity and efficiency of runing activities such as hazard direction, control and administration procedures. Furthermore, Andersen might non professionally evaluated the consequences of internal audit service so that it may act upon the true and just positions of fiscal statement, that fortunes have been led Andersen to go against the independency criterions. In add-on, Andersen might move a direction function to take direction duties such as puting internal audit policies or doing recommendations or determinations on the internal audit activities, assisting the company to plan internal controls or implement alterations. In footings of that status, direction menace might be created which impaired the independency of Andersen ( IFAC 2012, P. 84-86 ) . Hence, offering revenue enhancement services and internal audit services to audited entity may impair hearer independency and have a important impact on the creditability and dependability of fiscal statements of audit house.
Additionally, the illustration of Britvic ( 2012 ) indicated that professional comptroller provides the proviso of non-audit services to audited entity may take to auditor be deficiency of independency. For case, the one-year study of Britvic in financial 2012 shows that Enrst and Young charged Britvic entire fees 3.3 million lbs, included hearer fees are 0.6 million lbs and entire non-audit fees are 2.7 million lbs which is much higher than the one-year audit fees. However, without uncertainty the sum of non-audit services is significantly greater than audit-fees. While harmonizing to APB ES5 ( 2011, P.27 ) , if non-audit service fees are greater than the one-year audit fees, it is possible that hearer may be deficiency of independency. Furthermore, it can be seen that the entire fees are important to the entire income of audit house so that Enrst and Young might hold to the wants Britvic to make some adverse audit work in order to retain its clients. Therefore, in such circumstance, a self-interest menace was created to Enrst and Young ‘s independency as consequence of the fiscal involvements.
In add-on, the non-audit services that offered by Enrst and Young to Britvic included revenue enhancement advisory services, corporate finance services and other non-audit services which might be possible to make menaces to the independency of hearer ( Britvic, 2012 ) . For case, for APB ES5 ( 2011, p. 32-33 ) , a self-review menace might be created when Enrst and Young provided revenue enhancement advisory services to Britvic because revenue enhancement planning, revenue enhancement advices and conformity work that conducted by hearer might act upon the stuff on the fiscal statements. Furthermore, supplying revenue enhancement services may make protagonism menace to the independency of Enrst and Young because it is possible that Britvic ‘s hearer acted as an advocate function to assist deciding a affair such as engagement in the dialogue with revenue enhancement governments. Additionally, direction menace might be existed because Enrst and Young might move a direction function for Britvic and involved in doing determinations or prosecuting in the initiating minutess when turn outing revenue enhancement services. Another possible menace to the independency of Enrst and Young might be the self-interest menace. The ground is that 0.2 million lbs accounted by revenue enhancement advisory services among the non-audit fees of 2.7 million lbs ( Britvic, 2012 ) . It was a important fee to the entire income of Enrst and Young. Therefore, it might be possible that the professional comptroller in order to go on to offer revenue enhancement advisory services to Britvic, it tried to take some actions that violate its professionals ( APB ES5, 2011, P. 34-36 ) .
Furthermore, it might make menaces to the independency of Enrst and Young when supplying the proviso of corporate finance services to Britvic. On the one manus, if Enrst and Young should non supply corporate finance services such as handling, underwriting, advancing portions, advices that might hold important impact on the sums in the fiscal statements included structuring a corporate finance dealing, funding issues to Britvic, otherwise, it might make a self-review menace and protagonism menace to Enrst and Young ‘s independency ( IFAC 2011, p. 90-92 ) . On the other manus, opportunism might be possible to make if the corporate finance services are provided on the BASIC of contingent fee. In add-on, other non-audit services provided to Britvic might incorporate internal audit services, information engineering services, judicial proceeding support services, legal services and so on. Those services might besides make some different chief menaces such as direction menace, protagonism menace, self-review and self-interest menace to the independency of Enrst and Young ( APB ES5, 2011, p.1 & A ; 41 ) . Therefore, it can be seen that in certain fortunes, accounting house can be deficiency of independency when supplying a proviso of non-audit services to audited clients.
In decision, it is evident that the independency of professional comptroller is important since hearer independency non merely can increase the assurance of investors when doing determination on investings, but besides it improves a fiscal coverage procedure so that it gives assurance to stockholders of companies. Furthermore, go againsting independency criterions non merely take to the repute of hearers harm and cost them big sum of judicial proceeding, but besides it causes investors lose assurance in the capital market. Although some people stated that the proviso of audit and non-audit services provided by accounting house can non impair the independency regulations and it has advantages for hearer to scrutinize the fiscal statements of audit clients, such as heightening audit quality and competition every bit good as cut downing bureau costs. However, it is argued that hearer can non be genuinely independent when they received a considerable sum of audit and non-audit fees to supply audit and non-audit services to audited entity because there are some factors such as economic inducements that create menaces to endanger the independency of audit house. Additionally, supplying non-audit services non merely make struggle of involvements between hearer and audit clients, but besides may take them to move a direction or protagonism function in its clients, so it has negative consequence on the independency of hearer. To sum up, hearer should be independent to give an impartial position on the fiscal statement. Furthermore, either the authorities or accounting house should do policies to forestall hearer to be deficiency of independency and heighten their witting and perceptual experiences of independency.
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