Independence is critical in the auditing profession and goes manus in manus with objectiveness. Independence is “ freedom from state of affairss and relationships which make it likely that a sensible and informed 3rd party would reason that objectiveness either is impaired or could be impaired ” and objectiveness is “ a province of head that excludes prejudice, bias and via media and that gives just and impartial consideration to all affairs that are relevant to the undertaking in manus, ignoring those that are non ” ( Accounting Practices Board, 2010 ) .
However, one may inquire why independency is so critical in the auditing profession and whether there are methods which could be used to heighten it. There are in fact already assorted demands which attempt to keep auditor independency ; nevertheless it could be questioned whether these are sufficient plenty. For illustration, ES5 ( Ethical Standard 5 of the Accounting Practices Board ) explains the menaces to auditor independency and provinces that when these menaces can non be reduced to an acceptable degree, the house either must non set about the non-audit service battle or must non accept/withdraw from the audit battle ( Accounting Practices Board, 2010 ) . However, at what degree is a menace deemed to be acceptable?
The importance for hearers to be independent
The demand for hearers to be independent exists because of the studies produced by them. Hearers ‘ studies are used by houses to turn out to stakeholders that their fiscal statements genuinely and reasonably reflect their fiscal place and that everything that should be disclosed, is in fact disclosed. One may presume that it is merely the stockholders who would profit from an hearer ‘s study nevertheless this is merely one group of many stakeholders who benefit. Often creditors, such as Bankss and other loan/investment establishments, require the house to supply an audited set of fiscal statements before any money is transferred. Trade consumers of a house would besides profit from cognizing that the house ‘s fiscal statements have been audited, guaranting them of a secure supply. Together with this, employees benefit from audited fiscal statements because it would guarantee them that the house has non been delusory in unwraping its fiscal place and this would supply the employees with information on the security of their employment.
If hearers were non to be independent of audit clients so the hearer ‘s study would be misdirecting to stakeholders, as the sentiment formed in the study would be biased and would reflect what direction wants it to reflect as opposed to reflecting the professional sentiment of the hearer. Consequently, the function of the hearer would go a unpointed function as it would non carry through society ‘s outlooks and it would non convey any benefits to the stakeholders.
How the independency of hearers could be enhanced
Although there are already legal demands which attempt to keep hearer independency, there are other methods which could be used to heighten the independency of hearers.
One such method could be the demand to revolve audit houses. This demand would intend that houses would hold to alter audit houses every so frequently, for illustration every twelvemonth or every 5 old ages. Auditor independency would be enhanced because it would forestall hearers from being affected by the acquaintance menace. Familiarity menace arises when the hearer fails to sufficiently inquiry the audit client ‘s point of position and therefore lacks the professional agnosticism that an hearer should hold because the hearer has developed a close relationship with the audit client through long association with them ( Porter et al. , 2008 ) . By altering the audit house every so frequently, the opportunity for a close relationship to develop between the hearer and the audit client would cut down.
Looking at the prostration of Enron and its hearer Arthur Anderson, the jobs occurred because there was such a close relationship between the two houses. If the demand to revolve audit houses was put in topographic point so possibly this dirt would ne’er hold happened.
Not merely would scrutinize steadfast rotary motion increase the existent independency of the hearer but it would besides increase society ‘s perceptual experience of hearers ‘ independency and the relationship between the hearer and the audit client would be a distant 1.
Having said this, it can be argued that audit house rotary motion reduces the quality of the audit because over clip an audit house would develop increased cognition of the audit client and its operations and so it would be able to utilize the accrued cognition to better scrutinize the client in future old ages. If the client must revolve the audit houses, so this cognition can non be gained by the hearer and information may be overlooked.
Another method could be for audit houses to be either province owned or appointed by the province. Audited account houses, in theory, should be appointed by the stockholders of the possible audit client nevertheless in world they are frequently appointed by the managers or the audit commission of the audit client. Whilst this is the instance, hearers can ne’er be genuinely independent because the direction of the audit client has influential powers over the assignment of the hearer and their wage. By holding the hearer appointed by the province or by holding a province owned hearer appointed, the connexion between the hearer and the audited house is genuinely broken and so independency would be dramatically enhanced.
However, the job with holding a province owned hearer is that there may be a load to execute an audit with a political position in head. If this is the instance, so hearer independency and objectiveness would be impaired and this method would non hold enhanced independency at all.
A 3rd method could be for a panel of stockholders to be elected, as opposed to an audit commission. This would be favorable because it would return the assignment and wage determinations back from the audit commission ( dwelling of non-executive managers ) to the stockholders. The stockholder panel would dwell of no managers and so this would extinguish any motivations that managers may hold when finding which audit house to name and compensate. Consequently, the relationship between direction and the hearer would be more distant and so auditor independency would be enhanced.
However, as Porter references, in clip the panel could develop into a stakeholder panel and reflect a wider group of involvements. This could ensue in an answerability issue, as the managers would be accountable to the stockholders but the hearers would be accountable to the stakeholder panel ( Porter et al. , 2008 ) .
Yet another method would be to forbid audit houses from supplying non-audit services to their audit clients.
Whilst there are many possible solutions to the inquiry of whether independency can be enhanced, these all come with statements in favor of and against the proposals. Possibly the most of import point to see is whether the negative points of the possible solutions are outweighed by the cost of the dirts which they would forestall. Morgan Stanley estimated that the loss in market capitalization ensuing from the failures of WorldCom, Tyco, Qwest, Enron and Computer Associates was about $ 460 billion ( Ariff and Ratnatunga, 2004 ) . Any step which would hold prevented these failures should, without uncertainty, be implemented. Furthermore, if these proposals enhance auditor independency every bit good as enhance hearers ‘ perceived independency so it would be hard to reason against their debut.
However, the debut of any proposal requires public argument and positions from both sides of the statement to be expressed. Merely so can regulative organic structures to the full determine whether it is good to present new steps to heighten hearer independency.