This essay is concerned with the pros and cons of auditor independence and describes the way to the current audit regulation.
The editor specifies five major threats which could jeopardise auditor independence. If auditors have any financial or personal interests in their clients then the self-interest threat, the self-review threat, the advocacy threat, the familiarity threat and finally the intimidation threat may occur. The intimidation threat is stressed as the most important one: as auditors highly rely on companies’ directors. They have the power to interfere with auditors’ work and can cease all lucrative non-audit service contracts if auditors do not agree with their view. Moreover, auditors’ remuneration is determined and auditors are appointed by them in reality.
Furthermore, it is emphasised that especially in recent times some safeguards have been implemented by the profession, regulation, within the assurance clients and within auditing firms to eliminate the above-mentioned threats. Within the assurance client introduced independent audit committees are widespread. Further, auditing firms have implemented their own more narrowly prescribed ethical standards. Beyond this, it is highlighted that legislation is of paramount importance. The Companies Act 1985, 1989, 2004 and above all the ISA were enacted to enhance auditor independence.
The third section commences by describing the past of audit regulation. It is explained that in response to the growing public criticism in the 1960s and 1970s the professional accountancy bodies began slowly to introduce auditing standards, ethical codes, disciplinary, licensing and monitoring arrangements. Further, in the aftermath of the demise of many large companies in the 1980s, the government started to implement a new regulatory framework to reduce auditors’ failures. The Companies Act 1989 and the implemented ISA in 2004 are results of the entry into the EU, as the UK must adopt EU legislation.
It is estimated that in the near future the professions’ self-regulation may be abolished and stricter rules regarding audit liabilities will be implemented.
This essay concludes by stating that the current situation may upset all stakeholders as unbiased auditors are not guaranteed by the self-regulated profession. The fact that audit is a business may contradict it, too. Nevertheless, it is mentioned that auditors, who act dependently are a tiny minority in reality.
Table of Contents
1. Introduction
2. Auditor independence
2.1 Arguments against auditor independence
2.2 Arguments for auditor independence
3. Auditor Regulation
3.1 Pre-1980s period
3.2 Post-1980s period
3.3 View into the future
4. Conclusion
Research Objectives and Core Themes
The primary objective of this work is to critically examine the reality of auditor independence regarding the source of financial assurance and to analyze the evolution of audit regulation. The study investigates the tensions between the commercial nature of auditing and the requirement for objective professional standards, specifically addressing the mechanisms that threaten independence and the regulatory responses designed to mitigate these risks.
- The five major threats to auditor independence (self-interest, self-review, advocacy, familiarity, and intimidation).
- The impact of audit firm commercialization and reliance on lucrative non-audit service contracts.
- Historical and contemporary regulatory frameworks, including the Companies Acts and the role of international auditing standards (ISA).
- The efficacy of self-regulation versus government-imposed oversight in the auditing profession.
- The future of audit liability and the potential for increased competition within the industry.
Excerpt from the Book
2.1 Arguments against auditor independence
In the past the collapse of some huge firms and the failure of auditors to detect misstatements concerning this matter proved that sometimes auditors were biased. Elizabeth MacDonald suggests that “There's a fair amount of evidence … that auditors are not as independent as they should be.” (KeepMedia 2001)
In practice there are many circumstances that pose a threat to auditors’ independence. In this way Porter, Simon and Hartherly argue that the profession’s Guide to Professional Ethics Statement (GPES, released in the US) identified five major threats to auditors’ independence: The self-interest threat, The self-review threat, The advocacy threat, The familiarity or trust threat, The intimidation threat (Porter, Simon and Hartherly, 2003, p. 73).
The self-interest threat appears when auditors have financial investments, for example shareholdings or loans in their clients. By giving a qualified audit opinion all these investments would be in danger, for instance clients’ share prices would immediately drop dramatically. Auditors are aware of this disastrous effect on their investments. Hence, in this case they would tend to secure their investments by ignoring any misstatements. On the other hand, they may get free goods or services delivered by their clients. Then again, they would be tempted to turn a blind eye on irregularities, due to fear that their gifts will dry up abruptly.
Summary of Chapters
1. Introduction: Outlines the importance of auditor independence and sets the stage for analyzing audit regulation and the challenges facing the profession.
2. Auditor independence: Explores the diverse threats to auditor impartiality and examines current safeguards implemented by both the profession and client organizations.
3. Auditor Regulation: Details the historical development of audit regulation, from early self-regulatory guidelines to modern legislative frameworks and future expectations.
4. Conclusion: Synthesizes the findings, arguing that while safeguards have been improved, the inherent conflict of audit as a business requires further structural reform.
Keywords
Auditor independence, Audit regulation, Self-regulation, Financial statements, Assurance, Intimidation threat, Professional ethics, Companies Act, ISA, Audit committee, Accountability, Corporate governance, Public interest, Professional accountancy bodies, Audit failure.
Frequently Asked Questions
What is the central focus of this essay?
The essay critically examines the reality of auditor independence in the context of providing assurance for company financial statements and explores the historical and current regulatory landscape of the auditing profession.
Which five major threats to auditor independence are identified?
The author identifies the self-interest, self-review, advocacy, familiarity (or trust), and intimidation threats as the primary risks to objective auditing.
What is the primary goal of the study?
The goal is to analyze whether current regulatory and professional safeguards are sufficient to guarantee auditor independence given that auditing is a commercial business.
What scientific method is employed in this research?
The work utilizes a critical analysis approach, synthesizing professional literature, historical regulatory shifts, and case studies of major corporate failures to evaluate the efficacy of current audit standards.
What is the main topic of the final section of the main body?
The final section discusses the future of audit regulation, predicting a potential end to professional self-regulation and a shift toward stricter liability and increased market competition.
Which terms best characterize this work?
Key terms include auditor independence, audit regulation, corporate governance, professional ethics, and assurance.
Why is the intimidation threat considered the most significant?
It is highlighted as paramount because directors have the power to influence auditors' remuneration and can threaten to terminate contracts, making auditors dependent on management.
How does the author view the role of 'audit as a business'?
The author argues that there is an inherent contradiction between a firm's need to survive by attracting and retaining clients and the mandate to act as an unbiased, independent party.
Do audit committees effectively solve independence issues?
The author notes that while audit committees are essential for robust auditing, they must act independently from management and require members with sufficient moral courage to report irregularities.
- Quote paper
- Stefan Bode (Author), 2006, Auditor independence and regulation, Munich, GRIN Verlag, https://www.grin.com/document/66734
