Envalue the Auditor Independence Provisions - Essay Example

?Envalue the Auditor Independence Provisions Introduction The purpose of this study is to discuss the theoretical framework associated with auditor’sindependence, code of conduct and ethics, which is based on the FEE Paper Comparison International Ethics Standards Board for Accountants (IESBA) Code of Ethics that says “An individual’s objectivity must be beyond question when conducting and reporting on a statutory Audit.” This is applicable when auditors themselves act as statutory auditor, or when they are auditing on behalf of an auditing firm. In order to endow the public with a feeling of confidence, the auditor should maintain the objectivity (Rittenburg, Johnstone, and Gramling, 2011). This is only possible when the individual who is conducting the audit is independent of the organisation and the people within the organisation. The audit firms generally try to maintain a quality control system in order to safeguard the independence of the auditors. For achieving this objective, EC Recommendation (ECR), Statutory Audit Directive (SAD), which is also collectively regarded as European Union (EU) provision, and IESBA Code offer guidance and requirements for audit firms and statutory auditors, so that they can follow those standards (Federation of European Accountants, 2013). This study would summarise the concepts that are used in the legal regulatory framework, and would identify the conceptual framework of auditor’s independence. Apart from this the regulations for auditor independence would also be discussed, with respect to European Union, as this will assist in analysing how the auditors can keep their personal interest aside and focus towards an unbiased and flawless audit report. The Conceptual Framework of Auditor Independence Auditor independence signifies independence of the external and the internal auditors from the stakeholders or those who have financial interest in the company that is being audited. Independence involves integrity and an intent approach towards audit. This concept is based on the requirement of auditors to carry out their work liberally, in a goal-oriented manner. The internal auditors should have independence from those parties, whose interest would be hurt by the consequence of the audit. The internal issues that usually arise in such context are insufficient internal control, unsatisfactory risk management system, and lack of governance. The audit committee and the Charter of Audit usually offers independence of code of ethics and management of the company which assist in guiding the clients, third parties or suppliers on theories and concepts of independence (Federation of European Accountants, 2013). The independence of external auditors signifies freedom from those parties that have increase in the consequence published in the financial statement of the entity. The external auditors should be supported by the Audit committee of the company, and reference should be drawn from the public accounting codes and standards. The external and internal concerns are complicated when the nominally self-regulating divisions of the company offer consulting and auditing services. In order to solve this complication, Sarbanes – Oxley Act of 2002 is a legal solution. In case of statutory audit the most significant principle is regarded as objectivity. Before considering any non-assurance or assurance engagement, audit or entering into any relationship with the client, the auditor should consider all the threats to their independence that might hinder principle of objectivity (ICISA, 2004). Regulations in the European Union There are various regulations within EU in relation to auditor independence. The major enforcement in case of auditor independence is directed through the Companies Act of 1985, and Companies Act of 1989. The Companies Act of 1985 states that it the accountability of the shareholders to appoint auditors rather than the directors at the annual general meeting. This theory has been stated so that the directors cannot influence the auditors by threatening them or through bribery. Generally it has been seen that that the existing auditors are re-appointed for another annual general meeting, but the shareholders have full liberty of choosing another auditor or audit firm if they wish to do so. There are exceptional cases when the directors are allowed to appoint the auditors, such as to fill the casual vacancies. However, such appointments automatically expired by the next annual general meeting. According to The Companies Act of 1985, the shareholders can even eliminate the re-appointed auditor if they want to wish to elect some other auditor (Dauber, Qureshi, and Levine, 2009). The Companies Act of 1989 part II protects the independence of the auditors in various other ways. It directs that the auditors has to be from recognised supervisory body, otherwise they should not be allowed to undertake the work. Within EU ACCA, ACAEW, ICAI, and ICAS have been given such a status. In gauging the independence of the statutory auditor, both the audit firm and the auditor has to follow the EC recommendations that have been stated on the statutory auditors’ independence and IESBA code that are essentially referred (Federation of European Accountants, 2013). In this approach the threats need to be identified that hinders the independence of the auditors. Threats that the EC Recommendations have highlighted for the auditors are self-interest, advocacy, intimidation, trust, self-review. These are the challenges which hinder independence and checks individuals to keep aside their own objective for a transparent auditing (Smith, 2012). Profession Ethics and Code of Conduct Codes of ethics are the principles or expectations that govern the behaviour of the organisation and the individual for conducting audit. It explains the minimum obligations for conduct and the behavioural expectations than just specific activities. Auditing, especially internal audit is objective assurance, independent and consulting activity, which is planned to add value and develop the operations of the organisation. It assists the organisation to achieve its objectives by utilising disciplined, systematic approach to analyse and improve the efficiency of risk control, management and governance processes. The code of ethics in case of auditing should essentially have two components, namely the principles that are applicable for practicing auditing, and the rules of conduct that will describe the behavioural norms for the auditors. These rules act as an aid to the auditors for interpreting the practical implications and provide an ethical guide to the auditors (Gramling, Johnstone, & Rittenberg, 2012). The code of ethics should be based on the principle of integrity, confidentiality, objectivity, and competency. Integrity assists in establishing trust and assists in developing a basis for reliance on judgement. Confidentiality on the other hand is significant because the foremost duty of an auditor is not to disclose the information with appropriate authority (Russell, 2007). Objectivity means exhibiting high level of objectivity for evaluating, gathering and communicating relevant information regarding the processes or activities that are being examined. The auditors make balanced assessment of relevant circumstances. They should not get influenced for protecting their own interest or any other’s interest in case of developing judgements. Finally competency is required in terms of skill, knowledge and experience; otherwise the auditor will not understand fraud, theft or miscalculation (if any), in financial statements. The rules of conduct states that auditors should perform diligently, and honesty and they have to understand and observe law for making all the disclosures in a professional manner. They shall not be a part of any illegal activity and will contribute towards ethical and legitimate objectives of the company (Millichamp, 2002). Future Developments There are various ideas and assumptions present regarding the future development of auditing in context of independence. Many have advocated the fact that in order to stay strictly independent, auditors should not be authorized to offer audit clients with any sort of advisory services. This idea has been also directed in the EC recommendations’ eighth directive. This was designed so, in order to remove the conflicts that usually arises from interests of the companies to increase their revenue. In US the audit control procedure states that the audit reports should be reviewed by another company once in three years, which is also called peer assessment (Mathews, 2006). However, this system is not accepted by auditors in EU. However, in big companies, the peer reviews of audits are done, by the other offices of the same company present in another country. It has been also argued that the external auditors in the company should not be fixed, and this should be made mandatory. However, the empirical evidences are mixed regarding the issue. Many researchers have also stated that their reporting standard is usually lower when the tenure of the auditor is less. Most of the clients propose that the tenure should be a maximum period of five years (Gupta, 2004). Conclusion Audit firms and auditor must maintain their independence for the reports of the auditors to be free from any external, personal and organisational impairment. This report discussed all those factors which were enough to discuss how auditors can keep aside their personal objectives and interests in order to support the quotes that have been mentioned at the beginning of this study. Auditors are like examiners who check the annual performance of the companies in order to assist them in forecasting and decisions making. However, if code of ethics and laws are not followed then companies would function on wrong guidelines, and there are many examples that can be drawn from the recent financial crisis to describe how faulty judgement can lead to bankruptcy. References Dauber, N. A., Qureshi, A. A., and Levine, M. H., 2009. The complete guide to auditing standards, and other professional standards for accountants 2009. New York: John Wiley & Sons. Federation of European Accountants, 2013. FEE Paper on auditor independence provisions. [online] Available at http://www.fee.be/index.php?option=com_content&view=article&id=1300&Itemid=212&lang=en> [Accessed 13 June 2013]. Gramling, A. A., Johnstone, K. M., & Rittenberg, L. E., 2012. Auditing. 8th ed. Connecticut: Cengage Learning. Gupta, K., 2004. Contemporary auditing. 6th ed. New Delhi: Tata McGraw Hill Education. ICISA, 2004. International standard on auditing 560 subsequent events. [online] Available at: < http://www.icisa.cag.gov.in/Background%20Material/SUBSEQUENT%20EVENTS%20(560).pdf> [Accessed 13 June 2013]. Mathews, D., 2006. A history of auditing: The changing audit process in Britain from the nineteenth century to the present day. London: Taylor & Francis. Millichamp, A. H., 2002. Auditing. Connecticut: Cengage Learning. Rittenburg, L. E., Johnstone, K., and Gramling, A., 2011. Auditing: A business risk approach. Connecticut: Cengage Learning. Russell, J. P., 2007. The Internal Auditing Pocket Guide: Preparing, Performing, Reporting, and Follow-Up. 2nd ed. Milwaukee: ASQ Quality Press. Smith, 2012. CPA 2012 AUD: How to pass the CPA exams after studying for two weeks without anxiety. USA: T. Smith. Bibliography Weil, R., Schipper, K., and Francis, J., 2009. Financial accounting: An introduction to concepts, methods, and uses. Connecticut: Cengage Learning. Wolk, H. I., and Tearney, M. G., 1997. Accounting theory: A conceptual and institutional approach. 4th ed. Ohio: International Thompson Publishing. Read More