The Role of Safeguards in Strengthening Independence - Essay Example

? THE ROLE OF SAFEGUARDS IN STRENGTHENING INDEPEDENCE Report THE ROLE OF SAFEGUARDS IN STRENGTHENING INDEPEDENCE Fatma Hamad Almurakhi Student ID Number: 201001428 Due Date : 22-12-2013 The Role of Safeguards in Strengthening Indepedence Introduction The independence of the auditing body in the business environment is of paramount significance to the smooth running of financial operations. The Auditing should comply with the stated standards to ensure that the financial statements provided by these bodies reflect the true picture that exists within the organization. While this is so, manipulation of the auditing bodies is completely inevitable as these bodies are appointed and paid by the client. However, it is possible to optimize independence by neutralizing the threats that put independence at stake. Some threats that affect independence include self interest threats, self review threat, management threats, advocacy threats, familiarity threats and intimidation threats. In this light, designing and deploying effective safeguards will increase the level of auditor independence to and ensure integrity in their work. This can be achieved through the mandatory auditor rotation, peer review, independent auditor appointing, free setting and formulation of effective audit committees. Mandatory Auditor Rotation Mandatory auditor rotation is the act of compelling all financial organizations to adopt and engage a different auditor each financial year to avoid the preference of a single auditor. Often, the management prefers to hire the same auditors every year to ensure that they are able to manipulate them to provide audit results that conform to the will of the management (Chung 2004, p. 8). This inclination of the audit results to the management's opinion undermines independence and reduces the integrity of the end results. In this view, mandatory auditor rotation will ensure that the familiarity and the management threats are suppressed and the audit bodies have a better chance to provide results that reflects the true image of the organization (Chung 2004, p. 8). According to Forbes (2013, Para. 2), the US House of Representatives voted for mandatory auditor rotation as one way of setting the audit bodies free from manipulation. Peer Review In a peer review audit, after the principal auditor completes the audit process, other qualified professionals evaluate the work to verify its integrity and ensure that the financial statements are in accordance with those of the financial investors. This is a quality assurance process that aims at reducing any errors that may have occurred during the initial accounting process. In addition, this helps to reduce any form of data manipulation that may have been done intentionally under the influence of any independence threat (Allen and Siegel, 2002). Although this process may be quite expensive, it ensures that independence threats are neutralized and more credible results are attained. Independent Auditor appointing and free setting In this process, the role of appointing a professional auditor is withdrawn from the financial investor or client and dedicated to another body. The International Organization of the security commission (2002) states that the role of client in appointing the auditor provides a weakness in the independence of the audit results. Often, organizations will choose those auditors that they feel are easy to manipulate or threaten to ensure that they are able to cover up or pursue personal interests by imposing their own opinions on these professionals. To reduce this threat, an independent appointing body should be constituted to ensure that familiarity threats are eliminated by selecting professionals that are least affiliated to the firms. For instance, the government agencies can be chosen to appoint audit bodies for financial investors. Alternatively, shareholder committees should be formulated to take up this role of appointing a credible professional audit body that can provide credible results. In essence, giving this role to an independent body will help to safeguard the independence of the accounting process. Formulation of Audit Committees The audit committee is panel constituted of boards of directors that take up the role of streamlining all the audit operations to ensure that they comply with the required standards. This is one way of imposing strictness within the audit professional to reduce instances of malpractice and influenced financial accounting. Although the board may not be directly involved in the accounting process, it is responsible for maintaining ethical standards and discipline within this profession. As the audit professional are subject to this board, they will work in accordance with the stated orders to avoid antagonism with the board. This makes them less susceptible to external influence as this may cost them their jobs. In addition, the audit committee has the role of developing innovative strategies to strengthen the board independence in their oversight responsibility (Basu, 2009, pp. 4-29). Cumulatively, the audit committee will reduce the intimidation, advocacy and self interest threats that have suppressed independence of the audit operations. In this light, with an effective audit committee it is indisputable that the audit operations will be liberated from external influence. Conclusion In conclusion, designing and deploying appropriate safeguards will is of fundamental value in setting up independent audit operations in the financial sector. The real image of a financial investor can be mapped if only the audit process is transparent and independent from external manipulations. Threats to the indepence of the audit profession result in incredible results that are subject to personal interest and external opinions making the whole process worthless. To prevent this, mandatory audit rotation should be effected and peer review of the audit results should be deployed to mitigate possible threats to independence. Also, it is crucial to form an independent body that would appoint an independent audit body that can deliver quality results. Additionally, the establishment of an efficient audit committee will ensure effective monitoring of the audit operations, ensure that ethical standards are followed to the letter. Cumulatively, these safeguard measures will increase the indepence of audit operations to an optimal level. Bibliography Basu, S. K. 2009, Fundamentals of auditing. Delhi, Pearson. Available from: Chung, H 2004, Selective Mandatory Auditor Rotation and Audit Quality: An Empirical Investigation of Auditor Designation Policy in Korea, Krannert Graduate School of Management, desertation. Available from IOSC, 2002, Principles of Auditor Indepedence and the Role of Corporate Governance in Monitoring and Auditor’s Indepedence. Available from: < http://www.cmvm. pt/CMVM/Cooperacao%20Internacional/Docs%20Iosco/Documents/Principles_Auditor_Independence.pdf> Mckenna, F, House Counts On Honour Amongst Thieves: Votes Against Mandatory Auditor Rotation. Available from:< http://www.forbes.com/sites/francinemckenna /2013/07/09/house-counts-on-honor-amongst-thieves-votes-against-mandatory-auditor-rotation/> William T. Allen and Arthur Siegel, 2002. Threats and Safeguards in the Determination of Auditor Independence, 80 Wash. U. L. Q. 519 Available from: Read More