Auditor Independence and Scepticism - Research Paper Example

Auditor Independence and Scepticism Table of Contents Table of Contents 2 Introduction 3 Nature of Auditor Independence and Auditor Scepticism 3 The Nature of the Auditor Independence 3 Nature of Auditor Scepticism 4 The Development of Auditor Independence and Scepticism 5 5 Criticism of Auditor Independence and Scepticism 7 Criticism of Auditor Independence 7 Criticism of Auditing Scepticism 8 Conclusions and Recommendations 9 References 11 Bibliography 12 Introduction Auditor refers to a professional who is liable to ensure the accuracy of accounting statements of a company. Specifically, the responsibilities of an auditor involve the full participation of the professional to identify the indication of inefficiency and ineptness in the financial statement of an organisation and confront receptive issues related to the inefficiency. To justify these responsibilities an auditor must possess certain personal qualities such as honesty and ethicality. To be precise, the auditor whether internal or external, has his responsibilities towards the governance of an organisation and its quality (The Institute of Internal Auditors, 2005). However, in the realistic phenomenon auditors have been constantly judged on their personal qualities, which directly indicate to the appropriateness of the concept of auditor independence and scepticism. The concept of auditor independence and scepticism were both raised with the focus on the nature of responsibilities which a professional needs to abide while ensuring the quality of the financial statements of a company (Kleinman & Et. Al., 2001). Nature of Auditor Independence and Auditor Scepticism The Nature of the Auditor Independence To define the term ‘Auditor Independence’, authors have referred it as the foundation of auditing in a realistic behaviour. Relying on the nature of auditing, auditors need to identify, control and eradicate the inefficiency of the financial statements produced by the accountants of a firm in order to ensure the accurate status of the financial health of the organisation. Auditor independence, in this scenario assists the auditor to render value-added services to the client and the community at large. Auditor independence is strongly influenced by the audit process. The process instigates from the selection procedure and ends by reporting the findings and opinion of the auditor. Therefore, the concept of audit independence emerges to be crucial with due consideration to its importance and nature. It is in this context, that audit independence is implemented based on three basic principles, i.e. the auditors must belong to the external environment of the organisation and therefore are prohibited to be a part of the client organisation, the auditors are also proscribed to audit their own workings and cannot play any advocacy role to support the organisation if found guilty (Rezaee, 2007). Nature of Auditor Scepticism Auditor Scepticism is another concept introduced in the auditing practices, which refers to the personal skill of the auditors to challenge the management’s statements in order to critically evaluate the accuracy of the financial statements of an organisation. However, scepticism needs to be controlled due to the fact that challenging almost any and every assertion of a well established company will in turn affect the willingness to publish the financial statements (Peursem, 1989). The factors which play a crucial role in determining the appropriateness of scepticism are the regulations prescribed in relation to auditing and the financial practise of the company and the nature of the corporate. To be precise, the nature of auditor scepticism indicates to be an attitude of questioning the management and identifying and eliminating the probable chances of producing misstatements related to error or deception. It is of vital importance due to the fact that it not only ensures the auditing to be confirmed with extra professional efficacy but also proves supportive in performing the task rigorously. However, the level of scepticism should be of great concern as it is proven that high amount of scepticism can provide rise to needless costs while a minimal amount of scepticism can enhance the level of ineffectiveness during the audit (Auditing Practices the Board, 2010). The Development of Auditor Independence and Scepticism The role of an auditor has changed to a large extent from that of the past and the present. The auditors in their practises during ancient days had the eligibility to hold shares of the client company making the auditor a part of the organisational team (Aderibigbe, 2005). Certainly, this affected the level of auditor independence restricting the interests of the auditors to be bias in favour of the company. On the other hand, the amount of auditor scepticism was also restricted in this milieu. For instance, any kind of occurrence of misstatement presented by the company or demonstration of fraud and error witnessed in the company’s financial statement requires the amendment of the accounting policies by the auditors. But being one of the organisational members, the auditors were likely to ignore the imperfection with a natural fear to hamper his interest in the company. However, the evolution of auditing practises can be examined from the beginning of 1840 and divided into five phases, i.e. earlier to 1840, 1840 - 1920, 1920 - 1960, 1960 - 1990 and after 1990 to the present. The origination of auditing happened to take place in ancient China, Egypt and Greece. The examples of auditing can also be witnessed in the sovereignty of Henry I in England when a special group of officers were hired to examine the accuracy of the accounted revenue and expenditure transactions. According to Fitzpatrick, auditing in the past phenomenon was concentrated to judge the efficacy and honesty of the associates liable to keep a record of every transaction. Undoubtedly, it raised a question on the aspect of the honesty and trustworthiness of the auditor with a provided perspective of human nature. In the next phase, the auditing practises witnessed several issues related to the misstatement of financial data not only in the UK but in other western economies as well (Lee & Ali, 2008). The increasing number of fraudulence and errors which were a result of growing complexity in the accounting procedures during 1840s and 1920s contributed on the need to reemphasise and reconstruct the framework of auditing. Even in the later years until the end of 1960s, the role of the auditors were only to confine the financial statements presented by the company management to ensure the interest of its shareholders. However, in the 1990s, auditing gained a specific definition prescribing the roles and obligations of the auditor. It was in this period that auditing became much more risk-based which implied to focus on the key attributes that were likely to provide rise to errors or fraudulence (OConnor, 2004). Consequently, numerous questions were raised on the professionalism of auditors in the 21st century. As a measure to eradicate these obstacles, most of the auditing firms functioning in various countries divided their operations in multiple companies with rigid regulations. On the other hand, enhanced consideration was provided to the concept of independence and quality of the auditing services (Lee & Ali, 2008). Hence, the concept of auditor independence was introduced to eradicate the problems related to liberty and professionalism of auditors. While on the other hand, the aspect of scepticism was enforced to ensure the accuracy and effectiveness of the findings of auditing. Therefore, it can be stated, that the origination of auditing culture took place during early 1840s, but the emergence of auditor independence and scepticism developed in the 21st century (Hong Kong Society of Accountants, 2002). Criticism of Auditor Independence and Scepticism The practises of auditor independence and scepticism are relatively two fresh measures aimed at increasing the quality of the auditing services rendered by a firm. Hence, the concepts are undoubtedly of considerable importance in the present virtue of auditing. Despite the immense contribution and importance of auditor independence and scepticism, the two concepts have often been criticised by many practitioners in the realistic phenomenon. Criticism of Auditor Independence In the realistic practices, even after the development of auditing independence concept and its significance in the auditing process, many firms have been detected to be involved in presenting misstatements. The evidences also prove that the auditors were somewhat biased on the matter which augmented the chance of fraudulence regarding the misstatements. It is due to the facts that in the realistic behaviour auditors often possess certain factors of threat based on their personal perceptions such as the threat of self-interest, self-review and advocacy. Apart from these, threats also arise from the issue of familiarity or personal trust which the client organisation’s members show for the auditor (Bode, 2008). With an overall perspective, these factors conclude on the failure of auditors. However, in a wider perspective the threats which affect the efficiency of auditors arise from the cognitive aspect. Moreover, the structural issues, i.e. employing and dismissal of auditors by company managers and non-auditing services provided by the auditors enhance the chances of inefficacy while auditing. Even the legislative and the political threats emerge as threats to the aspect of auditing independence (Tanlu & Et. Al., 2003). Criticism of Auditing Scepticism Scepticism refers to the personal skill of the auditors to evaluate the honesty of the accounting practitioners. Therefore, the concepts of professional scepticism, which are entirely depended on the perception of the auditors, are influenced by various factors. At the foremost, the concept is influenced by the amount of scepticism implemented by the auditors. As discussed above, low level of scepticism can illustrate a minimal amount of effectiveness, while a larger amount can provide rise to unnecessary cost to the company. Consequently, the level of scepticism practiced by the auditor depends upon the personal readiness of the auditor as an individual. For instance, assuming that showing high amount of scepticism can affect the satisfaction level of the client can indulge the auditor to implement the thought. This in turn will result in a lower level of scepticism and thus hamper the accuracy of the findings (The Auditing Practices Board, 2010). To be summarised, the factors which affect the level of scepticism in a wider perspective are the degree of influences in terms of public opinion, personal relationships between the client and the auditor, the competency level of the auditor and the level of integrity possessed by the auditor. Although there is a significant amount of measures considered while commencing auditing practices, auditors have somewhat failed in performing their responsibilities with utmost care and professionalism. This in fact reflects a major limitation of the thought of auditing scepticism (Aderibigbe, 2005). Conclusions and Recommendations With reference to the above context, it can be concluded that both the auditing thoughts, i.e. auditor independence and auditor scepticism are of considerable significance in the practical phenomenon. Both the concepts are relatively fresh, with their origins developed in the 21st century and therefore are subject to various limitations. To be included, certain major limitations of these concepts are that the implication depends highly on the perception of the auditor. The perception again is strongly influenced by various attributes ranging from the threat of hampering the self-interest to the self-review of the auditor. For instance, the fees of an auditor when hired are paid in two or three parts, and the auditor can grow a fear that becoming sceptic can hamper the amount and his self-interest in turn. In the realistic practices this is often recorded to be a reason of lower level of scepticism which enhances the chances of inefficacy and inaccuracy of the auditing process. Moreover, the organisational structure also augments the level of threat influencing the factors of auditor independence and auditor scepticism. Illustrating the fact, auditors are generally hired by the top management of the client company who also possess the right to terminate the auditor in case of any inconvenience. This at a certain level affects the amount of independence and scepticism possessed by the auditor. In order to eradicate these limitations and attain an optimum level of supremacy on the thought of independence and scepticism, it is quite essential to generate a certain amount of awareness among the auditors. The limitations in terms of political, legal, structural and cognitive threats at large can only be eradicated when the auditors will be more conscious about their responsibilities. For instance, the threat related to self-interest can be eradicated only if the auditor possesses a personal characteristic framed by honesty and professionalism. However, the consequences arise from the end of the client companies such as the structural issues. Therefore, generating awareness merely among the auditors will not be sufficient. It will also be generated among the organisations performing audit in regular intervals. In a nutshell, the fact which can be quite supportive to eradicate these obstacles is the realisation of the importance of independence and scepticism in auditing. It is merely when both the organisations and the auditors recognise the benefits of these issues. On the other hand, the concepts till date lack a well-defined framework to prove helpful for the ultimate execution of the thoughts. In addition, proper legislative rules are also required to strengthen the concepts. However, the efficacy of the thoughts highly depends on the execution which again relies upon the perception of the auditor and the client organisation at large. References Aderibigbe, P., 2005. Auditor’s Independence and Corporate Fraud. Obafemi Awolowo University. [Online] Available at: http://www.krepublishers.com/02-Journals/JSS/JSS-10-0-000-000-2005-Web/JSS-10-2-077-147-2005-Abst-PDF/JSS-10-2-135-139-2005-192-Aderibigbe-P/JSS-10-2-135-139-2005-192-Aderibigbe-P.PDF [Accessed January 18, 2011]. Auditing Practices the Board, 2010. Auditor Scepticism: Raising the Bar. Discussion Paper. [Online] Available at: http://www.frc.org.uk/images/uploaded/documents/Discussion%20paper%20Auditor%20Scepticism%20-%20raising%20the%20bar21.pdf [Accessed January 18, 2011]. Bode, S., 2008. Auditor Independence and Regulation. GRIN Verlag. Hong Kong Society of Accountants, 2002. A Guide For Effective Audit Committees. The Audit Committee Guide Review Task Force of The HKSA Corporate Governance Committee. [Online] Available at: http://app1.hkicpa.org.hk/publications/audit/audite.pdf [Accessed January 18, 2011]. Kleinman, G. & Et. Al., 2001. Understanding Auditor-Client Relationships: A Multi-Faceted Analysis. Markus Wiener Publishers. Lee, T. H. & Ali, A. M., 2008. The Evolving Role of Auditors. Accountants Today. [Online] Available at: http://www.mia.org.my/at/at/200803/06.pdf [Accessed January 18, 2011]. OConnor, S. M., 2004. Be Careful What You Wish for: How Accountants and Congress Created the Problem of Auditor Independence. Boston College Law Review. [Online] Available at: http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=2274&context=bclr [Accessed January 18, 2011]. Peursem, K. A. V., 1989. Dairy Containers’ New Zealand Audits 1981-1989: Pyrrhic Victory for the Ancient Sceptic. University of Waikato. [Online] Available at: http://www.victoria.ac.nz/sacl/6ahic/Publications/6AHIC-33_FINAL_Paper.pdf [Accessed January 18, 2011]. Rezaee, M., 2007. Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, And Integrated Processes. John Wiley and Sons. Tanlu, L. & Et. Al., 2003. The Failure of Auditor Independence: Cognitive, Structural, Legislative, and Political Causes. Max H. Bazerman. [Online] Available at: http://www.people.hbs.edu/mbazerman/Papers/03-115.pdf [Accessed January 18, 2011]. The Institute of Internal Auditors, 2005. Common Misconceptions. Tone at the Top. [Online] Available at: http://www.theiia.org/download.cfm?file=2153 [Accessed January 18, 2011]. Bibliography Abou-Seada, M. & Abdel-Kader, M. G., 2003. Behavioural Aspects of Auditors Evidence Evaluation: A Belief Revision Perspective. Ashgate Publishing, Ltd. Carpenter, T. & Et. Al., 2002. The Role of Experience in Professional Skepticism, Knowledge Acquisition, and Fraud Detection. American Accounting Association. [Online] Available at: http://aaahq.org/audit/midyear/03midyear/papers/MidYear%20Paper%20(No%20Appendix).pdf [Accessed January 18, 2011]. Chen, Q. & Et. Al., 2009. Do Audit Actions Consistent with Increased Auditor Scepticism Deter Potential Management Malfeasance? American Accounting Association. [Online] Available at: http://aaahq.org/meetings/AUD2010/AuditActionsConsistentWithIncreasedAuditorScepticism.pdf [Accessed January 18, 2011]. Golden, T. W. & Et. Al., 2006. A Guide To Forensic Accounting Investigation. John Wiley and Sons. Gray, I. & Manson, S., 1989. The Audit Process: Principles, Practice And Cases. Routledge. Kopp, L. & Et. Al., 2003. A Model of Trust and Professional Skepticism in the Auditor-Client Relationship. University of Waterloo. [Online] Available at: http://accounting.uwaterloo.ca/seminars/old_papers/Morley_Lemon-A%20Model%20of%20Trust%20and%20Professional%20Skepticism.pdf [Accessed January 18, 2011]. Turley, S., 1997. Current Issues in Auditing. SAGE. Read More