Auditor Independence - Essay Example

Each time such news grabs headlines questions are raised about the expected role of auditors to be the whistle blowers on first whiff of material fraud or manipulation and if they had compromised their role by losing their independence. Investigation into reasons for Enron failure in particular revealed that its auditors had colluded with the management in weaving a web of complex financial transactions creatively to help window dress the dwindling fortunes and losses in return for hefty non audit fee.

The firm was found guilty and indicted which brought about break up of one of the five largest audit firms of the world namely Arthur Anderson. Now there are only four big audit firms in the world namely, Price Waterhouse Coopers (PWC) Deloitte & Touch, KPMG and Ernst & Young, popularly known as the big four. Recently another big four firm namely Price Waterhouse Coopers' name has been dragged into another scandal of global proportions i.e., "Satyam", the software company based in India. This company had overstated its revenues for a number of years and falsified accounts to show nonexistent bank deposits.

Once again the role of Auditors was reviewed and it is primarily concluded that the auditors had accommodated the management in creating the charade. The auditors responsible for signing the reports are behind bars for criminal conduct in rendering services. In Australia too there have been cases of failed entities like HIH Ltd and Harris Scarfe were both placed into administration in the 2001/2002 financial year and subsequent investigation revealed irregularities in the financial statements of both.

Around the same time, the Australian companies One-Tel, Impulse Airlines, Ansett and Pasminco also collapsed, seemingly without warning, suggesting a deficiency in the corporate governance practices of these companies (Walker et al, 2008, p. 9).Just like SOX (Sarbanes-Oxley Act) of USA, CLERP 9 (Corporate Law and Economic Reform Program was enacted in response to public outcry over the seemingly expensive presence of auditors without commensurate accountability towards their functions to be discharged in an objective and honest manner.

Thus a "conflict of interest" situation must be avoided by auditors. A formal enactment only strengthens and structures the conduct expected of auditors as a matter of best practice while discharging their duties. Explanatory Memorandum to CLERP 9 (4.19) states that the inclusion of an objective standard in the general auditor independence requirement is critical for enforcement purposes because objectivity, being a state of mind, is not, except in unusual circumstances, subject to direct proof.

The difficulties associated with identifying a compromise of independence are also inherent in the nature of the audit process. Accordingly, the perception of auditor independence, as demonstrated by external facts and circumstances, under an objective standard takes on great importance.Main impact on audit function as a result of this legislation is summarised below:Partner rotation in all public interest entities with different partners namely engagement partner, the individual responsible for the engagement quality control review and other audit partners on the engagement team who are responsible for key decisions or