The integrity of external statutory auditors (Essay Sample)

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ABSTRACT
This paper not only explains the independence of the statutory external auditor as a pertinent component to the integrity and credibility of the audit result, but also discusses and provides recommendations on the auditor’s independence. The paper brings into the limelight recent and contemporary issues in auditing, giving an analysis of their impact on the auditor’s final report where the independence of the auditor has been compromised. The Enron case is one such issue where compromise of the auditor’s independence carries detrimental effects to the client firm’s stakeholders and has been highlighted in this paper. The fact that credibility and integrity of the audit report are derivatives of the auditor’s independence and the need to ensure his independence, both real and perceived, in discharging his responsibility to stakeholders is also considered. Negotiation of audit fee and provision of expertise services to the client, are also discussed as a plaque to auditors’ independence.
INTRODUCTION
Auditing, being an independent examination of the books of accounts with the major view of forming an opinion as to whether the financial statements disclosed reflect a true and fair view and whether they are free from material error, provides useful information to the stakeholders who include the shareholders, creditors, government, potential investors, employees, suppliers and the management of a corporation. Integrity of statutory audit means that the report generated thereon was based on independent opinion and not biased or based on sectarian interests, and that its reflects a true and fair view. With regard to auditors’ independence, it is imperative that the auditor exercises professional scepticism, integrity and professional ethics instead of falling prey to being tempted to give an unqualified report with the aim of pleasing the management. (Institute of Chartered Accountants of India, 2005 p. 4) A statutory audit is a legal requirement that the financial statements of publicly-owned corporations be subjected to an audit whose outcome is revealed during the annual general meeting (AGM) to the various stakeholders who have interest in the company and to the general public. A statutory auditor opinion should be made in person and should report within the framework of the recognised and internationally accepted accounting principles which includes the going concern and materiality conceptual frameworks.
AUDITORS INDEPENDENCE
The Companies Act 1985 and the ACCA Rules of Professional Conduct provides rules and directives to ensure that auditors’ independence is not only independent but also seen to be independent. Auditor’s independence has no assigned meaning. It essentially is a state of mind as well as personal character. Carey (1970 p. 175) describes independence as a state of mind and a matter of character. According to Byrne (2001), it is a state of mind with sole regard to considerations applicable to the task in hand and ignores other factors. The auditor is required to exercise his/her professional discretion objectively and freely, for it to be said that there was independence. He/she should not allow prejudice or bias to override his/her objectivity but he should be sincere honest and straight forward in his assignment. Independence of mind is where there is an allowance for one to make an opinion without influences that might compromise professional judgement, and there is an allowance for one to make decisions based on integrity, objectivity and professionalism. (Institute of Chartered Accountants of India, 2005 p.5)
Independence in appearance means that it would be evident to a third party with relative knowledge that the auditors’ independence has not been compromised. This implies that the auditors’ independence should appear to be in existence to all reasonable persons with the requisite information. The relationship between the auditor and the client should be such that the auditor is satisfied with the independence and that a non-sectarian third party with knowledge of the relevant facts and taking into consideration the auditor and his behaviour during the assignment can also testify on its prevalence. The fact that an auditor must be independent should not be translated to mean that he should be free from all economic, financial and other types of relationships with the client as this may be impossible. However, any financial or economic relationships between the client and the auditor should be evaluated on what is reasonable and a third party with information can reasonably conclude to be unacceptable. (Institute of Chartered Accountants of India, 2005 p.4-5)
RECENT AND CONTEMPORARY ISSUES
CASE STUDY
At the Enron case, the auditor, Andersen, collaborated with the officials of Enron to defraud the company hence leading to its collapse. Some of the officials that worked in the company had also worked at Andersen. There were material errors that the auditors had knowledge of but did not disclose in the audit report. As such, Enron Company, one of the most reputable company, which was known to upheld integrity collapsed. (Norris, 2002 p. 1 &2)
Analysis of the Facts;
The auditor’s independence was compromised. A self-interest threat existed where the company official was formerly an employee of the auditing firm. Existence of a psychological factor that compromised the auditor’s independence was eminent. (Corless et al 1990, p.7) In a way, there was a certain amount of bonding between them in which ideally, provision of a favourable report to please the official was provided. In this way, losses were hid which deprived the company of its life. This unprofessional and unethical practise deprives the investors off their rightful earnings and might eventually lead to loss of their initial investments. (McNamee et al 2000, p.158) One loophole that the auditing firm pointed fingers on was the permissiveness of the Securities and Exchange Commission (S.E.C) which failed to order companies to make more disclosures so as to detect material errors.
There are also a number of other factors that affect the auditor’s independence. Among them is the auditor’s remuneration in which a resolution is normally passed at the AGM for the directors to fix the Audit Fee. Though there may be reasons for this, the plan is likely to dilute the independence of an auditor in his provision of reasonable assurance. Where the total remuneration from a client exceeds 1% of an auditor’s total billings, there is reason to raise eyebrows with regard to his independence (Derieux 2000 p.83). The provision of other services such as the consultancy and expertise services also crippled the auditor’s independence.
CONCLUSION AND REMARKS
Although the independence of an auditor may seem to be an impossible task to achieve, current loopholes to its breach can as well be sealed. Samuel A. Derieux, former AICPA president and chairman of the board of directors observed the complicated financial standards might not serve holistically the investing public and as such called for the formation of more simpler useful and comprehensible universal standards. (Derieux 2000, p.83) This calls for a reform of the company law. The provision of add...