An auditor who is independent ‘in fact’ has the ability to make independent decisions even if there is a perceived lack of independence present,[2] or if the auditor is placed in a compromising position by company directors. Many difficulties lie in determining whether an auditor is truly independent, since it is impossible to observe and measure a person’s mental attitude and personal integrity. Similarly, an auditor’s objectivity must be beyond question, but how can this be guaranteed and measured? This is why perceived independence is of such importance.
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It is essential that the auditor not only acts independently, but appears independent too. If an auditor is in fact independent, but one or more factors suggest otherwise, this could potentially lead to the public concluding that the audit report does not represent a true and fair view. Independence in appearances also reduces the opportunity for an auditor to act otherwise than independently, which subsequently adds credibility to the audit report. ==Rest The problems regarding independence stem from two main sources the auditors’ relationship with the company and the nature of the accountancy profession. edit] Relationship with the clientAn auditor earns a living from the fee he is paid it is therefore automatic that he does not want to do anything to jeopardize this income. [4] This reliance on clients’ fees may affect the independence of an auditor. If the auditor feels this client income is more important than their responsibilities to shareholders he may not perform the audit with the shareholder’s interests in mind. The larger the fee income the more likely the auditor is to shirk his responsibilities and perform the audit without independence.
This could lead to the manipulation of figures and exploitation of accounting standards. By performing the audit without independence the shareholders’ may get misled, as the auditor is now reliant on the directors. To encourage auditors to maintain their independence they must be protected from the director’s board. If they were able to challenge statements and figures without the risk of losing their job they would be more likely to work with complete independence. Ultimately, as long as the client determines audit appointments and fees an auditor will never be able to have complete economic independence. 5] In most cases it is the directors that negotiate an audit contract with the auditors. This may cause problems. Audit firms on occasions quote low prices to directors to ensure repeat business, or to get new clients. By doing so the firm may not be able to perform the audit fully as they do not have enough income to pay for a thorough investigation. Cutting corners could mean the audit team would be reporting without all the evidence required which will affect the quality of the report. This would bring into question their independence.
Under what conditions an auditor is dependent on the client is an open question. It is common for the audit firm of a company to provide extra services as well as performing the audit. Helping a company reduce its tax charges or acting as a consultant for the implementation of a new computer system, are common examples. Having this additional working relationship with the client would result in questions being asked of the independence of the audit firm. If non-audit fees are substantial in retaliation to audit fees suspicions will arise that auditing standards may be compromised.
The firm would no longer be unbiased, as it would want the company to perform well so it can continue to earn the addition fee for their consultancy. This would mean the audit firm would be dependent on the directors and they would no longer be working with independence. [edit] The structure of the accountancy professionPrice competition is a major factor in auditor independence. [6] Prior to the 1970s audit firms were not allowed to advertise their services and take part in bidding competitions for contracts.
Competition between the accountancy firms greatly increased when these restrictions were abolished, putting pressure on the audit firms to reduce audit fees. Competitive bidding for contracts has also encouraged the reduction of auditor engagement hours. [6] The pressure to reduce costs may compromise the quality of an audit. If a firm feels threatened by competition they may be tempted to further reduce costs to keep a client. This risks lowering the standard of the audit performed and therefore mislead shareholders. The increased competition between the larger firms means that company image is very important. 4] No audit firm wants to have to explain to the press the loss of a big client. This gives the directors of the large company a commanding position over its audit firm and they may look to take advantage of it. The audit team would feel pressured to satisfy the needs of the directors and in doing so would lose their independence. [edit] Independence regulations in the European Union This section is empty. You can help by adding to it. (April 2011) [edit] Independence regulations in the United KingdomWithin the United Kingdom there are various regulations in force regarding auditor independence.
The main enforcement of auditor independence is through the Companies Act 1985 and the Companies Act 1989 although the matter is also covered by the professional accounting bodies’ rules of professional conduct and the Auditing Practices Board. It is also of note that regulations (i. e. International Accounting Standards or International Financial Reporting Standards) relating to the preparation of financial statements are also relevant. The Companies Act 1985 dictates that it is the responsibility of shareholders (rather than directors) to appoint the auditor at the annual general meeting (AGM) – section 384 of the act refers.
The theory behind this is that directors cannot intimidate auditors with the threat of replacement or bribe them by offering reappointment. In practice the existing auditors of a company are generally reappointed for another term at the AGM but the shareholders are free to choose another auditor if they wish to. Directors can only appoint auditors in exceptional circumstances (perhaps to fill a casual vacancy during the year). However, such appointments by directors will expire at AGMs. The Companies Act 1985 (section 386) allows shareholders to eliminate the need to reappoint an auditor each year.
