As per the Company Act 1993 (section 207Q) the authority to select the auditor goes to the hand of the Registrar if the annual general meeting of the company is not able to appoint or reappoint an auditor. Public confidence in financial markets and the conduct of public interest entities relies partly on the credibility of the opinions and reports given by auditors in relation with financial audits. The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services. So, if there are major threats to independence that cannot be overcome with any other safeguards then the only thing that will be available would be resignation of the auditor (CPA Ireland, 2017). By Josephine Haste. This principle helps the company to balance between the efficiency, cost and independence related with the auditing. The user of the audit report mostly perceives these issues as reducing auditor’s independence (Hay, 2004). Self-review threat: A judgment is required of the auditor which demands that previous work of the firm (whether audit or non-audit) be challenged or re-evaluated. Under the principle 7 of FMA act and NZX Corporate Governance Code 2017, The board should establish a framework that ensure that there is no relationship between the auditor and the entity or any other related person who can influence the auditor’s independence by obtaining confirmation through the external auditor in writing (Financial Markets Authority Corporate Governance in New Zealand, 2014). Independence in fact and appearance relates to the integrity and objectivity of the auditor. Conceptual framework approach describes the audit team or review team to achieving mind maintaining independence which comprise of independence of Mind and independence of appearance. The auditors’ fees and expenses must be fixed for the period it is appointed or till the next annual general meeting by the source they were appointed such as shareholders through meeting or directors if it is casual auditor or Registrar/ Audit-General as per the section 207S of the Company Act 1993. It is critical for an auditor to be independent of the firms they audit due to many reasons. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. HIH Royal Commission Report (2003) is considered the biggest corporate collapse in the history of Australia where Justice Owen made number of recommendations with regards to the auditor independence and their duty of care which consider as on the major reason for the collapse (Robyn Moroney, 2014). Also, according to the Company Act 1993 and section 290 of the Code of Ethics, an auditor cannot have any employment relationship with the client company or related company such as director, employee, liquidator or receiver. Training of staff in these policies and procedures and appropriate disciplinary procedures. This approach was represented as law in WA Chip & Pulp (1988) case where Justice Wallace rejected the argument of the auditors that auditor’s duty does not include the detection of fraud and held that the auditor’s duty went beyond the need to examine the financial statements and whether the fraud was uncovered or even if there was a suspicion of it and promptly failure to report the directors or senior management about it constituted negligence. •Programming independence: auditors have freedom to develop own programme, both as steps to be included and amount of work to be performed, within overall bounds of engagement. Remember !! Auditor independence is mostly challenge by the close relationship between the auditor and a client company which provide the audit fees. The term “reasonable care and skill” is consistently increasing with time and cases. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. The independence of CPAsis an integral part of the framework of the profession – requirements relate to everything a CPA does – business and employment relationships as well as the services delivered to clients. Preparing accounting records and financial statements for audit clients poses a substantial self-review threat. The corporate law reform in Australia, The Sarbanes-Oxley Act ion the US and CA ANZ was start reviewing their standards. If the directors of the company have been misleading the auditor by providing manipulated accounting information, then they may try to prevent auditor from reporting this. Arthur Anderson was the audit partner of Enron who was one of the largest audit firm at that time and was a part of “Big Five”. inpractice Auditing 05 Nov 2015. This case again made it easier for the third parties to establish that an auditor owes them duty of care (Robyn Moroney, 2014) (Arens, 2013). The auditors must opine on financial statements as per his capability and within the boundaries of the code of conduct which protects his independent state of mind. There was a similar case known as collapse of the merchant bank Rothwells Limited, where the point was emerging about the need for auditors to resist pressure from the client and maintain a healthy scepticism in dealing with them which require an evaluation of the auditor independence and conflicts of interest of people involved in it (Mills, 1990). The advocacy threat: The auditor becomes involved in actively promoting or defending the client’s interests. Auditor professionals will always argue against the audit rotation. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. Auditor independence —meaning independence of both the firm engaged to perform external audits and the individual auditors who conduct the audits–is a central facet of external auditing. In Esanda Finance Corporation Ltd v. Peat Marwick Hungerfords (1994) case, Esanda sued the auditor claiming they relied on the financial report of Excel Finance Corporation which was negligently audited, in granting finance to the company but the judge made the decision in favour of the auditors which was against the finding in the Columbia Coffee and Tea case. Free resources to assist you with your university studies! It is a legal obligation for an external auditor to be independent. The auditors are professionals who receive a fee from client for his service so the threats to independence of judgement is unavoidable (Siegel, 2002). He also addresses this case as “case of the dog sniffing around and being required to follow up the scent and keep its eyes and nose open” (Law Teacher, 2013). Independence in auditing 1. However, the auditor’s understanding about their responsibilities are different than the public beliefs. The different perception of public and accountancy profession about the role and responsibilities of an external audit creates the expectation gap. Under this section, Equity investment (including options) in clients is specifically prohibited. The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. While appearing independent is about preserving “Independent of appearance” which is how public/users perceive auditor as being objective which is important to get users confidence over auditor’s judgement. The major issues that affect the audit independence are long relationship between client and audit, provider non-audit services to the client, employment of former auditors of client, job opportunities, related party etc. For example, stock options give upper management incentives to boost short-term stock prices at the expense of a company’s long-term viability. These reviews must be carried out before the auditor signed the audit report. Independence is one of the most important attributes of the accounting profession. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner. The code is the blended of principles and rule with the heavily reliable on principles (KnowdegEquity – Support for CPA, 2015). This include cost, but it can be very useful, if the audit firm is the sole practitioner. They believe that once the auditor signed the annual report of the company it means that the company has been investigated for fraud and wrongdoing and the financial statement are totally accurate and it reflects the true financial position of the company (Mills, 1990). Policies and procedures to implement and monitor the quality of employee performance and quality control of engagements. More than 100 years back in 1896, the landmark judgement was delivered in Kingston Cotton Mill case where Lord Justice Lopes describe an external auditor as “watchdogs” rather than “Bloodhounds” which establish the principle that auditors’ duties involve the exercising of reasonable professional care and skill. Auditing 1 Assignment 2. Auditors must be able to review material objectively and come up with a neutral, accurate, and honest report on the outcome of their investigations. Accounting firms sometimes engage set audit fees at less than the market rate and make up for the deficit by providing non-audit services, such as management consultancy and tax advice. What are the SEC Auditor Independence Rules? There are many users of financial statements who do not have sufficient knowledge to understand what is contained in a company’s annual accounts. Individual circumstances make it difficult to set a general limit, but a review and safeguards are needed when the total fees from an audit client exceed 15% of the gross fees of the firm (section 290.222 of the Code) (Professional and Ethical Standard 1, 2016). New Zealand Institute of Chartered Accountants has been granted accreditation under the section 50 of Auditor Regulation Act 2011 (Auditor Regulation Act 2011, 2017) but FMA must monitor the audit regulatory systems of each accredited body to the extent that it is adequate and effective and if the body are failed to comply with it, they may considered as committed an offence and is liable for fine not exceeding NZ$100,000.00 (Auditor Regulation Act 2011, 2017). There are occasions where independence of the auditors may be threatened or appear to be threated so the frameworks identify five threats to independence. There is and was always an expectation gap between auditors and user of the audit report regarding the perception of issue that affect independence and liabilities. 4 Independence in Fact Anderson was performing non-audit service as well to HIH. In the aftermath of Enron’s demise, the accounting firm was accused of not acting independently and suggestions were made that they had gone along with the accounting practices in Enron in order to retain their work. As per the principle 3 of FMA and Listing Rule 3.6.1 of NZX, each publicly owned company should establish an audit committee of the board with responsibilities to recommend the appointment of external auditors; oversee all aspects of the entity-audit firm relationship; and to promote integrity and transparency in financial reporting. No plagiarism, guaranteed! Justice Moffitt acknowledge that auditor is not an insurer and their duty is verification not detection of all errors that may occur in company’s financial statement (Tom Campbell, 2005). Copyright © 2003 - 2021 - All Answers Ltd is a company registered in England and Wales. This article is purely for educational purposes, with information collated from multiple news reports, journals and interviews with my CA friends. If internal audit is to retain its necessary independence in practice, it must take the time to invest in its relationships with the board, audit committee, key business stakeholders and senior management, sustaining a steady and robust dialogue with each party in order to perpetuate its own functional success. Familiarity—when an auditor becomes too sympathetic to the interests of another party because of a close relationship. Why independent audit committees matter? The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. Auditor independence is the ability of a person conducting an audit to do so autonomously and with integrity. Failure to oblige could lead to massive fines, expensive court cases, jail time and ultimately the collapse of the auditing firm (like in the case of Arthur Andersen). Paragraph 290.223 of the Code recommends that, in cases involving overdue fees, a professional accountant who is not a member of the audit team should review the audit work, and requires the audit firm to determine whether the overdue fees might be regarded as equivalent to a loan to the client and whether, because of the significance of the overdue fees, it is appropriate for the firm to be reappointed or continue the audit engagement (Professional and Ethical Standard 1, 2016). An auditor with experience of the business and the sector that they have developed over several years will support the risk assessment work. When the auditor audits the same client for long period, it automatically creates a familiarity threats. From the literature above, the importance of audit independence can be categorized into four reasons: Firstly, audit independence can hold the public confidence and avoid interest conflicts; Secondly, audit independence can help auditors to provide high quality financial report and avoid scandals like ‘Enron bomb’; Thirdly, the development of no-audit services make it more difficult but more important to … Most of the users of financial statements such as public, stakeholders and sometimes professionals also believe that it is auditor’s responsibility to give a warning if the company is in trouble. When the other services are provided by the audit firm to the client which create the self-interest threat and it will be major self-review threat and to safeguard it, we can create an invisible wall which means that the different team are created for audit service and for non-audit service. Auditor independence simply means the ability of the auditor to adopt an approach with integrity and objectivity within the audit process. VAT Registration No: 842417633. Parts B and C illustrate how the conceptual framework is to be applied to identify and address threats in specific situations (Arens, 2013). The recent developments have imposed higher responsibilities on auditors and wider the applicable standard of care, wider the definition of negligence and duty of care to owed to third party or in another word, we can say that the auditor’s responsibility has been increased with time and cases which demand for higher independence level in auditing. The activities such as unapproved employee bonuses paid to managers and executives, manipulation of the financial statement to present the favourable financial position, wrong accounting treatment despite of the auditor’s involvement were highlighted in the report. • Independence involves appearing independent and actually being independent. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The extent of reasonable care and skill and caution is based on the circumstances of each cases (Academic Dictionaries and Encyclopedias, 2014). So if the period of audit to the client is just few years, the risk is quite low so as a safeguards, audit firm can simply let the another partner to review the audit but if the audit period is longer such as 10 years, then the risk is significantly high so audit rotation (rotation of audit partner or even audit manager in some cases) would be better as the safeguard. Leadership that stresses the importance of ethical behaviour, Resignation from engagement can be extreme safeguard but in come circumstances the only option available. It is suggested that an auditor can demonstrate that undue economic dependence doesn’t place independence at risk by ensuring that the fees from one audit client or group of audit clients don’t exceed an appropriate limit. Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here. Importance of Audit Independence for Shareholders Shareholders are the direct beneficiary of companies and they will get more bonuses if the companies operate successfully. Section 12 of Auditor Regulation Act 2011 allow professional auditor who gain their qualification and experience overseas if the person meets the minimum standards required by FMA can be the member of one of the recognised body (Auditor Regulation Act 2011, 2017). There are infinite of ethical issue that can be faced by professional auditor and thus it is impossible for the code to cover all these situations. Auditors responsibility has been widened with the time and now has been extended to the third party who are other than the investors, shareholders and stakeholders. An n auditor must ensure that his judgement is not impaired by reason of any relationship with or interest in the company (Company Act 1993, 2018). Self-interest—when the financial interests of the auditor or relative are involved. This opinion intends to enhance credibility of the financial statement. They are the first reporting point for the whistle-blower (Financial Markets Authority Corporate Governance in New Zealand, 2014). Despite this general prohibition, section 290.173 states that provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or related entity audit clients that are public interest entities would not be impairing independence if the personnel providing the services are not members of the audit team and either: (a) the divisions or related entities for which the service is provided are collectively immaterial to the financial statements on which the firm will express an opinion; or. All threats to independence are brought to the attention of those charged with governance and if required with the audit committee as well. Being independent is about preserving “Independent of mind” which is about the capability to maintain profession objective while exercising professional judgement which is important to preserve quality of auditor’s judgement. These are safeguards attributable to: (a) Safeguards created by the assurance practitioner’s profession, legislation or regulation; and. *You can also browse our support articles here >. Auditors need to carefully and continually review the risk related with the financial engagement with client such as audit or non-audit fees and manage risk to their objectivity. whereas in AWA case, the auditor warns the management about the serious internal control problem only after sometimes due to which the auditor was held negligent however the management of the AWA was held guilty of contributory negligence as they failed to take appropriate action to protect itself even after getting warning by auditors (Ferdinard A. GUL, 2014). All work is written to order. It is as reported on 1st March, 2020. Adelphia, Bristol-Myers Squibb, FastTrack Savings & Loans, Rocky Mountain Electric, Mirant Energy, Global Crossing, Halliburton, Qwest, AOL Time Warner, Tyco, and Xerox are some of the firms that have come under scrutiny for potentially corrupt management and a clear lack of independent financial monitoring. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. Although the third party who made the decision to take over the business was unknown to the auditor, was owned a duty of care as the third party was relied on the publicly filed audited financial statement of a company (Arens, 2013). The authority to choose an auditor was in the hand of shareholders instead of the directors to avoid the scenario where directors can intimidate auditors or bribe them by assuring reappointment. New Zealand has basically followed the IFAC rules as the basis of their requirements. The recent cases include: Tesco dropping its auditor after 32 years after a massive accounting scandal was discovered resulting in the dismal and resignation of key board members in the group. During the 1990s, the financial importance of non-audit services to public accounting firms increased dramatically, and the growth of the consulting divisions or companies associated with the largest audit firms is seen as a significant possible impairment to the independence of audit partners (D A. Moore, 2004). Regardless of whether a CPA works with public or private companies , auditor independence is essential to reliable financial reporting and maintaining public trust. At the root of both this mismanagement and the failure of monitoring systems lie conflicts of interest. The major claim in BGJ was that the auditors had not alerted the directors to the foreign currency losses of $4 million. If the leader or senior partner of the firm follow the ethics or act in ethical way, it will encourage other staffs to follow the same path and be ethical as well. And auditors charged with independently reviewing a firm’s financial reports have often been found to be complicit with firm management in this effort (Levitt & Dwyer, 2002). 16th Dec 2019 There are various regulations and guidelines as lay down by New Zealand to protect audit independence. The auditors are in dilemma regarding the term as the court may conclude the auditor’s judgement on the degree of inquiry to be made fell short of the “reasonable care and skill” expected at that time despite compliance with the usual auditing standards and practices (Mills, 1990). In this case, the judge held that foreseeability alone is not sufficient enough to establish a duty of care, they need to prove the relationship of proximity as well (Arens, 2013) (Robyn Moroney, 2014). The Company Act 1993 (section 207) clearly stated that the auditor must report to the shareholders of the company instead of any managers or directors on the financial statements audited by them and the report must be comply with the requirements of all applicable auditing and assurance standards (Companies Act 1993, 2018). Advocacy—when the auditor promotes a position or opinion to the point where subsequent objectivity may be compromised. Here’s why auditor independence is important and how the SEC plans to alleviate some of the recordkeeping challenges associated with the existing rules. The demise of Arthur Anderson is normally linked with Enron case as there were visible lack of audit independence. It is characterised by integrity and requires the auditor to carry out his or her work freely and in an objective manner. The author Gupta (1999) is of opinion that is auditor is not independent of management; his opinion would mean nothing to shareholders, prospective investors, bankers, government agencies, and others who are concerned with the financial statements o… They fall into two broad categories: Safeguards created by the assurance practitioner’s profession, legislation or regulation include (Professional and Ethical Standard 1, 2016): Every audit firm is supposed to have a policies and procedures in place which gives the staffs an indication as what they should do when they face with the challenges from independence or ethical issue and these policies and procedures should be very descriptive as to what should be done by the firm. Actual independence is quite straightforward. The auditor should always maintain an appropriate level of independence from the client to balance the duty to provide quality audit report to the shareholders and public too. Anderson was auditing the company for long time. External auditors are hired by parties who are likely to benefit from the information provided in the audit like stakeholders and investors. Auditor independence refers to the independence of the external auditor. The importance of audit independence has been increased mainly due to the recent audit failures such as Enron, WorldCom, HIH Insurance, Feltex etc. Before issuing the report, the Widgets audit partner should also discuss Marker’s independence assessment and the safeguards applied with the Widgets board. It was the auditor to avoid the case where there is financial involvement of family members or involvement of personal relationship etc. The auditor independence is measured by how honest an auditor … Be independence of external auditors the technical the financial audit remains an important aspect of Corporate governance the fee! 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