Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.
Auditing as a profession is fundamental all around the world to many different stakeholders. It is a profession that also allows accountability to be taken on the true reflection of financial statements. Solicitors in the legal profession carry out work on behalf of the client whereas the auditor works to provide an independent opinion of the client’s financial statements. A statutory audit is a legal requirement by limited companies around the world, the “purpose of the statutory audit is to provide an independent opinion to the shareholders on the truth and fairness of the financial statements”. (ICAEW, 2006). Therefore, the auditor must be independent in his judgment and professional opinion, holding no ties with the client that could influence their decision e.g. owning shares in the company they audit, or cause a conflict of interest on the financial statements of the client, and find them free from error both unintentional (material misstatement) and intentional (fraud).
Stakeholders would much rather be provided with an independent audit opinion that can provide a true reflection and aid the company to perform better, rather than have a non-independent auditor give a bias opinion on the financial statements, therefore not giving confidence to stakeholders about the companies’ performance and ultimately their investment holdings. External auditors are required to comply with ethical standards set out in the IFAC code of ethics, therefore needing to be objective, professional, confidential and act with integrity in their search, thus improving trust in the profession and being perceived to operate independently.
An audit’s purpose is to assure stakeholders such as investors, creditors, shareholders, and the public interest, that the company is operating truly and fairly, this bridges the gap between the management running the company and shareholders. “Independence is driven by the critically important professional traits of objectivity and skepticism” (Accountancy Age, 2018). This reflects how audits need to be independent to find the balance between assessing how objective financial statements in their reflection of the companies’ position but also being apprehensive whilst auditing the company before coming to a conclusion. The audit report benefits companies in showing if they are a “going concern” in future decisions such as takeovers and mergers or applying for additional loans with a bank, therefore adding creditability to the companies’ performance.
The auditing profession has had many scandals consistently over the years which is caused by poor judgment, standards, controls and lack of independence. A recent example of poor independence is the Carillion scandal in 2017. Carillion was one of the largest construction companies in the UK having contracts with both the public and private sectors, due to poor corporate governance inside the company the auditor’s independence diminished. “KPMG says that Carillion was audited ‘appropriately and responsibly” (ACCA,2018). KPMG stated that carillon was a “going concern” in the future and that there were no issues, therefore this wasn’t a true and fair reflection of the companies’ position. Furthermore, KPMG was the auditor for “19 years”, alongside 2/3 previous carillon finance directors being former KPMG employees, this only augments the lack of independence by KPMG and how it fueled the eventual downfall. Auditors should remain independent and tenders should go out every 10 years so that the auditors don’t build strong relationships which ultimately compromised independence as seen with KPMG and Carillion. The scandal was documented on front-page news, only adding to the public perception on auditing as an industry and its lack of independence in providing credible judgments. The scandal not only impacted KPMG and its reputation but many stakeholders both internal and external. “A survey has revealed that just 9 percent of company secretaries surveyed by ISCA think that the audit process has improved since the collapse of Carillion” (Accountancy age, 2018), this reflects the notion that scandals will widen the gap between public perception and auditor’s perception on the service.
Auditing as a profession exists because capital markets wouldn’t have independence without there presence, the job of auditors is to act with integrity, care, objectivity and to be independent in their search and convey this in the audit report to advise clients to eliminate them. One threat that can affect auditing is the self-interest threat. This threat is where the auditor doesn’t want to lose the client and therefore their behavior ultimately overlooks any issues due to financial (outstanding audit fee and bribes) or non-financial interests, therefore professional judgment is compromised. The implications of this will lead to an inaccurate audit report and independence is also compromised, not reflecting the companies’ true performance due to other interests. An example of this is the audit of HP limited, the “engagement partners brother held 200000 shares in the company” (Auditor forum, 2012), however as the partner informed the company it did not compromise his role, but this does reflect a self-interest threat if the engagement partner did not inform the company, the company was later sued by HP for failure to act with integrity.
Another threat to independence is the intimidation threat. The auditor’s objectivity is compromised in the audit environment, for example, a dominant director who has too much power and influence over the firm, therefore this will affect the auditor’s judgment to remain professional in his duties. An example of this is Sports Direct. Mike Ashley is a dominant owner, and had a deal with his brother’s company and the auditors felt they “did not need to disclose a related party transaction” (Gaurdian,2019) alongside also having an outstanding tax bill that was discovered late from Belgium which was over 600 million. Grant Thornton stepped down soon after and discontinued their services as the threat was too large potentially affecting their image in the long run. There isn’t a safeguard apart from terminating services that can counter this threat altogether.
A final threat to independence is familiarity, this refers to how independence is compromised due to long association between the auditor and client and how this will affect the views of the auditor due to relationships formed. This would harm the auditor’s ability to remain independent over all those years and may lead to material misstatements unintentionally. An example of this is the recent case regarding BT and how PWC has stepped down as auditors after 3 decades of association due to BT overstating profits by 500 million (Guardian, 2019). This goes to show that the auditors missed errors whilst auditing BT and their objectivity was compromised due to a longstanding relationship.
Auditors are faced with copious threats in addition to the ones above that could compromise their audit, professional bodies have published guidance on how firms should combat these issues. “ISQS 1, states firms should only undertake arrangement when they are competent to do so” (ACCA, 2009), therefore auditors need to ensure effective planning and research before taking on a client, and assess all potential risks during the planning stage.
Audit safeguards are used as a means of protecting and helping to ensure threats are minimized, and this will consequently help the auditor to carry out their duties accurately and provide an opinion with reasonable assurance. “IFAC code 2016 splits the safeguards into 3 categories” (GMC,2019). Firstly, firm-wide safeguards which relate to a clear message to audit staff and teams to essentially act in the public interest through leadership and messages sent down from the top, the problem with this approach is that it may not be effective at reinforcing, therefore the message could be overlooked. The second is engagement specific safeguards such as a non audit professional, reviewing the auditors work, the upside is that they may able to give an opinion on mistakes however they aren’t specialized in that area to point out all errors. Finally safeguards within the client’s profession such as how the client’s systems, policies and procedures operate, and the relevant experience to make decisions, if the client had an independent internal audit department who regularly reviewed systems, processes and governance, this would ensure the firm would act professionally and would be reflected in the external auditor’s report, however this depends on how influential the internal audit department can be.
A potential safeguard to the familiarity threat is that the government will appoint auditors to clients, therefore long standing relationships are not formed and effective rotation is carried out by firms, therefore leading to independence to remain intact and true reflection in the audit report. The downside to this is that governments also change and this impacts their policies and political ties, therefore whoever is in charge in government will also have ulterior motives, therefore reducing the independence of those appointing the auditors. ICAEW believes that “The most effective way to ensure the reality of independence is to provide guidance centered around a framework of principles” (ICAEW, 2016). The presence of an audit committee within a firm would allow the company to profit from the advice and valuable communication to ensure individuals act independently, it would allow managers to be restricted and questioned on power and decisions with regular independence reviews, further strengthening corporate governance, unless the committee also has motives.
When audit scandals occur the failure is usually blamed on the auditors due to “their independence has been compromised by the non-audit fees payable to them” (ICAEW,2016). If a company is auditing a client they know the problems that are occurring and therefore can provide non-audit services and gain additional income, this affects the auditor’s ability to be independent. Non-audit services provide huge revenue for the big 4, therefore this has become an issue towards independence as the majority of non-audit revenue exceeds statutory audit fees. A safeguard is for audit firms to only be able to audit clients and not provide both services something KPMG and Delliote has done for its FTSE 350 companies (BBC, 2018) due to “erosion of trust”, this will improve the independence in auditing and allow firms to solely concentrate on auditing duties, however it can be noted further improvement internally such as extra training and changes in policies could build upon these changes to strengthen the culture.
For the independence to not decline, the current regulatory framework set out by the ISAAB and FRC needs to ensure that the quality of the audit remains high, if the quality of the audit remains high this then will keep independence intact alongside providing an accurate audit report which will allow the company and shareholders to make better informed decisions. Poor audit quality will lower independence and will be noticed upon the shortcomings of companies (audit failure). Its easy to notice poor audit quality but audit quality as a whole doesn’t have an actual definition, as what benchmarks audit quality changes over time with developments of companies and scandals, as auditing as a profession also evolves over time. “However broad concepts such as independence and competence will remain over time” (GMC,2019). It can also be noted that audit quality is subjective, those in auditing will have their own notion of what is a successful audit is, e.g. audit has been completed and with reasonable assurance the statements are free from error and bias, whereas the public may see audit quality as helping capital markets and investors in decision making with accurate financial statements. Therefore, audit quality derives from a combination of the auditors their skills, expertise and professional judgment combined with how they working with clients, in addition to working practices such as effective governance, ethics and regulation. All this combined together will result in a truer reflection of the client, aiding all parties involved as they believe the auditors have followed the framework. “The result showed that the independence and audit procedure positively affected the audit quality” (Journal of Accounting and investment, 2019). The study looks into 45 responses via a survey in east java regarding how audit procedures and independence positively correlate with high audit quality, thus reinforcing the notion of independence arises from a quality audit. It is also important to consider the agency theory, and how shareholders want to know that directors of companies act in their best interest, therefore they can apply pressure on external auditors to carry out a quality audit which will reinforce their confidence in the companies’ performance, ultimately the downside to this is not all shareholders have the power to pressure auditors to be independent.
The problem with independence in auditing is that there are so many stakeholders involved in a company and this creates an expectations gap between them, this is “the difference between what the public expects from the auditing profession and what the auditing profession actually provides” (ACCA,2019). This follows on and results in a reasonable gap. The public would like auditors to do more than what they actually do but this isn’t physically possible as auditors also have other clients and the availability of resources. Therefore, this strengthens the notion that the public are demanding more from auditors than what they actually do, thus a deficient performance gap exists, as auditors are conflicted with what their actual job should be, leading to a fall in audit quality. There has been an improvement to close the gap in recent times as “auditor’s report now lists out respective responsibilities of management and auditors of a company” (XPLAIND,2018), therefore auditors have more skepticism over companies and make it clear that prevention of fraud is managements responsibility and auditors are responsible to detect it and convey this across to management to deal with, reinforcing the notion that there have been efforts to close the gap and increase independence and audit quality. As well as this as the role of an auditor becomes more defined to the public regarding their job role expectations, duties may fall off. However, on the flip side the auditor’s role may have new expectancies as a result of the role becoming clearer.
To conclude auditor independence has always been in question, especially after scandals, the blame is shifted onto the auditors, and standards are revised, therefore auditing as a profession isn’t complete and needs continuous improvement. The positive is that it creates a better environment as time passes. John Kingsman in his review said “the FRC is built on weak foundation…. and company directors should be investigated” (Business Telegraph, 2019). A lot of independence issues are due to company directors and CEOs being former employees of accounting firms or having close ties, this ultimately affects independence regardless if the external auditor is independent. The CMA proposed that “FTSE 350, should be split between at least two firms, one of which should be from outside the big four” (Guardian, 2019). This enhances the notion that auditing also lacks independence due limited availability of firms and big 4’s domination, therefore rendering this suggestion difficult to achieve unless 2 medium-sized firms work unitedly and combine resources. There are many suggestions on how auditing can improve going forward and it will always be an ongoing issue, however the feasibility of ideas needs to be considered.
Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.