The primary role of an external auditor is to present an independent and unbiased audit report of a firm’s financial position. The auditing firm then also became defunct after a jury ruled against them for obstructing justice; after they had shredded documents of their auditing of Enron (Thomas, 2002). The RCA engaged has no public practice certificate or public liability insurance. Independence. Sorry, but copying text is forbidden on this website. Generally, external auditors are statutory auditors out of love for compliance with the regulations and in public sectors, hired by the public accounting bodies. These transactions were labelled as sales in order to make the bank look less risky than it actually was (Newquist, 2010). The concept of independence occurs at several points in the Strategic Business Leader (SBL) Study Guide.It is listed as one of the key underpinnings of corporate governance in Section B5, it is a crucial quality possessed by both internal and external auditors (Sections F2), and it is included in Section A3 as an ethical quality. Why is the independence of an auditor important? Auditing small entities - regional workshop 2017. regulations on auditor independence exist in many individual jurisdictions, these regulations may differ in approach, scope, terminology and substance. All you need to do is fill out a short form and submit an order. Lehman Brothers’ auditor, Ernst and Young, has been accused of “malpractice”, “negligence” and “failure to exercise professional care” after they apparently “failed to raise alarm on the bank’s accounting practices” (Watkins, 2010). Auditor independence refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. In Australia, there is an abundance of literature on auditor independence. However WorldCom showed the importance of internal auditors. Please ensure JavaScript is enabled. This paper aims to consider the importance of auditor independence in the external auditor's role in banking regulation and supervision. The independence of the outside director and external auditor means the directors and auditors will have to distance themselves considerably to assure shareholders that they have conducted their tasks. The Importance of External Auditor’s Independence According to Gillespie, Lewis and Hamilton (2004:221) an audit is: “a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.” co. uk/money/article-1257724/Will-Lehman-Brothers-Repo-105-allegations-bring-Ernst–Young. Introduction. Although it is not a legal requirement for a public company to be audited internally, many corporations tend to have their own internal audits. Independent auditing has been an important part of the corporate monitoring system since the mid-1930s, when it became a legislation requirement after the Great Depression. html [Accessed 7/2/2011] Newquist, C. (2010) “Cuomo Checks Ernst & Young Off the Hit List” Sift Media. Not surprisingly, a large body of research has examined auditor independence and objectivity, but this s habeen predominantly in the context of external audit. For example, consider yourself a potential investor in ABC Company. Importance of an External Audit While internal audits are important, and many organizations conduct them regularly, they cannot be truly impartial because people on the inside of an organization are naturally biased. While internal auditors can’t help but be personally invested in the outcome of their findings, there are no concerns over repercussions for the external auditor if the organisation is unhappy with their report. 26 within 2 years (Healy, Palepu, 2003). Looking at the relationship between the auditor and the client, every individual may perceive an arrangement differently, and this is where professional judgement comes to the fore. sector audit activity provides to all levels of government. If auditors do not remain independent, they For example, consider yourself a potential investor in ABC Company. Essay, Ask Writer For Our new digital magazine brings you the same quality content every month, in a new interactive and sustainable format you can enjoy on a PC, tablet or mobile. worldcom2 [Accessed 7/2/2011] Watkins, S. (2010) “Will Lehman Brothers and Repo 105 allegations bring down Ernst & Young? All Business Inc. 1/10/2002. (2010c) Corporate Governance, 3rd Edition, NJ: Prentice Hall Kim, K. A. , Nofsinger, J. R. , and Mohr, D. J. Recommended Articles This article has been a guide to what is External Audit and its definition. The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence. If, however, there is a significant financial connection, other than through the reasonable fees paid for the auditing services, or a connection via a personal relationship, actual independence may be impeded. AUDITOR INDEPENDENCE – ITS IMPORTANCE TO THE EXTERNAL AUDITOR'S ROLE IN BANKING REGULATION AND SUPERVISION Marianne Ojo ( [email protected]) Oxford Brookes University 1 ABSTRACT The role of the external auditor in the supervisory process requires standards such as independence,objectivity and integrity to be achieved. 17, No. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. So what is independence and why is it at the cornerstone of every audit that is conducted? http://goingconcern. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. For an audit report to be worth its salt, the auditor who prepared it must be seen to be, and actually be, truly independent and free of any undue influence. html Wikipedia (2011a) “Auditor Independence”. ” According to Wikipedia (2011a), auditor independence refers to “an attitude of mind characterized by integrity and an objective approach to the audit process”. The organization and the external auditors working together ensures that coding is correct and guidelines are followed. Learn more. This is where the importance of external audit proves its worth to an organisation. org/wiki/Auditor_independence [Accessed 7/2/2011] Wikipedia (2011b) “External Auditor”. Legislation had to be put in place that made sure that the auditing firms could only either offer auditing services or consultation services to a corporation (Kim, Nosfinger, Mohr, 2010c). Get Your Custom Essay on, The Importance of External Auditor’s Independence, By clicking “Write my paper”, you agree to our, By clicking Send Me The Sample you agree on the, The importance of Auditor independence and key aspects, Predecessor-Successor Auditor Communications: Assignment, https://graduateway.com/the-importance-of-external-auditors-independence/, Get your custom OBJECTIVES. This was caused by reckless spending by corporations in the late 1920s (Kim, Nofsinger, Mohr, 2010a). co. k/business/2002/aug/09/corporatefraud. Features of this site require JavaScript to function. However there are still many other corporations that have experienced problems as a result of the lack of auditor independence. This provides practical, case-based scenarios to help practitioners assess issues of independence that they may encounter. I run into more than a few internal auditors who struggle with independence. dailymail. It is extremely important that external auditors be independent of the corporations that they audit. The quality review program continues to find members who have failed to comply with this most critical accounting principle. However recent times, due to the economic downfall, have seen the fall of Lehman Brothers and the near fall of AIG. Let me take you back to your time at university. Their auditors, Arthur Andersen (formerly one of the ‘Big 5’ auditing firms) received blame for failing to recognise the fictitious accounting methods carried out by Enron. 1.0 The Meaning of External Auditor Independence and The Importance of External Auditor Independence 1.1 Meaning of external auditor: The role of auditing is divided into two, namely internal audit and external audit. Doubts are sometimes expressed regarding the independence of external auditors. Self-interest threats occur when the financial interest of the auditor … In more recent years, there has been heightened interest in issues associated with the independence and objectivity of internal audit… Independence of external auditors. Independence of the internal auditor means independence … Auditor independence refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited. https://graduateway.com/the-importance-of-external-auditors-independence The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. Regulation of auditor independence An overview of the different independence rules that apply when undertaking an … This means that there is no conflict of interest and no reason for auditors to not comply with the financial accounting standards. the importance of auditor independence to the external auditor's role in banking regulation and supervision, the first part of this paper considers changes which have taken place over the past two decades and why a general banker now requires the expertise of an external auditor. For more information, contact us today. Auditors are expected to provide an unbiased and professional opinion on the work that they audit. Independence here implies independence from parties that have an interest in results published in financial statements of the entity. This would lead to large numbers of people being unemployed which is a negative thing as it could cause a recession or even a depression if too many firms in a critical industry become exposed as frauds. Given the institutional arrangement of the audit and the conflicts of interest, one should not be surprised by this inference. ICAEW believes that: The most effective way to ensure the reality of independence is to provide guidance centred around a framework of principles rather than a detailed set of rules that can be complied with to the letter but circumvented in substance. You may consider these examples to be great works of fiction, but in fact they are taken from case findings from the quality review program. Recent observations from CPA Australia’s quality review program suggest that many of us skipped the lecture (and forgot to collect the notes!) The external auditor may however, have a commercial interest too. http://www. Auditing is a method of testing the effectiveness of internal business controls and is itself a control … com/professional-scientific/accounting-tax/951680-1. An External Auditor's Independence External auditors work for firms contracted by the company being audited. Auditing small entities - regional workshop 2017. What is Auditor Independence? The primary advantage of external audits is that they are more impartial than internal audits. The result of this study strongly agrees that providing NAS to external auditors to the same client impair auditor independence. However it is a legal requirement for all public companies to be audited by an external auditor. To help members better understand the independence requirements and fully digest this information, the Joint Accounting Bodies issued the fourth edition of the Independence Guide in February 2013. All of these examples are real concerns for auditors. If auditors do not remain independent, they The expense of hiring an external auditor could protect your future. For each example given below, state whether you think the accountant is independent or non-independent and, if the accountant is non-independent, whether that non-independence is actual or perceived. The practice guide is intended to point to the roles of audit (without differentiating between external and internal), methods by which those roles can be fulfilled, and the essential ingredients necessary to support an effective audit function. Part 1: New 2021 CPT Codes | Integumentary System (2002) “Called to Account”. Contingent Fees. 3-26. A sole practitioner completes the audit for an entity who engages the practitioner’s wife for bookkeeping services. A lack of independence between auditors and the corporations led to one of the biggest scandals in financial history. Audit firm rotation is widely seen as an important way to promote auditor independence and recent accounting scandals have led to growing calls for mandatory audit firm rotation. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. In short, independence and objectivity means that internal auditors and the internal audit activity have, and maintain, the ability to make unbiased judgement and decisions based on the audit activities and facts and that they are free from any internal or external interference or obstruction with functional accountability being to the board, either directly or through an audit committee. wikipedia. Time Inc. 18/6/2002. The people who pay their salaries and keep their team funded and staffed don’t understand what auditors do and therefore set the internal audit shops up for audit failure. Independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. However in recent times it has become even more important after a number of firms have become bankrupt due to fictitious accounting methods, the most infamous one being the Enron scandal of 2001. What is key in this quote are the words “or be seen to have”, which suggest that the accountant should adopt a wider viewpoint when assessing perceived independence. http://en. It is critical for an auditor to be independent of the firms they audit due to many reasons. A small firm accepts a large audit engagement where the fees associated with the audit will comprise 85 per cent of the total fee revenue for the firm. Credibility. It used to be the duty of the corporation’s CFO to employ an external auditor. Although internal audits are important for an organization, external audits increase the chances of uncovering potential compliance risks. It will also consider why the imposition of a The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence. Perhaps even more concerning is that when a breach of independence is reported, many members don’t fully understand that it may be illegal not to satisfy the requirements of actual and perceived independence. This meant that external auditors could do their jobs without being biased, therefore making financial audit reports more reliable for investors, government bodies and the general public. Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting (Rutgers Accounting Web, 2015). In financial terms, this means that the auditor should not have any dependency on the client by either personal affiliation or financial reliance. The auditor’s opinion is suspect without independence and the third parties think that there is no need for external auditors without independence (Salehi, 2009). External auditors play a key role in the corporate governance framework. Any relationship between the external auditors and the entity, other than retention for the audit itself, must be disclosed in the external auditor's reports. Here’s a prescription for some resources which may help you assess your own independence, both actual and perceived: Josephine Haste is CPA Australia’s manager for quality review education. This is a critical report because the information obtained from it will give guidance and support to investors, government bodies and the general public as to whether the corporation is adhering to the correct financial and accounting practices (Wikipedia, 2011b). External auditors are hired by parties who are likely to benefit from the information provided in the audit … If you know that the auditor for ABC Company keeps a close, … The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. Joint accounting bodies: Independence Guide. Divisions 3, 4 and 5 of Part 2M.4 and section 307C of the Corporations Act 2001, APES 110 Code of Ethics for Professional Accountants, sections 290 and 291 – applicable to all members of professional accounting bodies, Auditing standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements, Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information. 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