Abigail Rockwell
Due Date: February 15, 2014
Jamaica Water Properties Case Study
During a time in our recent history when greed and self promotion was the benchmark that most financial and managerial directors of companies, both public and private, seemed to strive for, David Sokol stands out above the crowd. Instead of looking to further his own self-image, career, or standing, instead of taking what most people would view as the easy road, Mr. Sokol did the right thing. He chose ethics, morals, and a straight compass to guide his career. Was it an easy road? No, but it was the right one. Would I be able to do the same thing? I would hope so. Although we never know with 100% certainty what we would do in a specific situation, I
…show more content…
One way to do that is to reduce the risk of personal relationships between the client personnel and members of the audit engagement team. Close, personal relationships make it easier for the audit team to overlook areas that might need further investigation. Thankfully, the Sarbanes-Oxley Act and SEC Provisions have already addressed the issue of an accounting firm/auditor’s independence. As long as the firm adheres to these rules and requirements, their risk is minimized. Some of these measures include:
Partner Rotation: Required by the Sarbanes-Oxley Act, the SEC independence rules require the lead and concurring audit partner to rotate off the audit engagement after five years. Additionally, the SEC also requires that there be a five year “cooling off” period before the partner can return to that audit.
Establishment of an Audit Committee so that there is a buffer between any disagreements between management and the auditor.
Maintaining Auditor independence through the exclusion of those with potential direct and indirect financial interest in the client from working on the audit.
It was the lack of independence between JWP and Ernst & Young that led to many of the issues that were not caught,
Auditor independence and a prohibition on audit firms offering value-added (read "conflict of interest") services
Auditor Independence contains 9 parts which stablish standards for external auditor independence, so it will have limit conflicts of interest, also contains that an approval requirements for new auditor, audit partner rotation, and auditor reporting requirements. Also restrict auditing organization from providing non audit services for the same clients they audit.
5. The audit client should be allowed to "follow" its engagement audit partner to another accounting firm because it obviously breach the independence of the auditor after forging a relationship with the clients. SOX specified the "cooling-off" period for the auditor from entering the client management, this serves the same purpose as well.
The auditor must assess the transactions for how much of a risk factor is involved. When reviewing these transactions, auditor must be able to review the internal controls of the company’s accounting personnel. The segregation of duties is associated with the safeguarding of an organization 's assets and the topic known as internal control. An example of the segregation of duties would be a company 's requirement that the bank statement for its checking
The last aspect, programming independence, covers the need of the auditor to have absolutely no interference from their audit client in how the audit is run. An audit client cannot attempt to control any aspects of the audit such as changing or restricting any procedures an auditor may want to perform. The audit client may not try to control any of the audit work and may not put any type of restrictions on how many auditors may come to the location to perform fieldwork.
The factor that plays the greatest role in determining auditor independence is independence in mind. Auditors may or may not appear to be independent, but if the auditor is truly independent in mind, then the auditor can remain objective and unbiased. The profession should consider tightening the Code of Professional Conduct to address the issue of an audit team member knowing a close friend that holds any position at the audit client. If this scenario arises, the firm can still audit the client, but the audit member with the close relationship won’t be able to be on the audit team.
For any audit engagement APES 110 section 100.5 sets out five fundamental principles that all audit members must abide by (Gay & Simnett 2012, p. 86). They must act with integrity, objectivity and not allow bias. They need to ensure professional competence, confidentiality and comply with the relevant legislation (Gay & Simnett 2012, p. 86). As such one of the principle requirements for auditors is auditor independence from their clients. In Harris-Scarfe’s case, this was not possible because the deputy chairman used to be a partner at Price Waterhouse, the firm’s auditors (Buchanan 2004, p. 69).
According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.
1. After discovering the suspicious items in JWP’s accounting records, should he have taken a different course of action than he did?
3 pillars of effective internal audit services- independence and objectivitiy, proficiency, and due professional care.
If the external auditors cannot maintain their independence in their service, the clients will lose their interests in the auditing service, and the external auditors will lose their source of revenue.
Auditors having the appropriate competence and capabilities to perform the audit, and follow ethical requirements, and maintain professional skepticism throughout the audit.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide
This includes the indirect ability of management to influence the career prospects of internal auditors, as well as the budget and planning of the internal audit function. This is exacerbated by internal auditors themselves using the function as a stepping stone to advance their career objectives. It also can be argued that the independence theory may be lost in such a culture, especially if it is combined with people within the organization perceiving internal auditors as partners, thereby subjecting the internal audit function to pressures threatening its independence, rather than recognizing the internal audit function as an independent assurance function("A Critical Analysis Of The Independence Of The Internal Audit Function: Evidence From Australia: Accounting, Auditing & Accountability Journal: Vol 22, No