The Benefits of Independent Finanical Audit Stakeholders

The audit of financial statements is mandatory for publically listed entities throughout the world. The auditor conducts various tests and based on the results forms an opinion on the truthfulness and fairness of the financial statements of the company and whether or not they are prepared in accordance with the financial reporting standards and are free from any material misstatement (Freedman, 2013). The purpose of auditing is to enhance the confidence of investors and to add credibility to the truthfulness of company 's true financial performance. However, there are some dos ' and don 'ts that an auditor must take care of. For instance, anything that threatens the independence of the auditor must be avoided as it adversely affects the truthfulness and objectivity of the opinion formed.

Independent audit in turn makes the financial statements more credible and reliable source of information

An important decision for any shareholder is deciding whether or not to do business with that company. When a business is audited, the operations are reviewed to make sure that nothing is being hidden. An auditor will review the company’s financial statement and practices to confirm that each are direct and correct. The financial statements are the business’s way of representing them and showing that they are following the Generally Accepted Accounting Principles. The audit process is an important one because it provides a platform for the auditor’s opinion concerning the financial statements of the company. As part of the audit process the auditor will conduct an audit plan that outlines a number of actions that he or she will be perform while also detailing the reason for those actions. With every audit, the business’s management is in charge of handing over the financial statements that the auditor will review; while the auditor will review the statements for any material or immaterial misstatements.

According to the American Institute of Certified Public Accountants, "an independent auditor's report ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period

What would the effects be on the capital markets if investors did not perceive financial statement auditors as having independence, objectivity, and integrity? Investors rely on the issuers’ financial statements. They need to get the assurance that the financial statements are free from error and are objective & honest. If the investors do not perceive auditors of financial statement as independent of a company, honest, & non-biased then will be less likely to invest in that company and its market value will go down.

The Public Company Accounting Oversight is a nonprofit corporation which, in 2002, Congress granted power to inspect, investigate, establish auditing guidelines and set standards for public accounting firms who provide independent auditing reports. The purpose is to create guidelines and rules to protect all stakeholders who would utilize financial reports, especially the general public and investors. An increase in transparency and accountability grants

a. A third-party user cares whether the auditor is independent so that the user could evaluate the credibility of the financial statements and determine whether or not to rely on the financial statements to make investment or business decisions. In addition, through assessing the auditor’s independence, the stakeholders could also better evaluate the performance of the management and the value of the audit work.

Deborah S. Archambeault, F. T. (2008). The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency . American Accounting Association .

An auditor needs independence to perform an unbiased audit. According to Iain Gray and Stuart Mason, an audit is an informed opinion, based on truthful and fair information provided by the interested party whom should be independent of the preparer/auditor (21). Based on this definition, an auditor must self-distance from the subject of the audit. An auditor must refrain to engage in other roles within the management of the company that is audited, in order to avoid intentional or unintentional interference, which consequently could jeopardize the independence of the auditor’s

In a perfect world, a company does not commit fraud or some other action to deprive its stakeholders standing, financially or otherwise. However, since the world is a smidge short of perfection, there are some checks and balances to protect stakeholders. Usually, a company’s accountants are such that the financial credibility is maintained internally and then confirmed by an auditor externally with the minimum of adjustments. If internal controls are ineffective, and a company is determined to undermine its stakeholders financially, those types of incidents are reined and culpable accounting practices are discovered by an auditor’s refusal to endorse the financials associated with said business. If the external process fails, the business’ potential viability fails. This has been proven over and over and quite famously.

The purpose of an audit is to enhance of confidence in the financial statements. An auditors opinion validates this purpose.

In a free and open market, listed companies are required by law to provide their stakeholders with financial information that is credible. One method that can be used to obtain a trustworthy and objective financial reporting is through statutory auditing. However, the recent financial scandals and crisis have renewed concerns regarding the tenure of auditors and its impact on their audit quality and independence. Regulators and other experts have become concerned that the familiarity created between management and auditors over time and the need to retain client firms weakens the independence of auditors, and adversely affect the quality of their audit reports (Arel 2013: 16). On the other hand, those opposing mandatory audit firm rotation claim that the costs incurred as a result of frequently changing auditing firms surpasse its benefits by far (Beasley et al., 2009:67). Pozen (2012:11) points out that the chances of audit failures are greater during the early stages of an auditor-client relationship since the new auditor may not have auditor knowledge regarding operations, processes, and client-specific risks. The role of audit firm rotation as a means of sustaining the independence and reliability of financial reporting will be discussed in the paper as well as the views of stakeholders regarding the rotation rule and make recommendations on how to improve audit quality and independence will be considered.

These statements can serve as an adequate early warning material for the protection of investors and creditors. Therefore, improving auditors’ independence will increase the reliability of corporations’ published financial statements and give assurance of that reliability to users of those financial statements. Some of the ways to strengthen auditors independent is rotation of audit firms at regular intervals.

The auditing profession by nature entails a person to be as trustworthy as they can possibly be since the need to be free from “undue influence” is not only expected but should exceed all expectations. The need for an auditor to have a clear mind, free from all distractions, can be compared to a surgeon attempting to perform a high-risk surgery where his actions would ultimately determine whether the person undergoing the surgery lives or dies. Saving lives is a universal principal and almost everyone acts upon it and so we have more lives saved than lost. Similarly stakeholders’ trust that auditors will act with integrity and honesty, which will enable them to see beyond the greed of money, therefore, act in the appropriate manner that will sustain the livelihood of the stakeholders. Relating to the importance of honesty, the authors highlighted Immanuel Kant theory, ‘Kant’s first categorical imperative, the universalizability principle: ‘act so you can will the maxim of your actions to be a universal law.’ Which supports the notion that it is also in the best interest for auditors to be ethical and trustworthy in order to sustain the functions of auditing. For example, if every auditor was to engage in dishonesty and unethical practices, they run a high risk of undermining the confidence and trust that stakeholders have placed on them. Without this public trust, the whole institution of

The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.