Auditor Independence Essay

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.

This memorandum discusses a brief history of Pat, his wrongdoings and related action, and the response by the related law enforcement agencies.

Legitimacy in accounting practices is ensured by the check and balance of having independent auditors from registered public accountant firms reviewing financial practices. The report features eleven sections and these sections pertain to accounting overview, independence of auditors to reduce interest conflicts, corporate responsibility, financial disclosures, tax returns, criminal fraud and various elements of white collar criminal activity (107th Congress

The Sarbanes-Oxley Act of 2002 (SOX) was enacted to bring back public trust in markets. Building trust requires ethics within organizations. Through codes of ethics, organizations are put in line to conduct themselves in a manner that promotes public trust. Through defining a code of ethics, organizations can follow, market becomes fair for investors to have confidence in the integrity of the disclosures and financial reports given to them. The code of ethics include “the promotion of honest and ethical conduct, requiring disclosure on the codes that apply to senior financial officers, and including provisions to encourage whistle blowing” (A Business Ethics Perspective on Sarbanes Oxley and the Organizational Sentencing Guidelines). The Sarbanes-Oxley Act was signed into law from public demand for a reform. Even though there are some criticism about it, the act still stands to prevent and punish corporate fraud and malpractice.

The Sarbanes-Oxley Act of 2002 – its official name being “Public Company Accounting Reform and Investor Protection Act of 2002” – is

Smackey Dog Foods, Inc. is a private company and is not subject to the regulatory guidelines of the Public Company Accounting Oversight Board (PCAOB) and is not required to make filings with the Securities and Exchange Commission (SEC). Despite this, the SEC plays an important role in influencing (Kieso, Weygandt, Warfield, 2004) and establishing auditing standards. Two of the influences applicable to the audit of Smackey Dog Foods, Inc. are auditor independence and the effectiveness of internal controls. Auditor independence is important since the financial statement users rely on the auditor’s unbiased opinion. According to Lindberg and Beck’s abstract (2002), “Auditor independence is often referred to as the cornerstone of the auditing profession, since it is the foundation for the public’s trust in the attest

Foremost, a company hires an auditor to preform an audit. He/she is paid $1,000,000 dollars for their services. In addition, the company is willing to pay the auditor an additional $700,000 for providing more services. This additional pay may stem from the auditor’s friendly relationship with the company’s management. This scenario could potentially cause a huge ethical dilemma for the auditor. Given the friendship between the two parties, the auditor could very well be tempted to “cook the books” by management. This could very well happen if the company needs to improve their company’s earnings. Friendship combined with lofty pay could easily persuade the auditor into disregarding the GAAP as well as the Sarbanes-Oxley Act of 2002. Furthermore, the nature of the job is highly unethical. As it violates several provisions of the aforementioned Sarbanes-Oxley Act. The auditor, management, and the top executives of the company will all be affected by this ethical dilemma.

New levels of auditor independence and personal accountability for CEOs and CFOs are provided by the Act. Additional accountability for corporate Boards, as well as increased criminal and civil penalties for securities violations, increased disclosure regarding executive compensation, insider trading and financial statements are also presented under SOX. (The Institute of Internal Auditors: “The Sarbanes-Oxley Act of 2002: Effect on Audit Committees at Organization Not Publicly Traded.” January 2004. Accessed May 31, 2012 from: http://www.itaudit.org/)

Some can say that the Sarbanes-Oxley Act of 2002 is working while some say that there still ways to get around to committing corporate fraud. Washington wants to crack down on corporate fraud so they came up with the Sarbanes-Oxley Act in 2002 that was designed to protect the interest of investors. “The Sarbanes-Oxley Act established oversight of public corporate governance and financial reporting obligations and redesigned accountability and ethics standards…” (Ferrell, O., Hirt, G., & Ferrell, L., 2009). The act was an important stepping-stone in the right direction especially when responding to the financial scandals of Enron and WorldCom. Those scandals shook customer’s faith and confidence in corporate management of private organizations.

In October 2001, Enron Corporation which was one of the world major energy, commodities and service companies with claimed revenues of nearly 111 billion dollars during 2000 collapsed under the weight of massive fraud in that it has become largest bankruptcy recognition in the US economy. Enron’s earning report was extremely skewed that losses were not represented in their entirety, prompting more and more wishing to participate in what seemed like a profitable company. After collapse of Enron, Auditor independence has become a social issue that weather auditor has to be independent or not. In addition, while auditing must consider matters objectively with dispassion, there were still doubts whether it implemented well. Further, there has been much speculation about the need for the mandatory rotation of auditors or audit firm rotation to warn false accounting between audit firm and client. By examining Enron case, this essay will discuss about advantages and drawbacks of the mandatory rotation of

This essay has asked me to look at the importance of external auditors and why it is vital for them to remain independent. I will try and look at the many ways of the advantages of independent auditing from different perspectives for example the company itself, the general public and the state. I think it is important to first define what an audit and an external auditor to be able to answer this question effectively. Firstly an audit is (1)“an accounting procedure under which the financial records of a company or individual are closely inspected to make sure that they are accurate.” An

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).

There are three main ways in which the auditor’s independence can manifest itself. Programming independence is essentially protects the auditor’s ability to select the most appropriate strategy to conduct an audit. Auditors must be free to approach a piece of work in whatever manner they consider best. As a client company grows and conducts new activities, the auditor’s approach will likely have to adapt the account for these. In addition, the auditing profession is a dynamic one, with new techniques which is constantly being developed and upgraded which the auditor may decide to use. The strategy methods which the auditors intend to implement cannot be inhibited in any way. While programming independence protects auditors’ ability to select an appropriate strategy, investigative independence protects the auditor’s ability to implement the strategy in whatever manner they consider it necessary. Basically, auditors must have unlimited access to all company information. Any queries regarding a company business and accounting treatment must be answered by the company. The collection of audit evidence is an essential process, and cannot be restricted in any way by Client Company. Reporting independence protects the auditors’ ability to choose to reveal to the public any information that they believe should be disclosed. If company directors have been

The aim of this essay is to study the function of external auditors in order to analyze why it is important to be independent. The primary mission of external auditors is to review and evaluate all the financial records of a company or corporation. They provide an objective opinion on the organization’s financial statement and effectiveness of the accounting polices in order to help management to make decisions. If the independence of the external auditors is impaired, the public will doubt the quality of professional auditing services, and the consequence would be very serious, just like the bankruptcy of Enron led to the disorganization of Arthur Andersen, once a giant accounting company in the world. In order to maintain and increase

This paper critically analyses the independence of the internal audit function through its relationship with management and the audit committee. Given the growing role of internal auditing in contemporary corporate governance and independence has gained renewed attention.