This section protects the right of the auditor to reveal any information to the public or shareholders that they believe should be disclosed. Conceptual framework approach describes the audit team or review team to achieving mind maintaining independence which comprise of independence of Mind and independence of appearance. Importance of auditor independence As discussed above there are three types of auditors, they are internal auditors, external auditors, and government auditors. An auditor with experience of the business and the sector that they have developed over several years will support the risk assessment work. 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. An audit is basically an examination of a set of records, both financial and non-financial, to ensure that they can be relied upon in terms of accuracy and completeness. The findings were in favour of the auditors which was contrasted with the findings in the AWA case where the auditor was found negligent (Malane, 2005). Sign up to our email programme to hear about our latest news and service offers. So, the issue of auditor’s independence has always been an important public concern and a matter of many debates, especially because of the fiduciary role played by the auditors in modern society. This act really helps the users of report to understand and to get satisfied on auditor’s objectivity and effectiveness and this report also need to include the identification of threat, the mitigation factors and the safeguard used for it. Although the third party who made the decision to take over the business was unknown to the auditor, was owned a duty of care as the third party was relied on the publicly filed audited financial statement of a company (Arens, 2013). 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). Code of Ethics for Assurance Practitioners (PES 1) also contains many requirements about the independence. As a result, some audit firms have commercial interests to protect too. If this happens, the auditors can no longer be said to be independent and the shareholders cannot rely on their opinion. The Technical Code of Ethics requires the auditor preforming audit must maintain independence of mind and appearance both. Copyright © 2003 - 2021 - All Answers Ltd is a company registered in England and Wales. More than 100 years back in 1896, the landmark judgement was delivered in Kingston Cotton Mill case where Lord Justice Lopes describe an external auditor as “watchdogs” rather than “Bloodhounds” which establish the principle that auditors’ duties involve the exercising of reasonable professional care and skill. The decision of the New Zealand Court of Appeal in the Scott Group case agreed that the auditors had been negligent when they failed to detect a material error in the accounts of a company. The code of ethics has three parts where part A also establishes the fundamental principles of professional ethics for members and provides a conceptual framework for applying those principles. Most of the users of financial statements such as public, stakeholders and sometimes professionals also believe that it is auditor’s responsibility to give a warning if the company is in trouble. New Zealand Institute of Chartered Accountants has been granted accreditation under the section 50 of Auditor Regulation Act 2011 (Auditor Regulation Act 2011, 2017) but FMA must monitor the audit regulatory systems of each accredited body to the extent that it is adequate and effective and if the body are failed to comply with it, they may considered as committed an offence and is liable for fine not exceeding NZ$100,000.00 (Auditor Regulation Act 2011, 2017). The corporate law reform in Australia, The Sarbanes-Oxley Act ion the US and CA ANZ was start reviewing their standards. So, the member must get the proper training about the policies and procedure and the disciplinary procedures within it so that if somebody breaches it then they will be discipline accordingly. The recent case of negligent by the auditor was Cattles vs PwC where PwC was fined of $2.3 million for negligence with the case settled in October for an undisclosed sum. They are the first reporting point for the whistle-blower (Financial Markets Authority Corporate Governance in New Zealand, 2014). It was the auditor to avoid the case where there is financial involvement of family members or involvement of personal relationship etc. Underlying the positions historically taken by the SEC and its staff is Rule 2-01(c)(4)(i)(B) of its Regulation S-X, which prohibits an auditor of a client that is subject to the SEC independence rules from preparing, or substantially assisting in the preparation of, the audit client’s financial statements. The author Gupta (1999) is of opinion that is auditor is not independent of management; his opinion would mean nothing to shareholders, prospective investors, bankers, government agencies, and others who are concerned with the financial statements o… Section 290.172 of Code of Ethics, generally prohibits the provision of accounting and bookkeeping services to audit clients that are public interest entities. This article is purely for educational purposes, with information collated from multiple news reports, journals and interviews with my CA friends. Remember !! The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The client has implemented internal procedures that ensure objective choices in commissioning non-assurance engagements. Therefore, it is extremely important for external auditors to do their jobs professionally and independently so that these problems can be avoided (Bartleby.com, 2012). If the leader or senior partner of the firm follow the ethics or act in ethical way, it will encourage other staffs to follow the same path and be ethical as well. Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here. Specifically, a suitably experienced and objective professional with sufficient stature should evaluate the next audit engagement to determine whether the team maintained its independence. Enron is the another classic case for the corporate collapse due to the lack of audit independence as one of the major reason along with the objectivity by the auditors, series of accounting fraud, failure of the board and poor corporate ethics (Tom Campbell, 2005). The debate surrounding the role of external auditors focuses in particular on auditor independence. Auditor professionals will always argue against the audit rotation. As per the section 207W of the Company Act 1993 and principle 7.2 of NZX Corporate Governance Code, the board of directors must involve the auditor in the meeting of the shareholders and the auditors are free to communicate the concern of the auditor as auditor (NZX Corporate Governance Code 2017, 2017) (Companies Act 1993, 2018). The major issues that affect the audit independence are long relationship between client and audit, provider non-audit services to the client, employment of former auditors of client, job opportunities, related party etc. The authority to choose an auditor was in the hand of shareholders instead of the directors to avoid the scenario where directors can intimidate auditors or bribe them by assuring reappointment. Institutional safeguards are broad such as education and training that can be recognized the person as the professional accountants (Ainul Islam, 2005). The external auditor may however, have a commercial interest too. 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). The recent developments have imposed higher responsibilities on auditors and wider the applicable standard of care, wider the definition of negligence and duty of care to owed to third party or in another word, we can say that the auditor’s responsibility has been increased with time and cases which demand for higher independence level in auditing. Auditor independence is mostly challenge by the close relationship between the auditor and a client company which provide the audit fees. Also, according to the Company Act 1993 and section 290 of the Code of Ethics, an auditor cannot have any employment relationship with the client company or related company such as director, employee, liquidator or receiver. Copyright © 2019 Corplaw | Pearse Trust Limited trading as Corplaw | Block A, 5th Floor, The Atrium, Blackthorn Rd, Sandyford, Dublin 18, Ireland, D18 F5X2, Top 5 Facts About Companies Limited by Guarantee, Letterheads for Irish Limited Liability Companies, Pearse Trust Limited trading as Corplaw | Block A, 5th Floor, The Atrium, Blackthorn Rd, Sandyford, Dublin 18, Ireland, D18 F5X2. Auditor independence refers to the independence of the external auditor. 5. If you know that the auditor for ABC Company keeps a close, personal relationship with the CEO CEO A CEO, short for Chief Executive Officer, is the highest-ranking individual in a company or organization. It used to be the duty of the corporation’s CFO to employ an external auditor. Financial interests are considered in s. 290 of the Code. This is quite popular one when we look for the safeguards for threats to independence specially when familiarity threats come up. These expectation gap is filling up by the courts or legislation through the cases in past century. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. Registered Data Controller No: Z1821391. New Zealand has basically followed the IFAC rules as the basis of their requirements. As per the FMA Act, it is the audit committee’s responsibility to deal with the complaint against the auditor or the relationship between the auditor and the management which may affect the objectivity, independence and quality of audit work. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. The auditor also depends on the management of the company to secure its re-appointment as auditor. • S/H and other stakeholders need a trustworthy record of directors’ stewardship to be able to take decision about company. Training of staff in these policies and procedures and appropriate disciplinary procedures. When company was reluctant to increase the audit fee, Anderson decided to reduce the amount of work performed for the company. Sometimes the problem is not about the member being unethical, but it was about the situation where members were not informed or properly trained about the policies and procedures. The ultimate safeguard is resignation. All threats to independence are brought to the attention of those charged with governance and if required with the audit committee as well. The code is the blended of principles and rule with the heavily reliable on principles (KnowdegEquity – Support for CPA, 2015). There are occasions where independence of the auditors may be threatened or appear to be threated so the frameworks identify five threats to independence. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. The firm was convicted in March 2002 which resulted in its ability to audit companies being withdrawn and in June 2002, the “Big Five” became “Big Four” (Tom Campbell, 2005). It is critical for an auditor to be independent of the firms they audit due to many reasons. HIH Royal Commission Report (2003) is considered the biggest corporate collapse in the history of Australia where Justice Owen made number of recommendations with regards to the auditor independence and their duty of care which consider as on the major reason for the collapse (Robyn Moroney, 2014). Consultation with another professional accountant. *You can also browse our support articles here >. For example, stock options give upper management incentives to boost short-term stock prices at the expense of a company’s long-term viability. Auditing 1 Assignment 2. The issue related with the audit independence was not the recent one but was existed when the public start noted that the fees for non-audit service were growing rapidly and auditor were more interested toward the non-audit service than the audit service. Actual independence is quite straightforward. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them. CA ANZ suggested the government to improve the Corporate Reporting standard. The term “reasonable care and skill” is consistently increasing with time and cases. The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. Despite this general prohibition, section 290.173 states that provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or related entity audit clients that are public interest entities would not be impairing independence if the personnel providing the services are not members of the audit team and either: (a) the divisions or related entities for which the service is provided are collectively immaterial to the financial statements on which the firm will express an opinion; or. They fall into two broad categories: Safeguards created by the assurance practitioner’s profession, legislation or regulation include (Professional and Ethical Standard 1, 2016): Every audit firm is supposed to have a policies and procedures in place which gives the staffs an indication as what they should do when they face with the challenges from independence or ethical issue and these policies and procedures should be very descriptive as to what should be done by the firm. Safeguarding independence is a key component requirement of the regulatory framework which supports capital markets. This created requirements for auditor to be and appear to be independence of those influences that could override his professional judgement. Paragraph 290.152 of the Code of Ethics, Principle 7 of NZX Corporate Governance Code, and FMA Act, lead auditor and review partner be rotated every seven year and in case of NZX listed company, it is 5 years (Financial Markets Authority Corporate Governance in New Zealand, 2014) (NZX Corporate Governance Code 2017, 2017). Most threats arise from one of the following sources: The Code identifies two broad categories of safeguards that reduce threats to an acceptable level. As per this case, the auditors only owe a duty of care to the shareholders as a group but not to individual shareholders who may use the financial report to make the decision that auditor may not foresee (Robyn Moroney, 2014). They believe that once the auditor signed the annual report of the company it means that the company has been investigated for fraud and wrongdoing and the financial statement are totally accurate and it reflects the true financial position of the company (Mills, 1990). Anderson paid the consultation fee to his former partner who was the chairman of HIH board. It is a legal obligation for an external auditor to be independent. The advocacy threat: The auditor becomes involved in actively promoting or defending the client’s interests. The ethical principles for the auditors included in part A are integrity, objectivity, Professional competence and due care, confidentiality and Professional behaviour (Arens, 2013). Nevertheless, the auditor should carry out his task with an inquiring mind, investigate any suspicious circumstances to their satisfaction and if necessary, warn management about it (Mills, 1990). The Company Act 1993 (section 207T) allows an auditor to be automatically reappointed at annual meeting of the company unless the auditor was the Auditor-General or unqualified auditor or existing auditor resigned or the company decided to change the auditor in the annual general meeting (Companies Act 1993, 2018). The auditor independence is measured by how honest an auditor … So if the period of audit to the client is just few years, the risk is quite low so as a safeguards, audit firm can simply let the another partner to review the audit but if the audit period is longer such as 10 years, then the risk is significantly high so audit rotation (rotation of audit partner or even audit manager in some cases) would be better as the safeguard. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. Self-review threat: A judgment is required of the auditor which demands that previous work of the firm (whether audit or non-audit) be challenged or re-evaluated. • Q. Here’s why auditor independence is important and how the SEC plans to alleviate some of the recordkeeping challenges associated with the existing rules. The duty of care was not extended to other parties that are not known to auditors till the case of Candler v. Crane, Christmas & Co (1951). A high profile example would be the relationship between Enron and their auditors, Arthur Andersen. By Josephine Haste. Failure to oblige could lead to massive fines, expensive court cases, jail time and ultimately the collapse of the auditing firm (like in the case of Arthur Andersen). (b) Safeguards within the firm’s own systems and procedures. Leadership that stresses the importance of ethical behaviour, Resignation from engagement can be extreme safeguard but in come circumstances the only option available. The different perception of public and accountancy profession about the role and responsibilities of an external audit creates the expectation gap. However, the auditor’s understanding about their responsibilities are different than the public beliefs. Dissertation These expectations include the external auditor to be suspicious, detect fraud, provide a certificate of good health for the audited company and independently exercise these responsibilities for the benefit of the public as well as the audited company and shareholders (Integrity, Objectivity and Independence, 1997). Arthur Anderson, the auditor of HIH Royal Commission Report was not independent as there were lots of threats involved in it. Section 32 of Audit Regulation Act 2011 has set up the minimum requirement and standards for licensing that a person need to be issued with a licence by an accredited body or the FMA. The conceptual framework approach comprises of three steps which includes identify the threats to independence, evaluates the significance of the threats and implement safeguards to eliminate or reduce the threats to an acceptable level (Professional and Ethical Standard 1, 2016). Public trust opinion to the public beliefs a person conducting an audit do! 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