Auditor Independence: Standards, Legislation, Academic Research, Essay.

Write an essay with reference to standards, legislation and academic research including the Reiter & Williams (2004) article and discuss and critically evaluate what it means for an auditor to be independent and how an auditor can be independent when they are being paid by the client. 

Auditor's Independence

This article will be written with the objective of finding the feasibility of independence of auditor with the context of auditor- client relationship with special emphasis on the regulations made by regulatory authority of Australia in the form of The Corporation Act, 2001 of Australia (Intheblack, 2014). To make this use more detailed we have to consider the reference of Australian Securities and Investment Corporation or ASIC and Accounting Professional and Ethical Standard Board or APESB. Main emphasis of this article will be given to the independence of auditor as per the requirement of the assignment and related matters are to be covered with reference to legislation of different authority. Auditor’s independence is a controversial issue as this is directly related to the appointment of the auditors as forwarded by the client. The accounting Authorities of Australia has to ensure independence of auditors as they are the mirror though which the stakeholders can observe the performance of the company so far it’s financial and accounting aspects are concerned (Grantthornton, 2016).

The demand of this profession clearly and distinctly defines the role of auditors and their independency about performing their job. It is stated that auditor has to be independent from the client who appoints them for this job. This requirement of independence of auditors are applied with legal framework and bindings which are enforced by the legislation of the Corporation Act of Australia through Division 3, 4 and 5 of Part 2M.4  and section 307C.this criterion is also endorsed by APES  code 110 related to Ethics of Professional Accountants. These same issues is being taken care by Auditing Standard ASQC 1 related to Quality Control for the enterprises which are taking the assignment of performing audit with the assignment of reviewing of financial reports with other relevant financial information and other engagements for assurance. There is implication of Auditing Standard ASA 220 Quality Control for the job of auditing of any financial report along with other financial information of historical period. There are different aspects which are detrimental for maintaining auditors’ independence out of which the main aspect is to be conscious about the relationship between auditor-and client. There are other areas which are to be prioritized by the auditors during their assignment consisting of domain of conflict of interest, other requirements which include provision of few non-audit services, and the relationship between auditor and audit team and with the auditable entity (Auasb, 2006).   

APES Code 110 of Ethics

 APES code of ethics ahs covered independence of auditors through section 290 with different sub- sections starting from 290.1 to 290.39.1. They are covering different aspects of auditors’ independence with different situations. Given the following list of sections which are covering different domains of the said issues:

Heading                                                         range of sections

Structure of Section                                       290.1 to 290.3

Conceptual framework                                 290.4 to 290.12

Network and network firms                          290.13 to 290.24

Public interest entities                                290.25 to 290.26

Related entities                                            290.27

 Those charges with governance             290.28

Documentation                                          290.29

Engagement period                                     290.30 to 290.32

Merger and acquisition                               290.33 to 290.38

Other consideration                                     29.039 and 290.39.1

All these above sections are covering ethical practices of auditors which are mentioned in APES 110 under different criteria. All these sections clearly set guideline also about the said practice of auditing so far independence is concerned (Asic, 2015).

The concept of independence of auditor is the basic to comply with the principles of objectivity and integrity. Section 290 of this code is depicted to address needs for engagements for Audit and Review, which are basically of Assurance Engagements in nature in which the member of public practice has the right to express his inference on Historical Financial Information. This code is based on conceptual framework set by the authorities globally in order to find out the detection and evaluation of threats to independence in order to mitigate the possibility such threat to the reasonable level through the application of desired safeguards. This approach is in contrast with the regulations the legislations has adopted which are often found to be perceptive in nature. So members and other followers of this code has to be aware that adherence of this code does not assure compliance of legislation which should be followed by specific reference of such legislation to find out eh legalized obligations.  As this difference of approaches makes specific comparisons to the respective legislation like the application of the Corporation Act, 2001 problematic, the basic principles of objectivity followed by integrity are consistently justified with impartial conclusion when both these approaches are being tested in the context of all allied facts by any logical personality. APESB is making footnotes to the application of the Corporation Act, 2001 when they thought of stricter requirement is necessary for any clause of this act related to independence of auditors for the purpose of information to the Members and followers of this act. it is also to be noted that requirements of all Corporation Act 2001 are not being noted and this drives to the situation  when the members and followers of this Act has to refer to frequently related to different issues in which independence of auditors is major one. Provision has been made for the statutory Independence of Auditors- general by the parliament of each jurisdiction of Australia in different manners which include the definition of the scopes as per the mandate of an Auditor general along with the appointment and subsequent removal of the Auditor- general and the compliance of his or her responsibilities in the said field. Needs of this code is applicable to Auditor General and their senior official who are empowered with delegation of authority to sign reports of assurance along with members with the permissible limit of conflict with applicable rules.   Refer to the two terms- material and materiality as referred in section 290 and 291, it is really tough to provide definition which can cover all situations when either of these two words are to be used. To assess materiality, am Member in Public Practice or a firm should consider both aspects of qualitative and quantitative measures of the mater to be considered which may have the ability to affect adversely on the objectivity of the Member and/or the firm (Apesb, 2010). 

Views of Sara Reiter and P F Williams

Refer to the article published in 2004 by the above personalities with the name ‘The philosophy and rhetoric of auditor independence concepts’ in Business Ethics Quarterly, Vol 14 No. 3, and this paper has analyzed This paper is helping to trace the evolution of the characteristics of the auditor from professional Man during the early regime of the twentieth century to the more public and abstract identities of Judicial man and Economic Man. The changed character of the auditors who are in the profession describes the legitimate reflection of changes in the domain of auditing as per the changed environment of economy with the values of American society. The concept of economic man is defined as self centered man with more priority and on self interest and with shallow character who never thinks of protecting the profession of auditing to be protected from the scandals of the corporate. As per the current scenario of accounting scandals of the corporate the profession of audit really needs Professional man who can have the ability to restore belief in the profession and has direct impact on financial markets. There are philosophical bases of the images of auditors related to their independence. These images with specific images of independence as mark of serration can be instrumental in creating problems of conceptualization of independence. It is not easy to discuss actual relationships when the basic concept of auditor-client relationship can be defined with separation.  It is also to be noted that the concept of independence are also mistaken if that is not based on the moral foundation of the firm. Hence it is suggested to give a thought to rebuild the moral foundation of the profession through recognizing collective responsibility (Reiter & Williams, 2004). 

Conclusion

It is to be noted that there are efforts by the Australian Authority of corporate matters along with the field of accounting, auditing and assurance services to ensure that independence of auditors is to be ensured by the legislation imposed by the said authorities. As independence of auditor is crucial factor for their performance, it always to be put under the magnifying glass to ensure that the same is to be ensured. As a practice, auditors are appointed by the shareholders of the firm to let them know the actual financial position of the company so that they will be able to take right decision regarding their investments. Hence independence is to be provided by making clear cut demarcation of client auditor relationship. The external stakeholders are not able to go into deep of the financial operation of any company. This leads to total dependence of auditor’s report to certify that the accounting report provided is true and fair to the best of their knowledge which can only ensured through proper practice of independence of auditors.

Reference Lists:

Apesb, 2010. APES 110 Code of Ethics for Professional Accountants. [Online] Available at: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 13 May 2017].

Asic, 2015. Auditor independence and audit quality. [Online] Available at: https://www.asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/auditor-independence-and-audit-quality/ [Accessed 13 May 2017].

Auasb, 2006. Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_220_28-04-06.pdf [Accessed 13 May 2017].

Grantthornton, 2016. Transparency Report. [Online] Available at: https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/services/audit/pdfs/gtal_2016_transparency-report-2016_final.pdf [Accessed 13 May 2017].

Intheblack, 2014. Client Relationship. [Online] Available at: https://www.intheblack.com/rss/~/media/5414cb1cd04d40748963042490eeb07f.ashx [Accessed 13 May 2017].

Reiter, S.A. & Williams, P.F., 2004. The philosophy and rhetoric of auditor independence concepts. [Online] Available at: https://scholar.google.com/citations?view_op=view_citation&hl=en&user=YdMXsT4AAAAJ&citation_for_view=YdMXsT4AAAAJ:IjCSPb-OGe4C [Accessed 13 may 2017].