Introduction
Audit can be defined as the examination of accounts or records of a firm so as to ensure they are accurate and make any correction, adjustments and examine verified accounts. It can also be defined as the true and fair analysis of financial accounts according to the laws and legislation. Owing to today’s competitive world, there is need for auditors to take full responsibility on ensuring that value added service are provided to their consumers through the identification of any risks related to the businesses and offering guidance on any weaknesses in the management and internal control of the firm.An auditor is required to be free from biasness in representing a company’s financial status. It is essential for every auditor in the UK to be a registered member of any of the accountancy bodies in the UK. One of the rules they have to abide with is to become independent. By utilizing a framework approach based on principles, auditors are provided with guidance on how to ensure independence. There are a number of benefits that the auditor stands to gain from this framework approach. One of the benefits is that the auditor has the responsibility of assessing a particular circumstance to determine which types of safeguards can be implemented to reduce the threats of independence.
Analysis on threats on independence of auditors and safeguards to those threats
Types of threats affecting the independence of auditors and their safeguards are usually mentioned in the ethic codes of the professional accountancy bodies. Consequently, any regulatory review of the accountancy profession by the government is normally transferred to the independent auditing practices board which is responsible for coming up with the standards on auditor’s independence. Nevertheless, the requirements and structure of the independence of an auditor is not likely to change any time soon. According to the regulatory framework, threats of auditors’ independence can be categorized in to the following;
Self interest threat; it happens when an audit firm or when any member of the audit team can profit financially or from other self-centered disagreement with the audit consumer. Instances of situations where this threat can be created can encompass the following, although are not limited to; a direct monetary material or interest or an indirect financial interest in an audit customer, A guarantee or a loan which is to or from the audit client or any of his officers or directors, worries on the probability of loosing an engagement among others
Advocacy threat; This takes place when the audit company or any member of the audit team may seem to be promoting or endorses the position or opinion of a client to a situation where the independence may be compromised. Instances of events include but are not limited to Acting as a promoter or dealing with the securities or shares of an audit client and when an auditor acts on behalf of the client or as an advocate in resolving disputes or litigations’ with third parties.
Intimidation threat; This happens when any member of the audit teams does not act in objective or in a professional manner due to actual or perceived threats from the officers, employees or directors of an audit customer. Instances as such may include but are not limited to, stress and pressure to limit the length and extent of any work performed so as to decrease the fees involved, intimidations over replacement and firing in case of a disagreement with the appliance of principles of accounting and never changing personality in a big position at the audit client and being in control of any deals with the auditor.
Nevertheless, in case of any of the engagement undertaken, the auditor ought to be able to articulate which of the audit independence threats apply. Any threat and it’s extend will depend on the circumstances involved .Consequently; any assessment which is considered will necessitate the use of judgment.
Effective and efficient safeguards are usually the solution to success when it comes to the framework approach. It is vital to comprehend that independence can and will never be complete as an auditor is normally selected and paid by the shareholders or the clients. With this in mind, the main aim of safeguards is to limit the effects of threats to independence at a level which does not distort the opinion forming process of the auditor. There are a number of ways in which threats to auditor independence are limited. One way is through mandatory audit rotation. This method is advantageous as auditors would not be vulnerable to pressure and stress caused by the management as they are aware that they will be replaced and move on to some other company in due time. Major partners should be rotated after every seven years whereas their engagement partners after five years. In comparison to other countries UK is already ahead of other countries in terms of maintaining auditors’ independence. The EU Eighth directive principle states that statutory auditors or audit firms are not supposed to make decisions on behalf of their customers and therefore should be independent. The country has effectively established ethics, rues and principles which tackle auditors’ independence issues and threats. Consequently, auditors’ independence will be improved while conflict with the management reduced.
Another way that threats to auditors’ independence can be limited is through peer review. This is where the audit work carried out by one firm is constantly reviewed by another company so as to ensure quality of work provided. It is the responsibility of the profession to make peer reviewed to be disciplinary as opposed to being corrective or educational. In addition, the standards of the audit should come with penalties offer benefits to the profession. This way, threats such as self interest or advocacy can be limited.
One other way of safeguarding auditors’ independence is through the formation of audit committees by the audit profession regulatory bodies. Activities such as annual reports and audit committee meetings usually have a great impact on auditors’ independence. An active committee is also a vital factor in ensuring and maintaining the independence of auditors. This has the implication that, stakeholders have or will put their trust or have faith in the audit committees as communication between auditors and management in a firm will be enhanced.
In the United Kingdom, the regulations of the audit profession include provisions which are meant to govern their independence. These can be found in the Company Acts of 1985, which contain Auditing guidelines and standards that are meant to reinforce and strengthen the outlook of auditors’ independence. Under the Companies Act of 1985, auditors have the independence and the right to use a firm’s book of accounts during the time of audit. However, through out the years, many changes have been made in the in the company act of 2006, which mentions the auditors regulations and rights.
The Auditing Practices board (APB), issues specific ethical standards which normally deal with any matters which are in relation to the independence of auditors. These ethical standards are compiled in recommendation of the European commission. However, these ethical standards are not are not a component of the regulations but are again vital and necessary for auditors to follow when doing their work which is based on the objectivity, integrity and independence of the auditors.
After the collapse of the Enron, the Co-operative Group of Audit and accounting was formed by the UK Government to set up an adequacy framework for the auditor’s independence. The responsibilities of APB in auditors’ independence were extended to that of setting up the standards of auditors’ independence. In addition, so as to effectively manage the relationship between auditors and firms, there is need for audit committees to play a big role in ensuring this.
Recommendations
There are various recommendations that can be offered to increase an auditor’s independence. The first proposal has been set out by the European Commission which states a mandatory audit rotation. This enables editor to serve a company at least two years but no more than six years. Once the maximum term to serve has expired, the audit firm will no longer be able to serve as an auditor in the company. This is important since it assists in the formation of solid friendship between the management and the auditor team. In this way, the auditor will be able to maintain objectivity and utilize their professional judgment since management familiarity will have been scrapped off. In addition to that, mandatory audit tendering has been suggested. If organizations apply a tendering process when appointing an auditor, then this will enable competitive and transparent auditors. Moreover, shareholders will be included in the process of choosing an auditor. This will encourage onus on shareholders since they will ensure that the auditor independence is upheld. In addition to that, the client management will be forced to justify their reason for choosing the auditor which has to be based mainly on competence and independence of the auditor. Lastly, the third recommendation which can be put in place to ensure audit independence is the placement of limit on the non auditor work that the auditor is required to perform. This ensures that the auditors become objective in their work thus ensuring auditor independence. Any work that is non audit related will be considered as a conflict of interest therefore encouraging the objectivity and independence of auditors.
Conclusion
It is important for auditors to be protected against any threats. However, the current safeguards are there to ensure that the independence of auditors is in place, despite the fact that, they are not enough as they one protect auditors at an individual level only but not at inter firm levels, Nevertheless, Effective and efficient safeguards are usually the solution to success when it comes to the framework approach. It is vital to comprehend that independence can and will never be complete as an auditor is normally selected and paid by the shareholders or the clients. Thus The European Commission has therefore, come up with some proposals to fix this. Some of them include audit firm rotation and mandatory audit rotation which helps in addressing issues such as lack of independence by stakeholders.
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