Teoh & Lim (1996) in their study find that the formation of audit committees has a strong positive impact on enhancing auditor independence. The major factor behind such reservation was the amount that the auditors received as non-audit fees from these clients. The author Ezeipe(2004) describes the concept of auditor’s independence in three dimensions [4] : Programme independence: Sometimes client manager have the intention to restrict or modify the procedures that the auditor want to perform. To do an audit, confirmed information must be present and some standards by which the auditor can evaluate the information. The author DR Zulkarnain (2006) analyses the size of audit firm and perceived auditor independence in his study. In cases of accounting scandals (for example Enron and WorldCom), the audit firm appeared to be in collusion with the management in hiding fraudulent activities. Large audit firms have larger client portfolios which enable them to resist management pressures whereas small firms provide personalised services as their client portfolios are limited and they have to succumb to management requirements (Lys and Watts, 1994). A seminal publication by Mautz and Sharaf (1961) discusses independence and describes several meanings of the concept. And although you must be independent, gauging firm independence isn’t a decision you have to make until you reach the level of senior manager or partner at an auditing firm. Unfortunately, the research stream which evaluates the association between non-audit services and auditor independence, by examining the effect of non-audit fees on the auditor’s propensity to issue a going concern modified opinion (hereafter GC), has produced rather mixed results [20] . Expert Answer . The Chartered IIA’s Position. However, where the fees generated from non-audit services are relatively high (in percentage to the audit fees received by such accounting firms), this creates a situation whereby the auditor’s independence is likely to be compromised since the auditor may be repudiated profitable contracts [7] where he gives an eligible and reliable opinion on the financial statement being reviewed. Financial information systems design and implementation, Appraisal or valuation services and fairness opinions. July 29, 2011. I run into more than a few internal auditors who struggle with independence. Audit failures [5] reported in the past have affected the profession of auditor worldwide because the interests of shareholders and stockholders have not been safeguarded. The questionnaire and the interview survey reveal that most of the respondents are in the opinion that auditor independence would be secured by the presence of an independent and active audit committee. However, since this mental process is unobservable and auditors also have incentives to violate their independence through satisfying their clients so as to maintain the economic bonding to the client [3] (DeAngelo, 1981), there is a need for the auditors to be perceived as independent(named independence in appearance) from the management team who prepares the financial statements. For example, Gul (1991) who analyses banker’s perceptions of AI proves that each independence-related variable such as the audit firm size, affects bankers’ PAI in its own right. Orren (1997) states that independence in fact refers to the actual, objective relationship between auditing firms and their clients whereas independence in appearance is the subjective stated of that relationship as perceived by the clients and the third parties. The non-big four firms are more risk averse with regard to litigation arising from fraud and irregularities compare to non-big four firms. The issue of maintaining auditor independence is more crucial for smaller firms than larger firms. The study examines the opinions of commercial loan officers who were the users of financial statement and who would know the significance of audit report and the issues related to auditor independence. Similarly, Patten & Nuckols (1970), Knapp (1985) and Lau & Ng (1994) find that the existence of an audit committee increases the likelihood of bankers’ approving a loan, which is a reflection of an increased confidence in the auditor. Specifically, the SEC is concerned about two effects of non-audit services. Independence for an auditor is essential for all services an auditor performs to prove to end users that ownership interests are not being influenced in any way. Some prior research base on the effect of non-audit fees on auditor independence is also inconclusive [21] (for example, Wines 1994). Competition [11] has been identified as an external factor affecting auditor independence (Shockley 1981). For example, Salehi (2009) examined non audit services and audit independence. Shockley, 1981 [16] ;). Independence, because of its importance, is the first rule of conduct. To do an audit, confirmed information must be present and some standards by which the auditor … Independence is an important auditing standard because the auditor adds justification and credibility to financial statement even when there are no material misstatements or omissions in the financial statements prepared by management (okolie 2007). The Importance of External Auditor’s Independence According to Gillespie, Lewis and Hamilton (2004:221) an audit is: “a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.” Discuss View Answer An attitude of independence is a most essential element of an audit by a firm of certified public accountants. The Financial services code, updated and published in September 2017, by a committee of representatives from the banking and insurance industry, the Financial Reporting Council, the Prudential Regulation Authority and the Bank of England established by the Chartered IIA further promoted the independence and authority of internal audit; stating that … Further, the provision of non-audit services help the incumbent auditor to have a better understanding of the client and knowledge spillovers ( Francis, 1984), and thus to a better informed audit reporting decisions. The author Sori (2009) made the study of audit Committee and Auditor Independence through the Bankers’ Perception. The other is that the consulting nature of many non-audit services puts auditors in managerial roles, potentially threatening their objectivity about the transactions they audit. The non-rotation of audit firms is not considered to be a dominant factor but the formation of audit committees is found to have a strong positive impact on improving auditor independence, while the positive impact of disclosure of non-audit fees is considerably less. Auditor Independence means, carrying out audit responsibilities without being partial and not under the influence of the management. • Failure by auditors to do this undermines the credibility of the accountancy profession and standards it enforces. a. Compare the importance of independence of CPAs with that of other professionals, such as attorneys. However, in studies conducted by Shockley (1981) and Teoh & Lim(1996) tenure was not found to have a significant impact on perceptions of AI. He must fully and fairly disclose his obligations. (U.S. Senate 1976). Also, the practitioner independence requires the auditor to be free from personal interest and susceptibility to excessive pressure [2] ( Moizer & Sutton, 1997). In this study, only factors such as the provision of non audit services, the audit firm size, the audit firm’s tenure, the degree of competition in the audit services market, the size of audit fees and non audit fees and the audit committee will be analysed and whether these factors will impair or enhance auditor’s independence. They note that Carey (1961) discusses two meanings of independence for professional auditors. More broadly, the Proponents of the provision of audit services discuss that audit efficiency arise from providing both the audit and non- audit services. Thus auditors should always remain free from interference of client managers. This preview shows page 3 - 7 out of 10 pages. Auditors in violation of the Code immediately lose their license to practice. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner. From the survey, it is evidenced that, larger size of audit fees is the main factor that is perceived as having risk of losing auditor independence followed by other factors [14] . However, Gul (1989) [17] who finds the contrary, in describing this, he contended that the existence of competition caused auditors to be more independent and thus create a good reputation in order to preserve their clientele. Corps Act Provision of non audit services is not banned but audit clients, 1 out of 1 people found this document helpful, Corps Act: Provision of non-audit services is not banned but audit client’s director’s, b. For example, Shockley (1982) in his study suggests that the negative effects of MAS, the size of the audit firm and competition on a third party’s PAI actually arise because of the linkage of these variables to audit fees. Independence is essential to that contribution. Several prior studies concluded that NAS has negative effects on auditor practices and auditor independence. However as suggested by Linberg and Beck (2004), Competition in the audit market makes the auditor more careful and concerned with the audit assurance level in their services. In a UK study (Beattie et al 1999) competition was the factor influencing auditor AI. This concept has been discussed widely and many definitions have been presented in literature. In most empirical studies audit independence is proxied by the comparative degree of the audit fee as against the NAF received from a particular audit client. Many firms which operate in an intensely competitive environment may have difficulty remaining independent as the client can easily acquire services of another auditor. Auditor Independence Independence is the cornerstone of auditing. The sample comprised of audit partners and the author argued that the factors affecting the perceptions of AI are likely to change over time owing to changes in the local economic, political, cultural and regulatory environment. Alternatively, large fees paid to auditors, particularly those that are related to NAS, make auditors more economically dependent on their clients. Auditor reputation is directly associated with audit quality. Nevertheless, following the collapses, auditing profession as a whole has been affected and changes were proposed to ensure that audit firms reduce their over-reliance on NAS (The Star, 2002). If users believe that auditorsare not independent, the value of the audit function is eliminated. 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). Some examples can be Dykxhoorn & Sinning (1981) in German, Gul (1989) in New Zealand,) , Lau & Ng; (1994) in Hong Kong, and Alleyne et al. Several prior studies also suggest that NAS has positive effects on auditor practices and auditor independence. They found experimentally that audit partner participants have searched more supportively, weighted confirmatory evidence more heavily, and have made more elaborate arguments in the presence of low balling and potential non-audit revenue than provision of audit, and NAS claimed that auditors would not perform their audit service objectively and that joint provision would impair perceived independence (Glezen and Miller, 1985 [15] ;). Almost all empirical studies that attempted to find relationship between larger audit firm size and AI concluded that there is a positive relation between them [18] (De Angelo 1981). Why is independence so essential for auditors? Why is auditor independence so essential? Furthermore, the research discusses also the different policies related to auditor independence. In order to ensure the independence of auditors and to protect the interest of investors, the accounting profession in most countries has come up with a code of ethics that spells out guidelines for auditors’ competency and independence. A. auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct are​ followed, including independence. In such a case, the only course of action is to retreat from the assurance commitment". Securities and Exchange Commission, 1979 asserts: "The [auditor independence] issue is both one of appearance and of fact; if public confidence in the integrity of financial reporting is to be maintained, it is of the utmost importance that public confidence in the objectivity of independent auditors be similarly maintained". Most writers [19] , who discuss the relationship between tenure and AI, support that audit firms working for a given client over a lengthy period has the risk of losing an auditor’s independence. Whyis independenceso essential for auditors? A total of 86 officers responded to the self administered questionnaire. Another study by Abu Bakar (2009), attempts to survey the major deter factors of auditor independence as perceived by the accountants in Malaysia. Oxley Act of 2002 implemented a ban on nine non-audit services which comprise of: Bookkeeping and other services related to the financial statements. The result of this study strongly agrees that providing NAS to external auditors to the same client impair auditor independence. Mitchel et al. Some studies can be those of Abu Bakar (2005) who analyses the factors influencing auditor’s independence from the perceptions of Malaysian loan officers. Independence of mind (will not affect) vs. Researchers in the U.S. suggest that there is no relationship (DeFond et al., 2002; Geiger and Rama, 2003). First, large fees paid to auditors may increase the effort exerted by auditors and thereby increase audit quality. auditor independence is necessary so that auditor's opinion view the full answer. In the U.S., the Securities and Exchange Commission (SEC) chairman, Levitt (2000) pointed out that, "…qualified, committed, independent and tough-minded audit committees represent the most reliable guardians of the public interest". The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. SEC requires Audit Committees to evaluate the independence of the company’s external auditor when deciding whether or not to hire the auditor for providing non-audit services. In Malaysia Gul and Yap (1984) reported that NAS provision increased their confidence in auditor independence. They found no evidence that lengthy audit-firm tenure has a negative effect on audit quality, thus impairing auditor independence. A lengthy association between a company and an accounting firm is likely to result a close identification of the firm with the interests of its clients, thus an independent action by the accounting firm become difficult.