The Importance of Audit Independence

The Importance of Audit Independence1. IntroductionAs the confound wayment of the modern business, analyse is playing a more than than and more all-important(a) role to construe the trueness of the financial forge-up and attend to cut across users to take on proper stopping points. Consequently, it is in truth important for exami study accountors to remain license in frame and intelligence when conducting an take farm animal based on a public limited comp whatever. To expound this topic clearly, the essay is divided into the adjacent parts Firstly, it makes a literature review of take stock license and cogitate the viewpoint into four categories secondly, it introduces the definition of study independency in form and mind and stated the important of both of them separately Finally, it analyzes why it is important to remain canvas independency from approximately(prenominal) angles such as shareholders, creditors, government, operators and new(prenominal) stakeholders.2. Literature reviewWhen it comes to the audit independency, many scholars come conducted systematic question in this topic. Some scholars pointed out that auditor has two kinds of independence- torso and mind, pretermit of the former one whitethorn shake the publics confidence on independence and lead to fill conflicts, and lack of the last mentioned one means auditors misplace their professional ethics and this is very dangerous (Carmichael Swieringa, 1968). Salehi have emphasized that the cornerstone for the auditing profession is audit independence. The auditors picture is suspect without independence and the thirdly parties compute that there is no need for extraneous auditors without independence (Salehi, 2009).Due to exceedingly publicized audit failures, the topic of auditor independence has gained increasing vigilance from academics, regulators, and practitioners around the world in recent years (Hope Langli, 2008). Under the circumstance of m any extravagantly profile companies fraud cases exposure such as Enron, Adelphia, WorldCom, the immensity of audit independence to improve corporate governance is getting more and more attention (Rezaee. 2003).As the no-audit function has become a more and more important lucrative business for CFA firms, audit independence is somewhat sourd, which make it even more polar to go on audit independence for auditors (Gul, Tsui Dhaliwal, 2006).Besides, Bou-Raad G. emphasized the signifi hatfulce of audit importance from the tax -added prospect. upcountry auditors are non just a traditional audit for lapse but also a valuable access to assisting handlers to execute the physical objects of the organization. In other words, corporate management benefits from audit spirit (Bou-Raad. 2000).From the literature above, the importance of audit independence prat be categorized into four reasons Firstly, audit independence can hold the public confidence and invalidate interest conf licts Secondly, audit independence can help auditors to provide spirited fibre financial circulate and avoid scandals like Enron bomb Thirdly, the development of no-audit services make it more difficult but more important to maintain audit independence Lastly, audit independence can improve the quality of audit and it can assist managers to make strategy formulations.3. The introduction of audit independence in body and mindWhen it comes to remaining independence in body, it can be also called physical independence, outdoor(a) independence or surface independence. Auditors should take the role of independence auditors on front of the third parties. And it is the direct evidence for the public judging the independence of auditors. Once field of study users think that auditors have some current or potential race that constipations the independence with the consignor such as employment, business partner, family or relatives and so on, it depart definitely decrease the audit fu nction as they probably do not depend on those reports so more (Law, 2010). Auditors should have no specific relationships with entity, and they mustnt hold equity stakes of the entity and should not be on the senior mark of it. In order to avoid misunderstanding and enhance the trust, auditor must avoid or derogate this threat to a level which is acceptable. Independence in mind is secure to improve and the public can only infer the independence of auditors from the body like relationships with the entity and other stakeholders. Actually, even if auditors maintain independence in mind, as long as the public think they take sides with the entity or any other parties, no matter how precise the audit result is it is useless.As for remaining independence in mind, it demands that there is no stake amidst auditor and the consigner intrinsically. In the whole auditing process, auditor should keep an artless attitude that makes a professional decision and never succumbs to any extern al pressure. It comes up with higher requirement for auditors mindset. They are required to be neutral, objective and fact-based.Actually, those two concepts are different but integrative. They reflect both external and internal sides. Only remaining independence in body and mind can make sure the auditing result persuasive. Also, the function and value of conducting audit can be realized.4. The importance of remaining audit independenceStakeholders make delivery decisions by taking advantage of reports. Whether those reports are related and genuine are questions. Audit can help to solve this problem. However, auditor fails to follow through the duty if they cannot remain independence in the conducting process. On one hand, report users provide doubt this kind of dependence if they thought auditor and consigner belong to the same party. On the other hand, when auditor cannot keep an truthful mindset, the auditing opinion probably gets defame. For example, auditor fails to fin d out the instruction is cooked and issues incompetent opinion. This result is easy to subvert related report users for decision fashioning. They whitethorn bear loss because of depending on this audit opinion. As the smear varies from Stakeholder to Stakeholder, the chase analysis in the importance to remain independence in body and mind is based on different Stakeholders.4.1 The importance of audit independence for the shareholdersShareholders are the direct beneficiary of companies and they bequeath get more bonuses if the companies engross successfully. Consequently, shareholders have high demand for audit independence. Actually, when the company is in low-d receive operation, controlling shareholders are not willing to public the truth, and then bear the interest of minority shareholders. Controlling shareholders dont have the incentive to employ high independence auditors, and this phenomenon is called Entrenchment Effect (Fan Wong, 2002).As the shareholders right s eparates from the management right, owners do not involve into the daily management to the company. They employ faculty to cash in ones chips their company and enjoy the lettuces. Usually, shareholders care ofttimes about the profit cogency, efficiency, going solicitude, and solvency and so on. Those indexes reflect how well manager operates the company. Also, shareholders can assess managers performance tally to the information. Generally speaking, they obtain the information from the reports prepared by managers. However, the report may involve fraudulence because it is manager who makes those reports. It has the possibility that managers cook the report so as to cover up their mistakes, bad performance and other point where they fail to fulfill their responsibility. At this time, auditors work helps answer the question that how much report users can depend on the report information. But if auditor is otiose to keep independence, it probably arouses the doubt to audit opi nion from report users. Obviously, audit loses the value under this watch. Without unbiased and objective audit opinion, report users are unable to acquire useful information to know the companys condition and assess managers performance. Once shareholders lose control to the company, this business mechanism will definitely go disorder as managers probably make their own benefits by taking advantage of shareholders resource and power and regardless of the boundary from regulation and law (Agbejule, 2009). In the end, the company probably goes to liquidation or bankruptcy.4.2 The importance of audit independence for creditorNowadays, debtor-creditor relationshipis very common and necessary. Debtors unavoidableness to loan in order to expend production or develop new market, and creditors want to obtain interest using their spare money. And what the creditors concern most is the debtors ability to pay for the debt. The debtors financial reports can offer some information such as so me ratios which can reveal the debt give ability. And if the company has a bad financial result, creditors can consider trade in a loan ahead of the expiry day to insure their money is safe. However, those reports are made by the debtor. Therefore, creditors may raise the doubt whether there exists the possibility that debtor offer false information to memorise money or conceal the fact that they have no ability to pay that money back. At this time, auditors work can eliminate or alleviate this doubt. However, audit cant work out if auditor were unable to remain independence when conducting the audit. Creditors are likely to make a wrong decision due to the failed audit opinion. When creditor lends money to unqualified debtor, it probably bears a lot of bad accounts and toxic asset as consequence (Siddiqui, 2002). Consequently, audit independence which can help to provide true financial reports is very crucial to creditors.4.3 The importance of audit independence to governmentAs a company operates within one country, it uses the infrastructure construction and investment surroundings offered by the government. It should take on tax responsibility. The financial statement provided by companies is the evidence for government to decide whether levy or not and how many to levy. For example, business tax is based on the gross income of the company which can be found on the income statement. And the income tax is based on the profit also from income statement. If company cooks the financial reports in order to save tax cost, the government will be suffered directly. Therefore, government will conduct audit in case of tax evasion.Moreover, lacking of audit independence would influence government indirectly. If auditors provided fake financial reports, the pubic will be suffered. They will have less confidence on the trueness of the operation of the company, and the stakeholders will feel betrayed. If their interests are impaired, conflicts would emerge, and it i s bad for the stability of the society. That is why the government create the 2002 Sarbanes-Oxley Act after the Enron Bomb.4.4 The importance of audit independence for operator more people may misunderstand that auditor is enemy to operator referring to manager in this essay and the existence of audit is a stone in the way. This idea is partial and shallow. The role of audit plays is to increase the dependence to the information and check whether the whole business activities are in accordance with the regulation. To some degree, it serves to obtain superior management (Shih, 2006). Sometimes, auditors will come up with solutions to the be management problems. For example, the internal control has leak which may incur situation where damages the whole benefits of company. Going details, the design of regulation may give a chance for embezzlement. Or auditor finds out some staff goes against regulation. Cases like that should call managers attention for better management. If audito r cannot keep independence when conducting audit, it will pose the threat to the company such as damage the company benefits. For example, the auditor is a brother to the cashier. When this auditor conducts audit to cash, he cant remain independence or his independence has been affected. He may conceal the fact if the cashier had some guilt and issues unqualified opinion (Fadzil, 2005). Because of this opinion, managers cant notice this threat. It may have a bad impression on their working performance and company development.4.5 The importance of audit independence for the other stakeholdersThe existence of a company has to bear many responsibilities. Therefore, the stakeholders can never be limited to the above mention. When a company becomes a listed company namely a public limited company, it has to fulfill more duties to the society and accept more supervision from the public. It raises fund by stock shares. Its public investors sell or buy the shares in the stock exchange, and their decision usually relies in the financial reports. However, those reports perhaps cannot reflect the financial position and income condition. Audit opinion is very important in their decision making process. If auditor could not remain independence, the audit opinion will mislead the users. Investors will lose money if they invested a loss company. For example, the collapse of Enron results from the history firm Andersen failed to remain independence. In the end, the share price cannot reflect the value of the company (Abbott, 2000). Stock market will go wrong and the economy will fall apart.5. ConclusionsThe most important responsibility for auditors is to provide high quality financial report which can help report users to make right decisions. The authenticity and reliability of the financial report is very crucial because it directly decides the strategies of stakeholders. The trueness of financial report which is also the quality of audit is decided by two factors profes sional competence of auditors and audit independence, and the latter is more important. Audit failures caused by lack of audit independence have led to many companies fraud cases. Audit independence is also the need of shareholders, creditors, government, operators and other stakeholders. All in all, it is really important for auditors to remain independence in body and mind when conducting an audit.