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Financial information must be appropriate, timely and reliable in order to meet the needs of users. For the information to be reliable it must be of high quality, thus, quality is a crucial element of any audit report. To make a report of high-quality the auditor must possess skills such as attentiveness, investigation, resilience and extreme persistence. Although, these qualities will not be allocated in the right direction if the auditor is not independent. Thus, independence is the key element of a high quality report.
In the paperwork, firstly, we will look at auditor’s independence as one of the most important tools of auditor’s to achieve the best results and why it is important to stay independent. Secondly, we will assess the work of IESBA, the body, which helps enforce the ethical principals to assist auditors to be independent. Thirdly, consider approaches, which could be implemented to improve statutory auditor’s independence. Lastly, investigate a case, which involves ethical and professional issues and suggest actions, which could be taken.
The importance of Auditor Independence in the auditor-client relationship
Establishing a healthy and professional relationship between an audit firm and its clients is very important. It is significant to set certain behavioural norms in the beginning of the relationship. Certain normative acts, which have been created to serve a regulatory purpose, already exist but not everyone wants to play by the established rules.
The rules of Auditor Independence help auditors objectively assess the accounting work within the client’s company using professional scepticism. The auditor is fully responsible for the job he/she undertakes. The future of the client company depends on the auditor’s decision. Some companies have certain motives and might feel the need for some «help» from an auditor. The client might try to bribe the auditor or intimidate them. Being under pressure, the auditor might give in and in the end will not be able to do their job with integrity, objectivity, professional competence, due care, confidentiality and professional behaviour, which are the integral framework of the IESBA Code.
In my opinion, auditor’s job is to «bring justice» sort of speak. If an auditor is dependant, he/she is unable to be fully professional. Thus, positioning yourself as an independent auditor from the start will secure a proper professional relationship.
Although in some cases helping a client may seem appealing, the auditor must think of the consequences and make the right choice within the framework on law. After violating the IESBA, the auditor will not seem as a trustworthy, reliable and honest person, on the contrary, he/she will be seen as an unprofessional person, who is unable to fulfil his/her initial task.
Non-compliance with the rules of Auditor Independence can lead to dire consequences and is punishable. It is dangerous not only for the auditor him/herself, but for the client and for the auditing company in general as well. Thus, auditor independence is crucially significant, since it is not an aim, it is a tool. Auditor Independence is one of the main tools to ensure the quality of the audit. The consequences of the misconduct could be various, depending on the severity of the violation. Such consequences could include: suspension, fined, letigation, reputational risks, etc.
There are organisations, which regulate unlawful acts of audit companies. One of such organisations is the US Securities and Exchange Commission (SEC). SEC is one of the main independent bodies in the US, which regulates and supervises the US securities market and can press charges against unlawful acts, which has happened on many occasions.
A large amount of firms have neglected Auditor Independence and SEC was the body which has regulated the situation. Firstly, I would like to mention a company, which is called RRBB. RRBB is a full-service accounting, advisory and consulting firm, which was founded in the year 1961. In the year 2013 the company and one of its partners, Brian Zucker, were accused of violating auditor independence by SEC. Prior to the merger in 2011, Brian Zucker was the owner of his own firm, which provided financial and operations principal services to broker-dealer clients. Since the merger Zucker had been providing simultaneous services. Zucker both worked for a broker-dealer client as an audit engagement partner and provided FINOP services to the clients. Two main problems arose:First, the FINOP services constituted prohibited non-audit services, including bookkeeping; Zucker made managerial decision and provided supervisory services for the client company. Brian Zucker made major decisions within the client’s firm and then provided auditing services, violating the IESBA Code’s rules. Providing such services is illegal(СТАТЬЮ КОДЕКСА). Due to the unprofessional behaviour both RRBB and Zucker were charged with causing the broker-dealer client’s failure to file independently audited financial statements and with 102(e) violations. RRBB was censured and paid $12,000 in disgorgement and a $25,000 fine. Zucker was suspended from practicing for one year with the right to apply for reinstatement.
A couple of years later, in the year 2016, an accountant and also a partner of the EFP Rotenberg LLP was suspended for being involved with fraud. The accountant was guilty of failing to spot fraud in company audit. The company had been prohibited from accepting new public company clients for one year. The firm and the accountant, Nicholas Bottini, have also agreed to pay $125,000 penalty to settle the SEC charges. Moreover, the accountant has been permanently suspended, which means that he will not be able to participate in the financial reporting and audit for public companies anymore.
In the same year, 2016, two accountants, with the firm, were investigated by SEC and had to pay a civil penalty in the amount of $50,000. The accountants names are Joseph D’Arelli and Mitchell Pruzansky. Their firm D’Arelli Pruzansky P.A. violated the auditor independence rules Rule 10A-2 when D’Arelli was a lead audit partner for one client’s quarterly reports during his sixth consecutive year of engagement and Pruzansky served as lead partner for certain of four clients’ quarterly reports during his six consecutive year of engagement. This led to failure of filing at least one quarterly report that was not reviewed by an independent accountant in violation of Section 13a of the Exchange Act and Rule 13a-13 thereunder.
The given examples clearly demonstrate how important it is for an auditor to be ethical and professionally decent. Without following the principles, the auditor risks losing his/her business reputation and the ability to engage in audit activities in general. That is why the issues of professional ethics of auditors are always very emphasised.
The role of the International Ethics Standards Board for Accountants (IESBA)
Any society, sector or a company can not live in anarchy and needs a set of rules to live by. There is a legislation for every РАБОТЫ and there are certain organisations which create those sets of rules, enforce and control compliance with them. One of such organisations is SEC, which has been mentioned earlier. Another organisation is the International Ethics Standards Board for Accountants (IESBA). IESBA is part of International Federation of Accountants (IFAC), which is an association of representatives of professional accounting organizations from all developed countries of the world. The main aims of IFAC are serving the interests of society, improving the accounting profession at the international level and developing a strong international economy through the implementation of high-quality professional standards.
The organisation develops high-quality ethical standards and other pronouncements for professional accountants worldwide. The Code of Ethics for Professional Accountants in also a part of their activity. The Code helps auditors understand how to deal with certain situations and avoid being sued or penalised.
The Code serves as the basis of ethical requirements for professional accountants in many countries. Although accounting professionals around the world work in environments with diverse cultural backgrounds and regulatory requirements, they are always required to comply with the basic principles of the Code. At the same time, if any national requirement contradicts with the Code, the national requirement is the one, which must be complied with.
According to the Code, with the exception of specially specified cases, its objectives and fundamental principles will be equally valid for all professional accountants, regardless of whether they engage in public practice or work in industrial, commercial, public sector or in education.
Ethical requirements have been created to ensure the highest quality of work of accountants and auditors and build public trust in the professional community. IESBA constantly observes the market, improves the laws and changes them for the better to help everyone understand the Standards more clearly and precisely. The last revision of the Code was in April of 2018. It was made clearer, easier to read and understand in general, it also went through some structural alterations. Moreover, the Code provides new material on exercising professional skepticism.
Although, the IESBA deals with such important issues, there are some drawbacks to their work. Since the Code and other Standards are used in different countries and is translated into many languages an issue arises: difficulty of interpretation. Some definitions and concepts might be understood and applied incorrectly, which makes the process tough. Also, small and medium-sized accounting and auditing firms can experience complications using the Standards.
In my opinion, despite of some problems, IESBA is well suit for the work it conducts, since it actually pays attention to the market and makes relevant changes to the Code to make it easier for auditors to understand and learn how important being independent is and how the independence influences the overall quality of an audit.
Alternative approaches to increase the independence of the statutory auditor
To consider statutory auditor’s independence, we must understand what statutory audit actually means. Statutory audit is the audit, which is conducted in order to identify the conformity of the organization with the requirements of government (required by law). Statutory audit in turn carries out the audit procedure itself. Not all companies are required to be audited. Although, for example, public companies are required by law to have an annual audit by an independent audit firm.
Obviously, statutory auditors must be provided with proper training, awareness and orientation on the subjects they have learned. In this process they could be updated of recent developments, their ethical conflicts could be resolved and they could have practical insights into the profession from more experienced people.
Large companies should provide training programmes for smaller-scale companies to enhance the quality and independence of statutory auditors in general. Competent staff within the large companies may provide such services (i.e. lectures).
It is very difficult to create approaches to increase auditor independence, which will properly work worldwide, because of different cultures, markets and the way people conduct business in general. Some companies create an independence matrix form that an auditor must sign before being assigned to a client. The form!!!!!!!
The forms only might not work completely: we can not forget that there is a human factor. People can lie or misstate information for their own purposes. Thus, I think the client must check some information to confirm it from their side as well and provide it to the audit firm. For example, whether the auditor does not have any shares with the client company.
Another way of increasing auditor’s independence could be rotation, which will eliminate the familiarity threat. If an auditor is to FAMILIAR with the company, he/she might not be able to detect the risks and will not perform the audit with due care. In some countries it is required for companies to rotate auditors, but it could be done more often. By rotating the statutory auditors, they will not get to acquainted with the client and be able to perform more objectively and professionally.
Thus, conducting any audit procedure involves following a specific goal and solving the corresponding tasks. At the same time, the activities of the auditor are unthinkable without observing the principles of the audit. The principles of conducting an audit are consistent with the ideas developed in public opinion about human decency in a broad sense. For the auditor, adherence to these principles is crucial. Without proper observance, the auditor runs the risk of losing business reputation and the ability to engage in audit activities. That is why the issues of professional ethics of auditors receive great attention both in the scientific and analytical literature, and in the organization of the work of auditors.
A new take on ethics and independence.
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