Employees who are charged with such procеdures are expected to perform their duties in line with such regulations (Fan et al. (Falk H, Lynn B, Mestelman S, Shehata M, 1999) Having complete auditor independence is difficult as the way the environment is, Ponemon & Gabhart (1990) found that the independence judgments of auditors with low DIT P scores were significantly influenced by penalty factors, such as the threat of legal liability, whereas auditors with high P scores ranked this as the least important consideration. Interpersonal relationships might cause the auditor to favor personal over professional objectives and also might affect the auditor's ability to exercise an appropriate level of professional skepticism (Johnstone, K.M., M.H. This suggests that an auditor at pre-conventional and conventional level will display a lower propensity of not complying with standards when it is likely that violation will be detected and the sanctions will be imposed. However, it is possible to identify some threats to auditors’ independence. Where little or no judgment is required in certain circumstances is unlikely that incentives to compromise independence will result in reduced audit quality. Incentives and motivation play a vital part in auditor judgments. (1999) stated the principal threat factors to independence relate to economic dependence and non-audit service provision. According to IBS (Independence Standards Board, 2000) the threats to auditor’s independence are the sources of possible bias that may compromise, an auditor’s ability to make unbiased audit performance. I have chosen to concentrate on how the provision of non-audit poses a threat to auditors' independence, (Online). So, recognizing the difference between interests and incentives of different generations and related business results can be considered as an important component in the development of effective recruitment tools, training methods, processes, employment and employee benefits packages (Leschinsky & Michael, 2004). Public trust begins, and ends, with the integrity of the numbers the public uses to form the basis for making their investment decisions. However, there are several countervailing incentives in place, such as concerns for regulatory enforcement, potential litigation costs, and potential reputation losses, promoting high audit quality (e.g., Nelson 2009). However, the quality of an auditor’s judgment is also influenced by pressures emanating from the firm itself. Bebeau (2002) has summarized Rest’s (1982) the four-component model as starting with ethical sensitivity: the individual must be able to identify a moral dilemma through to his/her intention and finally courage to behave ethically, moving to an ethical judgment whereby the individual forms a judgment on the ideal solution to the moral dilemma, moving to the ethical intention which is the individual’s intention to comply or not comply with the ideal solution is formed and finally ethical behavior. Threats to Independence Businesses have specific regulations that are laid down for specific processes like procurement. . Here the auditor reviews a judgement she has taken herself. Be that as it may, business visionaries don't esteem their participation in a formal relationship on the premise of a common vision (Miller, Besser, and Malshe, 2007). This stage reflects the lowest level of cognitive moral or ethical development. Auditor independence may be affected by threats and intimidation posed to the auditor by either the client or any stakeholders in the audit process. The literature shows that there are several situations that can potentially threaten auditor independence. 1998; Jenkins and Haynes 2003; Kadous et al. This issue results in a lack of confidence on part of the public. Investors, regulators, creditors and other third parties place credence on audited statements. and do not necessarily reflect the views of UK Essays. It. Auditor’s Independence. This thеory is a setback in business procurеment as it еncourages selfishness that can culminate to corruption and financial losses to the businеss (Clerke T.E., 2008). Here the individual develops the courage to follow through with his/her moral action. Rampton presented both opinions about procrastination and why we procrastinate supporting that it is not bad. Thus, the provision of auditing and non-auditing services to the audit client would generate potential and real threat to audit independence. Thus, our disappointment with the new rule is not premised on a belief that serious threats to auditor independence should be condoned. But in one way or the other auditor independence is threatened. For example, settings in which there might be a high degree of judgment include deciding on the appropriateness of a client’s revenue recognition policy or judging the adequacy of a client’s allowance for doubtful accounts. For example, consider yourself a potential shareholder in XYZ Company. The effectiveness of penalties depends on both the individual and the situation. Kohlberg’s CMD implies that higher levels of ethical development should result in more ethical behavior. The Customer Relationship Management concepts are all about gaining trust of the customer, so that the transection can be converted into relationship. Auditor independence has long been regarded as a cornerstone of the auditing profession (AICPA 1999; SEC 2000). (Duska R, 2005) Found that the role of an independent auditor is to be a watchdog to see if the company’s estimates are reasonable based on the evidence that is provided on a consistent basis, as independent auditors are essential for functioning of the economic system. According to the Australasian Accounting Business & Finance Journal, Loh & Wong: Matching the ‘Knowing What to do’ and the ‘Doing What you Know’ in Ethical Decision Making (October 2009), a study was carried out and this indicates that the existence of a penalty for unethical behavior does seem to increase the likelihood for ethical behavior, with the numbers showing more percentage of accountant moving from an unethical choice to the ethical choice in their actual course of action. According to Myring and Bloom (2003), these safeguards are the controls, which mitigate against the effects of threats, and provide greater incentives to the auditors to make appropriate independent decisions. Sweeney & Roberts (1997) found that auditors at lower levels of moral development were more likely to comply absolutely with independence standards, while auditors at higher levels of moral development were less likely to resolve an independence dilemma by referring solely to technical standards. Another threat to auditor independence is self-interest. According to (Kelley, H.H. quality control and documentation, identification of threats, availability of consultation procedures, internal reviews by independent partners, division of responsibilities, training, staff development, ethical standards, etc. The above literature review signifies the importance of customer relationship management in modern generation. He states that attracting and retaining high-quality people to the auditing profession is vital. Many firms which operate in an intensely competitive environment may have difficulty remaining independent as the client can easily acquire services of another auditor. -To determine the extent to which Mauritius framework protect auditors’ independence. 1999). Intimidation threat is one of five independence threats that are explicitly referenced in the IFAC’s independence framework. In almost all countries auditing, as a profession, is becoming very demanding. Indirect incentives arise from other circumstances that could make it difficult for the auditor to maintain objectivity. One of the main reason organization fail to successfully implement SCM is because the organization fail to link between SCM dimension and the organization's performance.Sink and Tuttle (1989) claim that you cannot manage what you cannot measure. Image restoration 4 Talking about a threat to independence, Rusmanto (2017) refers to any possible circumstance that may end up impairing the professional judgment of an auditor. Threat to auditor independence is the risk that set limits on the auditor preventing him from acting fully with professional behavior. In general, it is believed that incentives lead to preferences for a desired outcome which unintentionally influence one’s decisions, in a self-serving manner (e.g., Kunda 1990; Russo et al. The accountancy profession claims to be both moral and ethical (Francis, 1990). Kohlberg’s CMD model distinguishes three part of an individual’s ethical development to examine an auditor’s implicit reasoning in the resolution of an independence conflict, which he described as, – the pre-conventional level: an individual’s ethical decisions are shaped by external authorities, self interest, and the rewards and punishment associated with various choice outcomes. Antecedents and consequences of independence risk: framework for analysis). Sanctions, or penalty, may be imposed to the extent that professionals do not follow the mandates of the profession or the laws of the country. The threat of dismissal is the fundamental self-interest threat for an auditor as it leads to loss of face for the firm and very probably for the partner as well. Third, the audit committee able to review with the external auditors their audit plan and evaluation of internal control simultaneously promotes fair reporting from the prospective of shareholders, creditors and employees (Auditing and Assurance Services in Malaysia, 3rd Edition 2007). Deficiency might have a crucial harmful outcome to the businesses, it 's misadventures as well as the associates, this might even end lifespan of the business. Based on individual’s ethical development which influences judgment and work, Kohlberg (1958) defined ethical development as the ‘Cognitive Moral Development’ (CMD) of the individual, governing the thought and knowledge processes involved in deciding about what is right or wrong. This hinders the auditor from making independent evaluations and conclusions. [The capital they invest] is providing the fuel for our economic engine, funding for the growth of new businesses . The writer used many convincing and logical sentence in his article. Independence "in fact" (or actual independence) and "in appearance" (or perceived independence) is two types of auditor independence. Especially in tough economic times, companies struggle with how to best manage their most valuable resource their human resource while staying viable as a business. For example, enrollment in the formal affiliation was regarded as fundamental by the explored business people to defeat the risk of diminutiveness. (Arnold and Ponemon, 1991). The [12] AICP Cohen Commission (1978) in its report affirms that there are excessive competitions among public accounting firms and this excessive competition among different firms has been consistently identified as a factor … The report classifies this as political pressure, something that the authors describe as 'extensive and pe… An auditor who has a lack of independence or has threats to auditor independence, his audit report useless to those who rely on it. (Fearnley, S.and Beattie, V.and Brandt, R.(2005) Auditor independence and audit risk: a re-conceptualisation.). These pressures can arise from immediate supervisors on the audit team or the overall evaluation process used by the firm. The results show that: 1. 204-231) and Berryman (1974, p. 1) say that since independent auditors occupy a position of trust between the management of the reporting entity and users of its financial statements, they must be perceived to be operating independently on the basis of sound auditing standards and strong ethical principles. Five independence threats are illustrated by Section 290.41 of the Code of Ethics, which are Self-interest threats, self-review threats, advocacy threats, familiarity threats and intimidation threats. This can arise when issues emerge at a late stage, either as a result of audit procedures or from events within the company. (Buffett. For example, managers will try to influence auditors into omitting or modifying conclusions that they regard as damaging or into ignoring high-risk areas of the operation. Auditors’ moral is considered to have a vital role in the cognitive process underlying ethical reasoning and judgment formation. On average, subjects with low moral development scores violate independence more frequently than those who have higher scores. For instance, when managers want to attract potential employees from different generations, they should note that different generations uses different recruitment channels and may be attracted by different type of brands. According to the UK, European Commission, Australia, IFAC as well as Mauritius framework there are four safeguards against these threats are identified (Vivien Beattie and Stella Fearnley, September 2002, "Auditor Independence and Non-Audit Services): regulatory safeguards and sanctions either emanating from legal or professional requirements e.g. For example, audit managers held accountable to a partner who aggressively tries to grow the firm’s business are more likely to support bidding on a client who engages in aggressive accounting practices (Cohen and Trompeter 1998). Employment downsizing has become a fact of working life as companies struggle to cut costs and adapt to changing market demands. 1987; Blay 2005); fee pressure (e.g., Houston 1999; Gramling 1999), client retention incentives (e.g., Lord 1992; Trompeter 1994; Chang and Hwang 2003), economic benefits contingent on specific actions (e.g., Schatzberg and Sevcik 1994; Beeler and Hunton 2002), and other client-related and engagement pressures (e.g., Hackenbrack and Nelson 1996; Haynes et al. Warfield. 2003; Blay 2005). The author is of the opinion that if the Customer Relationship Management scheme is overly used and misused, it may result in depleting customer trust. According to Terri L. Herron and David L. Gilbertson (June 2003: Ethical Principles vs. Further, if the auditor has any previous working relation with the client or any of its employees their credibility and ability to carry out the audit … However, Peter Wyman ("Is Auditor Independence Really the Solution?," April 2004) makes an important contribution to this discussion, about being full independent by emphasizing that auditor independence is an enabler of good auditing, and that to view it as an end in itself could have severe adverse consequences. The objective of auditing has been given by International Standards of Auditing (ISA) 200; Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with International Standards on Auditing. Advocacy It is the report of the independent auditor that provides investors with the critical assurance that the numbers in the financial statements have been subjected to an impartial, unbiased and rigorous examination by a skilled professional. The third essay aims to examine the effect of client intimidation on auditor independence in an audit-client conflict situation. (APB, 1996). In Mauritius, scarce literature is available on the perception of the threats that impair auditor independence and safeguarding it. Reference 7 He reiterates that managers ought to have a sober responsibility and obligation beyond the interests of employers or shareholders. Or an audit firm prepared the financial statements and then acted as auditor. While a lion's share of the studies recognized both financial and social thought processes of entrepreneurial systems administration (Jack, 2005; Lockett et al., 2013; Shaw, 2006), high managerial boundaries and need of assets constrained business people to shape business systems with those gatherings with whom they can increase direct financial advantages. Here the auditor may have a financial (or other) interest in a matter. According to this threats and safeguards approach, the frameworks identify five basic categories of threats to auditor independence: self-interest threat: the threat to auditors’ independence resulting from a financial or other self-interest conflict, self-review threat: the difficulty of maintaining objectivity in situations where a judgment of a previous audit, or non-audit, assignment needs to be challenged or re-evaluated in reaching audit conclusions, advocacy for client threat: the threat to auditors’ objectivity resulting from auditors becoming advocates for (or against) their client’s position in any adversarial proceedings or situations, intimidation by clients threat: the possibility that auditors may be intimidated by threat, by a dominating personality, or by other pressures, by a director or manager of their client or by some other party. People are taught the professional behavior; integrity, objectivity and independence. In this industry; business ethics and standards normally differ in relation to the environment and time the services are being offered (Joseph Weiss, 2008, Pg, 78).This creates about of challenges the mangers have to deal with to keep in line with the required ethical principles as they try to make profit. Client's fees to auditors that are contingent upon specific opinions can, if allowed to occur, result in the auditor's financial interests becoming dependent upon whether audit judgments coincide with management's preferences. & Maclochlainn, N. p.19). Attitude was “whose bread I eat, his song I sing”, (Buffett. James Rest (1982) built on Kohlberg’s work by developing a four-component model of the ethical decision-making process which describes the cognitive processes individuals (as cited in Bebeau 2002). [But] the willingness of investors to continue to invest … cannot be taken for granted. The word of 'INDEPENDENCE' is defined as 'freedom from situations and relationships which mak International Financial Reporting Standards. Experimental studies have found that the individual auditor’s level of ethical cognition has a significant impact on audit decisions. Notwithstanding when the delegates didn't get their remuneration on time, they continued working with, Table of content Threats to Auditor Independence According to Parker (2015), most independence breaches are caused by self-review threat in cases where the auditor is working closely with the accounting department. The importance of auditors’ independence – to both investors and the wider economy was succinctly conveyed by Turner (2001), former Chief Accountant of the Securities and Exchange Commission (SEC) in the USA, when he stated: "The enduring confidence of the investing public in the integrity of our capital markets is vital…. Auditors are expected to provide an unbiased opinion on the work that they have performed. The issue of auditor’s independence has always been an important public concern and a matter of many debates, especially because of the fiduciary role played by the auditors in modern society. Safeguards are identified and classified by the Financial Reporting Council, the Mauritius Institute of Professional Accountants and the National Committee on Corporate Governance to strengthen auditor independence. A recent report from the Institute of Internal Auditors – The Politics of Internal Auditing– reveals that internal audits are typically fraught with tension and that many auditors are working under inappropriate pressure. The aim of this study is to provide data viewed from a local perspective by taking into account the Mauritian’s framework, as well as institutions, which provides the training to equip people with the required professional and ethical conducts required as an auditor, so as to safeguard auditor independence. Gupta (1999) and Okolie (2007) also agree that one of the most effective safeguards is the rotation of auditors. When organization decided layoff. A lot of issues were identified, thus why this literature review is spread into two dynamics outlining the threats of auditor independence and highlighting the solutions. Sutton and T.D. If an auditor is exposed to a certain threat, he or she should either develop safeguards to reduce the threat to an acceptable level or resign from the audit engagement. Threats to Independence The threats to audit independence arises from the following sources : Self-interest threats occur when the financial interest of the auditor and his relatives are involved. Concerns are shown towards both the competence (discovering a problem or making a correct judgment) and the independence (disclosure of the problem by the auditor) of the accounting firm (Duff, 2004). These incentives also arise when auditors audit their own work, including financial statements they prepared, valuations they recommended for financial statement items such as in-process research and development, outsourced internal audit services they did, and management decisions they advised on. Various authors have looked at the issue from different angles depending on what they perceive as major influence on the independence of auditors. Monitoring and penalizing independent auditors behavior reduce the frequency of independence violations when the probability of losing a client is small, but the frequency of violations is not reduced when the probability of the loss of a client is high. •To recognize that previous academic studies have influenced profession in the preparation of ethical guidance. This result is independent of whether the independent auditors’ behavior is monitored. The International Federation of Accountants (IFAC) (2012) reveals five threats to auditor independence: self-interest, self-review, advocacy, familiarity, and intimidation. Complimenting FedEx for its HR procedures, Work Force magazine created, 2001. Auditors have the main aim to assure the trust of the public. Unfortunately there is no easy way to establish real auditor independence (Wyman 2004). The answer is a resounding 'yes'. Get Your Custom Essay on Auditor's Independence Case Study Just from $13,9/Page. Moizer (1997) identifies two types of ethical reasoning: consequentialism, whereby actions are judged in terms of their consequences (to self or others); and. D , 2006) Meaning that the conflict arises as auditors are hired and paid by the companies they audit which was stressed in (Mautz R.K, 1961), similarly (Mayhew & Pike, 2004) views this as a conflict of interest which is a threat. A number of proposals have been put forward to safeguard auditors’ independence and empower them to withstand pressures to compromise. The reliability and validity of an opinion rely on the independence of the auditor. Or maybe, business visionaries require results from systems administration that have an immediate and positive effect on their organizations. There is familiarity threat if the auditor has a close relationship to or too familiar … An auditor is a qualified person who carries out the audit assignment and reports on the ‘true and fair view’ of the client entity’s financial statements so that the users of financial statements can rely on the reliability and credibility of the financial statements. Impression management 5-6 As such, it relieves the Board from detailed involvement in the review of result of audit activities. Or that different generations often have different tastes than their education. D , 2006) Also states that Professional scepticism. • Threats to Professional Standards: Auditors may fail to gathers sufficient audit evidence to form an audit opinion and become biased and work in his own best interest, because the auditor is not independent, which makes them fail to execute professional requirements. The Mauritius Financial Reporting Act 2004 states: "independence" means independence of mind and independence in appearance. Although the author tries to states some convincing facts about procrastination but he stated many false assumptions, week evidence and logical fallacies which weaken his article. • Commitment of the workers Many would disagree and argue that it is a partial view of human nature. 1980) "A number of articles have been written about crisis management issues by researches and practitioners in diverse type of developments and environments which make it difficult to understand and becomes an objective to the public". While auditor at post-conventional level judgment will not be affected by nature or severity of sanction. Introduction 2 However, that mandatory rotation is primarily a safeguard of the appearance of independence. 2000). The quality of auditor judgments has been found to be adversely impacted by the perceived risk of client loss (e.g., Farmer et al. Competition [11] has been identified as an external factor affecting auditor independence (Shockley 1981). This research enables us to investigate the relationship between independence and audit risk as well as ethical cognition and auditor independence and the role of the regulatory framework in influencing individual auditors as well as safeguard the trust of the public. An individual’s attitude toward sanctions, which varies across individuals, may affect judgments when sanctions are present. However, if all the auditors were truly independent the subject would not find such a prominent place in the code of conduct of every professional institute of the world. Part 1: This assignment examines whether an appropriate accounting framework and ethical code of professional conduct effectively enhances auditor independence. Part 2: The impact of both auditor independence and audit risk on the main elements related to an audit work; audit quality, audit failure, earning management and the audit process, to ensure confidence for the public interest. Mautz and Sharaf (1961, pp. . It effectively links supply chain partners to achieve breakthrough performance in satisfying end-customer needs and provide feedback regarding customers’ needs and the supply chain’s capabilities (Wisner, Tan & Leong, 2008).Indicators of supply chain performance have an important role to play in setting objectives, evaluating performance, and determining future courses of actions (Lee, Kwon & Severance, 2007). Are those in which there is no easy way to establish real independence! Of their actions -to determine the factors associated with the client can easily acquire services of another auditor with. Of non-audit poses a threat to audit independence and logical sentence in his article is unlikely incentives. 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