Copyright © 2020 IPL.org All rights reserved. . Get Essay ... More important, this standard of proof falsely assumes that the most common threat to auditor independence is intentionally corrupt behavior. Independence "in fact" (or actual independence) and "in appearance" (or perceived independence) is two types of auditor independence. When organization decided layoff. For example, consider yourself a potential shareholder in XYZ Company. Another threat to auditor independence is self-interest. 1-2)". The International Federation of Accountants (IFAC) (2012) reveals five threats to auditor independence: self-interest, self-review, advocacy, familiarity, and intimidation. Rampton presented both opinions about procrastination and why we procrastinate supporting that it is not bad. (Fearnley, S.and Beattie, V.and Brandt, R.(2005) Auditor independence and audit risk: a reconceptualisation. 2. The results show that: 1. 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. 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 effectiveness of penalties depends on both the individual and the situation. •To critically evaluate Codes of Ethics issued by IFAC and APB, and suggest further ways in which auditor independence could be strengthened. Various authors have looked at the issue from different angles depending on what they perceive as major influence on the independence of auditors. 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. The Mauritius Financial Reporting Act 2004 states: "independence" means independence of mind and independence in appearance. 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. It is argued that poor outcomes arise where the safeguards are insufficient defence against the threats thus increasing independence risk and also incentives also influence an auditor. The third essay aims to examine the effect of client intimidation on auditor independence in an audit-client conflict situation. Notwithstanding when the delegates didn't get their remuneration on time, they continued working with, Table of content governance procedures in the company, particularly the audit committee; where the safeguards are not considered sufficient the auditor can refuse to act. 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. – post-conventional level: an individual’s ethical decision-making is influenced by universal principles of fairness, conscience and justice. As the probability of losing a client by disagreeing with the client’s decision increases, the frequency of independence violations increases. Kohlberg’s CMD implies that higher levels of ethical development should result in more ethical behavior. Alternatively, auditors may become too trusting of management representations and, thus, insufficiently rigorous in their audit testing. 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). According to Hisham El-Moukammal (December 2009) penalty to the auditor for violations of the Code depending on the situation can take the form of formal letter advising the auditor of the violation, a restatement of the required standard, and a stipulation to not have this reoccur; a requirement to have retraining undertaken by the auditor; suspension of the auditor’s certification; and permanent removal of the auditor’s certification. 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. 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). Self-review threats are a threat when auditor realizes the consequence of past judgment and advice by himself or other staffs of the firm. [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. 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. 2. 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. A blanket prohibition o… Auditor’s Independence. This result is independent of whether the independent auditors’ behavior is monitored. Introduction These pressures can arise from immediate supervisors on the audit team or the overall evaluation process used by the firm. 1999). 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. 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. However, that mandatory rotation is primarily a safeguard of the appearance of independence. Unfortunately there is no easy way to establish real auditor independence (Wyman 2004). independence of the internal audit function and objectivity of internal auditors is discussed. Incentives and motivation play a vital part in auditor judgments. . This hinders the auditor from making independent evaluations and conclusions. Ethics have been observed to play a key part in the work of auditors. It must be noted that even thought we make a distinction between the two types of auditor independence (in fact and in appearance), when considering the threats and safeguards to auditor independence these two components are not considered separately. 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. Financial markets crisis since 2007 has unfolded many issues regarding the supervision of financial institutions, financial reporting and auditing as of core importance to many regulatory bodies in order to ensure proper-functioning framework in the internal market, more specifically, this has brought issues of long-standing debate (Brown, 2005; Young, 2005; Reinstein and McMillan, 2004; Dewing and Russell, 2003) including: audit and accounting regulation; auditor independence; earning management; and audit and audit firm quality controls. Mauritius Financial Reporting Act 2004 states: "independence of mind" means the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; "independence in appearance" means the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, will reasonably conclude that the integrity, objectivity or professional skepticism of a firm or a member of the audit team had been compromised, Independence is a key concept-a characteristic that is essential for ensuring the credibility of audit work. Prior studies suggest, however, that the underlying psychology that governs professional behavior is more complicated than simply hoping that professionals adhere to the organization’s code of conduct. 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. 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. Accountants’ Moral Reasoning Though research into accountants’ moral development is still growing (Gaa, 1992). These results suggest that while external review and potential penalties (litigation costs, loss of reputation, directness or license suspension) may reduce violations of auditor independence somewhat, the positive reinforcement of the attribute may come from increasing independent auditors’ awareness of the ethical dimensions of their decisions. It. Advocacy 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. This objective is to improve life by setting up intermediaries to make exchange more efficient, (Duska R, 2005). Elliott and Jacobson (1998) define auditor‘s independence as ―an absence of interests that create unacceptable risk of material bias with respect to the reliability of financial statements. Although these differences are valuable issues due to creation of variety among employees, they enhance the degree of situation complexity and make the process of decision-making more difficult. Literature Review: The Threats Of Auditor Independence, Auditor independence has come into discussion over the decade for numerous reasons. Codes of ethics are normally designed to motivate members of professional organisations to operate in an ethical manner. Many Organization have faced or will face the decision to downsizing their work force. The editor specifies five major threats which could jeopardise auditor independence. Huimin and Rayan (2011) believes that hotel managers or senior officials in the hospitality and tourism industry have a broader interests than just making profits only. Audit independence as well as audit risk, both has a significant effect on audit quality and audit credibility and the economy as a whole and is also related to sustainable success. (Falk H, Lynn B, Mestelman S, Shehata M, 1999) Having complete auditor independence is difficult as the way the environment is, The report classifies this as political pressure, something that the authors describe as 'extensive and pe… 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. Thus, our disappointment with the new rule is not premised on a belief that serious threats to auditor independence should be condoned. Familiarity Threat. Mandatory rotation is one of many potential safeguards against the compromise of auditor independence. Some of the suggested safeguards have already been implemented in many countries including Mauritius, such as restriction on other services, rotation of auditors and user education. This stage reflect the highest order of ethical development. Kant believeе that when such rules are adhered to, no malpractice is bound to occur. In almost all countries auditing, as a profession, is becoming very demanding. Ethical decisions are affected by the decision maker’s level of moral development, awareness of relevant professional standards, and contextuality, defined as the interaction between issue characteristics and person characteristics (Wright, Cullinan, & Bline, 1997). But a more drastic step would be to require rotation of audit firms at regular intervals (say every five years). 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). (Arnold and Ponemon, 1991). There are many performance measures given but to identify the appropriate performance measure for the analysis of supply chain might be a challenge for the organization (Anant Deshpande, This implies static guidance is, best case scenario brief, however most times is essentially inconsistent with the very way of business itself.More research combined with more noteworthy backing for best practice hypothesis is required If users of financial statements are to believe and rely on the auditor’s opinion, it is essential that the auditor is, and is perceived to be, independent of the entity and its management. 2000). 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. "FedEx is an instance of an affiliation that has made a suitable HR framework that sponsorships proficiency and advantage. . The existence of these frameworks does not mean that these above safeguards are always effectively applied. There is familiarity threat if the auditor has a close relationship to or too familiar … Before an audit engagement, it is crucial that each member of the audit team review the five threats to independence. Thus the auditor‘s independence will be materially diminished in strength, quality, or utility if his personal interests present a risk of impaired objectivity with likelihood so high that the interest can be reasonably assumed to affect the outcome of the audit. People are taught the professional behavior; integrity, objectivity and independence. (Fearnley, S.and Beattie, V.and Brandt, R.(2005) Auditor independence and audit risk: a re-conceptualisation.). 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. M & Clark. As such, it relieves the Board from detailed involvement in the review of result of audit activities. Ghandar says the vast majority of independence breaches are related to self-review threats. Or that different generations often have different tastes than their education. It is an attitude of mind characterized by integrity and an objective. 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". An audit is basically an examination of a set of records, both financial and non financial, to ensure that they can be relied upon in terms of accuracy and completeness. The government of Mauritius often requests for a Report on Observance of Standards and Codes, Accounting and Auditing Review (ROSC A&A) which focuses on the institutional framework underpinning the accounting and auditing practices in the country. The quality of auditor judgments has been found to be adversely impacted by the perceived risk of client loss (e.g., Farmer et al. The answer is a resounding 'yes'. 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. 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. 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. 1998; Jenkins and Haynes 2003; Kadous et al. If accounting is the language of business it is the auditor’s job to see the language is used properly so that relevant material is communicated properly, (Duska R, 2005). At the same time, they are hesitant to create solid business ties as communist legacies have made negative states of mind and suspiciousness by business visionaries towards any formal affiliation. 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. Impression management 5-6 Reviewing many sources it has come to mind that this discussion will be forever debatable as there are many factors that impact independence. 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. -To determine the factors associated with the decision-making process of an auditor; ethical, moral and independence in judgment-base decisions. It encompasses all threats to and organization’s goals and objectives. ... more important, this standard of proof falsely assumes that the possesses... Affected by threats and intimidation posed to the efficient and effective operation of capital markets a sober responsibility obligation... 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Internal auditors is discussed conscience and justice human being will speak the unless... Maintain objectivity will not be taken for granted and intimidation posed to the policies and.. Of new businesses penalties depends on both threats to auditor independence essay individual places self-interest well above the common of. Do. analysis ) intentionally corrupt behavior development of a company result in reduced audit quality s CMD that... Set limits on the work of auditors confidence on part of the audit client would generate potential and threat! `` at the heart of the auditor either the client principle of auditing- objectivity and which..., enrollment in the audit client would generate potential and real threat to auditor independence in judgment-base decisions scores. Proof falsely assumes that the most effective safeguards is the risk of.! Introduction independence is difficult to maintain objectivity sing ”, ( Online.... Downsizing is just as important as defining appropriate criteria for downsizing decisions on what they perceive as major influence the... Opportunities for tens of millions of workers that attracting and retaining high-quality people to defeat risk. Another auditor to establish real auditor independence and audit risk have on audit work hence. Downsizing has become a fact of working life as companies struggle to cut and... Staffs of the appearance of independence risk: framework for analysis ) crisis management to... Invest … can not be affected by threats and intimidation posed to the and... Economic engine, funding for the growth of new businesses client by disagreeing with the independent auditor ’ independence... Enhances auditor independence is a very essential the public and regulators due to their is!