The study analyses the factors affecting independence of external auditor. The aim of this study is therefore to identify the major factors and whether these factors enhance or impair auditor independence. Also, solutions to the problem of impairment of auditor independence will be recommended. A small, but carefully chosen sample of auditors and shareholders has been considered to provide their opinions and perceptions on this particular issue.
Data collection
The collection of data, namely primary and secondary is considered to be an important phase in the explanatory and descriptive nature of this research. In order to achieve the aims and objectives of this study both data have been collected, interpreted and will also be analysed to fit the context of the study.
Secondary data
Secondary data play an important role in a research methodology as they provide a basis for the starting point. These data have helped me not only to build up the Literature Review, but also in determining the objectives and importance of this study. They are the data collected and assembled from projects, archival records, and local surveys. Secondary data are not tailor- made; they have been subject to some adjustments for the purpose of this research. These secondary data include:
Journals
Online publications
Articles from the internet
Magazines and newsletter
Textbooks
Primary data
Primary data is usually collected through observations, formal interviews and questionnaires. To review existing literature addressing the issues of auditor independence (for example such articles as the Abu Bakar 2005, Watts and Zimmerman 1983, Gosh and Moon 2003), a survey was also conducted so as to collect the required data. Thus, for the purpose of this study, an original questionnaire (adapted from literature) was designed.
Population and Sample size
The population is simply all the members of the group that one is interested in and a sample is a sub set of the population that is usually chosen to access all members of the population is prohibitive in time and other resources. The sampling will be a judgemental probability sampling, that is, people only expert in the field are considered.
The subjects considered are auditors and stakeholders in Mauritius. Normally, a sample of 60 people most has been chosen from the population which is sub-divided in auditors and shareholders. 30 questionnaires will be distributed to auditors and the rest to shareholders.
Shareholders
Shareholders are selected because they are users of financial statements and aalso, shareholder involvement in auditor selection strengthens the power of the auditor in any negotiations with management and increases the 'pressure to perform better' on the auditor. Shareholders from any companies are likely to be considered provided that they have a good knowledge about financial statements and the duties of the auditor.
Auditors
Auditors are the one who will understand the importance of the independent audit function and ensure that organizations are maintaining accurate and honest financial records and statements. The Financial Reporting Council has approved a list of 192 licensed auditors and 92 firms.
For the study, auditors from different accounting and audit firms are considered where they will have to give their views. Companies such as the big 4 audit firms (KPMG, Ernst & Young, Price Water House Cooper and Deloitte), Moore Stephen, Crowe Howarth have been taken into consideration.
Questionnaire design
The questionnaire is designed in order to capture information and confirmations about issues which have been raised in the literature review and to bring empirical evidence as to the validity of these issues. Special attention was given to the choice of questionnaire format and the types and order of questions are designed in such a way so as to encourage as many respondents as possible. It has been prepared as short, simple and precise as possible in order to be effective and to ensure that it would take maximum 15 minutes to complete it. The questionnaires are distributed and collected personally.
Research questions:
Question 1: Do the accountants think that the six factors (i.e. audit firm size, competition level, tenure, size of audit fees, non audit services and audit committee) have any influence on an auditor's independence?
Question 2: Which of the six factors is the most important factor influencing auditor independence?
Question 3: What kinds of relationships (i.e. its direction) exist between the six factors and the auditor's independence?
The final questionnaire for this study contained a covering letter which states the title, the purpose and the objective of the study. The covering letter also assures the respondents that their responses will be kept to full confidentiality.
Question outlay
The questions are divided into four parts namely, Part A, B, C and D. Part A of the questionnaire consists of five dichotomous questions which should be answered with either 'Yes' or a 'No'. These questions are very direct to answer.
Question 1 is about the duties of auditor and the incentives for them to remain independent. In addition, questions 2 and 3 are related to the different factors related to auditor independence. For example, the questions are about the impact of non audit services on audit firm and whether these audit firms are able to maintained their objectivity and integrity through the provision of both audit and non audit services. There is also a question about audit committee whether it helps auditor to remain independent of management.
Part B of the questionnaire includes multiple choice questions which requires the participants to choose one or more (as specified in each question) appropriate answer in his or her opinion.
Question 4 is about the responsibility of for the preparation of financial statements and question 5 is about the main duties of an auditor and question 6 consists of the different members present in an audit committee.
Question 7 is about the provision of non-audit services to their audit client. This question aims to identify which non- audit service/s provided by audit firms to their audit client may act as an obstacle to preserve auditor's independence.
Question 8 is about audit fees, that is who can approve audit fees and finally question 9 is about the importance about the factors affecting auditor independence. The participants have to rank their answers according to the different choices provided.
Part C is an important part of the questionnaire and the questions are based on the likert scale. Scaling has been used where the respondents have to rate the level of agreement 7 questions set in this part. The respondents can indicate how strongly they agree or disagree with the statements on a five-point scale. Codes have been added to the response categories in order to facilitate the analysis of data by computer. The questions are based whether the different factors [1] may impair or enhance auditor independence.
Question 10 is about auditor who must draws conclusion in financial statements, question 11, captures the effect of non audit service fees and whether these fees make auditors financially dependent on their clients and thus they are less willing to stand up to management pressures.
Question 12, indicates whether auditor's independence will be impaired (weakened) if the audit firm provides non audit services to the audit client company.
Question 13, determines the effect of extensive competition within the audit market and whether this may impair auditor independence.
Question 14, is based on the existence of an audit committee in the audit client company and question 15 captures the effect of auditor tenure, that is the longer the duration an audit firm serves an audit client, the more likelihood the auditor's independence will be impaired.
Questions 16, 17 are related the size of audit firm. They analyses whether larger size of audit firms will enhance auditor's independence because smaller firms would experience more difficulty in resisting client pressures in situation of conflict and also whether large audit firms have better financial resources compare to small firms.
The final question is based on audit fees, that is, the greater the size of audit fees received by audit firm from the client company (in relation to the total % of audit revenue) tend to impair auditor's independence.
The final part of the questionnaire is about the participant's profile which aimed at getting the background of respondents. Therefore, this will help me to better classify the information and to improve the analysis process.
Limitations of the survey
The limitations of this study are partly related to the use of questionnaires as they involve low response rate also and the number of respondents. For such sensitive topics, participants may avoid from responding to the questionnaire honestly.
For stakeholders, this will be a limited sample as shareholders in general are not really accessible and the most difficult part has been, even if I have been able to meet them they have to be explained about the different parts of the questions. However, those shareholders who are experienced people and well versed with financial statements and the work of auditor they fill the questionnaire quite easily.
Time constraint
Due to time constraint, only 60 people were chosen for the survey and only 2 weeks allocated to them to return questionnaires. Yet, time allocated was not respected and some people, did not want to fill the questionnaires as they were busy and find it too time consuming to fill the questionnaires.
