Auditor independence is a crucial determinant in the delivery of audit quality. A key aspect of auditor independence is ensuring that other services provided to an audit client do not impair the auditor's objectivity. Without independence, the value of the auditor's attestation function would be decrease in the eyes of a third party that relies on the auditor's communication. Independencerequires objectivity and freedom from bias. And the auditor must favor neither the client nor third parties in gathering evidence and valuation the fairness of financial statements.
Threats to independence are explained in the new Professional Statement F1, which is the standard agreed in November 2001 by representatives of the 120 nations who make up the International Federation of Accountants (IFAC), as:
* Self-interest threats, the possibility that the firm or individuals within it could benefit from a financial interest in the client
* Self-review threats, the possibility that the firm or individuals within it would have to re-evaluate their own work to form a judgment
* Advocacy threats, situations where the firm or individuals within it could promote the audit client's point of view in a manner which compromises objectivity
* Familiarity threats, the possibility that the firm or individuals within it have become too sympathetic to the audit client's interests
* Intimidation threats, the possibility that the firm or individuals within it may be deterred from acting objectively by actual or perceived threats from the audit client
Safeguards fall into three broad categories. For an auditor, these are:
* Safeguards created by the profession, legislation or regulation, such as education, professional standards, monitoring and disciplinary processes and inspections and review
* Safeguards within the audit client, including competent employees and robust corporate governance structures
* Safeguards within the audit firm, including policies and procedures to implement and monitor independence and quality control
The principles and rules set out in the new Professional Statement F1 allow an auditor, and others, to evaluate any circumstance, including those currently unforeseen, and to determine procedures and actions necessary to avoid or resolve those circumstances that pose threats or risks to objectivity.0
Australia has been one of the leaders in requiring full disclosure of financial information and insisting that information be independent verified. The current regulatory environment for the independence of auditors can be described as co-regulatory. For instance, the professional accounting bodies play a major role through their professional requirements and codes of ethics; the ASIC(Australian Securities & Investments Commission) plays a role in ensuring that auditors of Australian companies remain independent by enforcing those provisions of the Corporations Act (notably section 324) which deal with the independence of auditors; and CALDB(Companies Auditors and Liquidators Disciplinary Board) also play a role in the independence of auditors as this body deals with disciplinary matters concerning auditors.
Among these regulatory for auditor independence, the CLERP 9 Act and Code of Professional Conduct are 2 significant rules which I have to mention.
CLERP 9 paper established a vision for promoting transparency, accountability and shareholder rights. Under CLERP 9 standards for auditor independence, it states that independence will be
a) A "conflict of interest situation" exists in relation to the audit client at a particular time;
b) the auditor is aware that the situation exists, and
c) the auditor does not ensure that the conflict of interest situation ceases to exist.
CLERP 9 also prohibits nine specific employment relationships and ten specific financial relationships between client and an audit firm or a member of the audit firm.
Besides CLERP 9, in Code of Professional Conduct, it requires that auditors need independence of mind and in appearance. This means that auditor has "state their opinion without being affected by the influence of companies' professional judgment, allow an individual to act with integrity and exercise objectively professional skepticism." They also need to inform the outside parties with all relevant information, including safeguards applied, with all the professional skepticism had been compromised.
On the view of regulation in Australia, it seems very sound because of specific requirements for the auditor, but in the daily practice, there still has some problems occurred. Recent Australian Corporate collapses (such as HIH Insurance Ltd, One Tel Ltd and Ansett) have tested the co-regulatory regime.
For example, on 15 March 2001 the major companies in the HIH Insurance group were placed in provisional liquidation. One such matter in the case of HIH, the relationship between Andersen (the auditor of HIH) and HIH gave rise to a perception that Andersen was not independent of HIH. The circumstances give rise to that conclusion included:
- the presence of three former Andersen partners on the board of HIH
-HIH's dealings with the audit committee and non-executive directors, including the consequences of the meeting between Davies, Gooley, Head and Gardener in the absence of HIH management in March 1999
- pressure on Andersen partners to maximise fees from non-audit work, to the potential detriment of their professional obligations.
Therefore, Auditor independence has still been the subject of a considerable number of research papers and discussion documents which have produced many recommendations for improvement.
To sum up, independence is fundamental to the reliability of auditors' reports. To be credible, an auditor's opinion must be based on an objective and disinterested assessment of whether the financial statements are presented fairly in conformity with generally accepted accounting principles.
