The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner.The Need For Auditor Independence The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. Doubts are sometimes expressed regarding the independence of external auditors. It can be argued that unless suitable corporate governance measures are in place, a firm of auditors may reach audit opinions and judgments that are heavily influenced by the wish to maintain good relations with the a client company. If this happens, the auditors can no longer be said to be independent and the shareholders cannot rely on their opinion. Accounting firms sometimes engage set audit fees at less than the market rate and make up for the deficit by providing non-audit services, such as management consultancy and tax advice. As a result, some audit firms have commercial interests to protect too. This raises concerns that the auditor's interests to protect shareholders of a company and his commercial interests may conflict with each other. A high profile example would be the relationship between Enron and their auditors, Arthur Andersen. In 2000, Andersen received $27m for non-audit services, compared with $25m for audit services, meaning Enron accounted for over 25% of the fees generated by the firm’s Houston office. In the aftermath of Enron’s demise, the accounting firm was accused of not acting independently and suggestions were made that they had gone along with the accounting practices in Enron in order to retain their work. Related: How To Appoint An Auditor To A UK Limited Company Threats To Auditor Independence The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of non-audit services:-
Related: Risk Management – Ensure The Organisation
Benefits The need for independence arises because in many cases users of financial statements and other third parties do not have sufficient information or knowledge to understand what is contained in a company’s annual accounts. Thus, they rely on the auditor’s independent assessment. Public confidence in financial markets and the conduct of public interest entities relies partly on the credibility of
the opinions and reports given by auditors in relation with financial
audits. Why is it important for an accountant to be independent?Auditor independence is part of the foundation of the auditing profession. An independent, reliable, and ethically sound audit gives a company credibility and allows the public to trust in the accuracy of the results and the integrity of the accounting profession.
What is the meaning of independent when referring to an auditor?Independent auditors are certified public or chartered accountants who examine the financial records of companies and are not affiliated with the companies being audited.
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