Auditand Assurance Individual Essay
Thispaper seeks to discuss the possible problems and challenges companiesencounter when they retain auditors for long periods of time, forinstance, how the auditors guarantee independence in their auditingprocess. The paper discusses the possible solutions that addressthese challenges witnessed by several firms and companies. Furtherthrough research the paper brings an in depth findings on theexpected advantages and disadvantages of the solutions proposed toaddress these problems when the same auditors conducts auditingprocess for the same firms or companies for a duration of not lessthan 10 years.
Auditorsare the internal or external independent bodies tasked with theresponsibility of examining the legitimacy of financial operationsand activities of an individual’s or organization’s accounts(Corpgov.law.harvard.edu, 2015). It entails an independent andorganized assessment of accounts, books, vouchers, and documents offirms in an attempt to examine the extent to which the financialstatements offers a true and unbiased view of the concern as requiredby law (Corpgov.law.harvard.edu, 2015) . For an effective auditingprocess auditors are required to exhibit a high level of independencefrom the firms that may have a financial interest in the businessbeing examined (Corpgov.law.harvard.edu, 2015).
Long-termrelationship between companies and their auditors has been observedto generate a high level of closeness that reduces auditorindependence and impairs audit quality (zlmedia, 2005). These majorfinancial failures by auditing firms led to the creation of thePublic Company Accounting Oversight Board (PCAOB) to facilitate theimprovement of audit committee responsibilities, mandatory rotationof reviewing and lead audit partners after the end of every fiveconsecutiveyears.
Inorder for companies to enhance the credibility of financialstatements, an independent audit firm is needed to provide reasonableexamination that is true and fair in line with the accountingstandard (Du and Roohani, 2007). The main goal of auditing process isunsatisfactory when the users of audit report perceive the auditormay have been influenced by other parties, particularly the companydirectors or managers. Therefore, audit independence is the essentialcornerstone of the auditing profession as it enhances public trust inthe profession of accounting (Du and Roohani, 2007).
Butover the years since the beginning of the twenty first century, anumber of major financial scandals have occurred putting the auditorsin the limelight this has negatively affected the auditorindependence as perceived by the public (Earley, 2015). The long termpersonal and professional relationship of the companies and theirauditors significantly affects the auditors’ independence in threemain ways, that is, the auditors programming independence,investigative independence and reporting independence. Programmingindependence enhance the ability of auditors to choose appropriatestrategy to carry out the auditing process (Wang and Lian, 2010).
Thisindependence may be affected when the company being audited restrictthe auditors to use the same auditing strategy even though newtechniques are developed that requires an upgraded auditingstrategy(Earley, 2015) . The investigative independence confers theauditors with ability to implement the strategies in the mostappropriate manner by having unlimited access to all the companyinformation (Earley, 2015). This independence may be compromised ifthe company does not answer the all question desired by the auditor.Lastly reporting independence grant the auditor’s with the abilityto disclose any information to the public they believe it needs to berevealed. At many instances, most directors of companies strive toprevent the disclosure of this information if they have been involvedin misleading the shareholders by giving false accounting information(Nuijten, van Twist and van der Steen, 2015).
Becausethe auditors are attached to the companies for a long time and earnstheir living from the fee they are paid, it follows that they wouldoperate in a manner not to interrupt this income. The reliance on thefees from clients significantly affects the independence of theauditors. Most commentators’, politicians and interested partiesbelieve that long term auditors to any company perceive that theclient income is more important than their expected responsibility tothe shareholders this auditor perception coupled with their hugeregular income is more than likely to facilitate biased examinationand thus compromised their independence leading huge losses by theshareholders-who may be politician and other interested parties.
Inorder to address the resultant challenges of long-term professionalrelationship between firms and their auditors, mandatory audit firmrotation after a given period of time need to be effected bydifferent companies. The audit firm rotation proves to be aneffective means to break the auditors’ closeness with themanagement. Since the nature of auditing process requires auditors tointeract closely with their clients, it follows therefore that thislong-term relationship may bring about a compromise in auditorindependence. This long-term relationship may lead to auditors beingallocated permanent office space. This means that when any issuearises, conflict of interest may be initiated for the auditor henceit will significantly affect the audit process. Audit firm rotationshelp breaks this rotation and fosters auditors’ independence(Bobek, Daugherty and Radtke, 2012).
Onthe contrary audit firm rotation may not be the best solution becauseall the auditors whether newly appointed or long-term must interactclosely with the management daily during the process of undertakingauditing (Bobek, Daugherty and Radtke, 2012). The relationship willinevitably be established regardless of the duration of the auditingfirm with their client (Bobek, Daugherty and Radtke, 2012).
Theaudit firm rotation helps firms check any resultant staleness andredundancy of auditing firms which negatively affects itsindependence (Bobek, Daugherty and Radtke, 2012). This conditionarise due to auditors’ view that the auditing process is only asimple repetition of the earlier engagements and only anticipateresults instead of keeping alert to subtle but essential changeswithin the company (Bobek, Daugherty and Radtke, 2012).The longterm auditors rely on work papers of the previous years to setbudget, make audit plan and give important information required forthe current-year audit (Bobek, Daugherty and Radtke, 2012).
Thoughaudit firm rotation solve the problem of staleness and redundancy,long-term auditors using previous years auditing provides importantbenefits that serves to increase the effectiveness of the auditingprocess (Nuijten, van Twist and van der Steen, 2015). The establishedawareness and familiarity developed by the auditor with the companygives a better understanding of company’s critical issues and henceleverage a better appreciation for the variation witnessed from oneyear to another.
Owingto the complexity in structure of current corporations, means that itis a challenge for an auditor to fully understand the businessstructure of a given company within a short duration (Nuijten, vanTwist and van der Steen, 2015). As a matter of fact, it has beenobserved that high rates of audit failures are witnessed when theauditors are new since they have not yet established theinstitutional understanding required for a comprehensive audit(Nuijten, van Twist and van der Steen, 2015). In addition, a regularauditor does not begin everything from scratch and thereforeguarantee less interruption to normal business when compared to newauditors (Nuijten, van Twist and van der Steen, 2015).
Theaudit firm rotation discourages the eagerness of auditors to pleasetheir clients owing to establishment of long-term future audit feeshence they perform auditing to please clients so as to be retained(Nuijten, van Twist and van der Steen, 2015). This is the main reasonwhy audit firm rotation was established. When the auditors have shortterm connection, they do not easily experience a conflict of interestand hence their operation becomes more free and independent. Theauditors will not be willing to make any negotiation with the firmfor any benefits since they understand that rotation happensregularly. Because another firm will be taking over after sometime,the auditors becomes more vigilant in their auditing process knowingthat any lapse will be detected by the new auditors (Wang and Lian,2010).
Thedisadvantage of audit firm rotation is that it does not fully preventauditors from pleasing their clients. This is because even thoughthey know mandatory firm rotation occurs, auditors still develops atendency to please their clients for the entire pre-establishedrotation period. In essence within the rotation period auditors stillhave time to make income.
Mandatorytendering is another way to solve compromise on audit independence.This set out the audit contract for auditors to tender at least 10years this is termed as a comply-or-explain basis. This persuadeaudit firms to upgrade audit quality as reappointment can never againbe assumed urge audit boards of trustees to evaluate auditorexecution in more prominent point of interest
contrastedwith required audit firm rotation, expand straightforwardness aroundaudit board choices on review arrangements give a situation thatlessens the institutional familiarity danger to auditor autonomy,along these lines enhancing auditor doubt and review quality and
Buildcompetition in the audit market and open up open doors for littlerand mid-level
auditfirms to grow (Wang and Lian, 2010).
Mandatorycompromise audit review is another strategy used alternative tomandatory audit firm to address auditors’ independence (Wang andLian, 2010). The practice of mandatory comprehensive firm surveyputs an onus on the audit advisory group to consider, and writeabout, the auditor`s independence in both personality and appearance,and in addition the utilization of expert judgment and auditorincredulity.
Itis apparent from the discussion that the auditors’ independence issignificantly compromised under different circumstance. Long-termpersonal and professional relationship between firms and theirauditors brings about familiarity and closeness. This ultimatelyleads to auditors pleasing their clients and disregarding theshareholders’ (commentators, politicians and interested parties)interests in the auditing process. In essence this has been a leadingcause of scandals witnessed in several firms globally. The mostappropriate way to deal with these challenges is the implementationof mandatory audit firm rotation, which has gone a long way to checkthe compromise of auditors’ independence. On the contrary, thereare numbers of downsides regarding these proposed solutions andtherefore more research need to be done to ascertain the bestpossible solution.
Bobek,D., Daugherty, B. and Radtke, R. (2012). Resolving Audit EngagementChallenges through Communication. AUDITING: A Journal of Practice &Theory, 31(4), pp.21-45.
Corpgov.law.harvard.edu,(2015). Proposals for Auditor Independence and Audit Firm Rotation.[online] Available at:http://corpgov.law.harvard.edu/2012/04/21/proposals-for-auditor-independence-and-audit-firm-rotation/[Accessed 17 Oct. 2015].
Du,H. and Roohani, S. (2007). Meeting Challenges and Expectations ofContinuous Auditing in the Context of Independent Audits of FinancialStatements. Int J Auditing, 11(2), pp.133-146.
Earley,C. (2015). Data analytics in auditing: Opportunities and challenges.Business Horizons, 58(5), pp.493-500.
Nuijten,A., van Twist, M. and van der Steen, M. (2015). Auditing InteractiveComplexity: Challenges for the Internal Audit Profession.International Journal of Auditing, p.n/a-n/a.
Wang,L. and Lian, C. (2010). Probe into the Auditing Solutions for MajorMisstatement Risk. Asian Social Science, 6(8).
zlmedia,(2005). Audit Firm Rotation and Audit Quality. [online] Available at:https://zlmedia.wordpress.com/2005/01/30/audit-firm-rotation/[Accessed 17 Oct. 2015].