It is the aim of public audit to better the true and just representation of fiscal studies by supplying sensible confidence from an independent beginning. However, if public hearers are influenced by parties with related involvements, users of the audit study will non believe the credibleness of fiscal statements be met that the hearer may hold been influenced by other parties. Therefore, whether the external hearers of listed companies are sufficiently independent to function the public involvement is considered as a most of import issue of public audit. Since 2000, the current international regulative environment for the scrutinizing profession was focused on by the populace because of the loss of trust in public audit from a moving ridge of accounting dirts ( Lindberg & A ; Becki??2004 ) .
Concept model of Audit Independence
Because fiscal studies have of import economic effects for the users, how to stand for fiscal place and operational public presentation is important to different parties. If there is no audit independency, the involvements of the public audit can be impaired by some parties for improper intents. Therefore, all regulative organisations all make great attempts to revise the construct of audit independency to better regulative environment.
How to specify independency is different in current audit criterions. In APB Ethical Standard 1 revised in 2008, independency is freedom from state of affairss and relationships which make it likely that a sensible and informed 3rd party would reason that objectiveness either is impaired or could be impaired ( APB Ethical Standard 1, 2008 ) . In Code of Ethics for Professional Accountants revised by IFAC in 2009, independency is classified in independency of head and independency in visual aspect. Independence of head is the province of head that permits the look of a decision without being affected by influences ( Code of Ethics for Professional Accountants, 2009 ) . Independence in visual aspect is the turning away of facts and fortunes that are so important that a sensible and informed 3rd party would be probably to reason that objectiveness or professional agnosticism has been compromised ( Code of Ethics for Professional Accountants, 2009 ) . Mautz, R.K. & A ; Sharaf, H.A. ( 1961 ) classified independency into programming independency, fact-finding independency and describing independency.
Obviously, there are no important differences in the above definitions, since their accent all are placed on the freedom of public audit from the influence of related parties. But the definition by IFAC has more operability. It provides hearers with AIDSs in how to protect and heighten their independency.
International Regulation of Non-Audit Services
In pattern, hearers provide clients with non merely audit service but besides non-audit service. Non-audit service can bring forth benefit to both clients and hearers ( Verrecchia, 2001 ) . Based on audit cogent evidence and audit decision, the non-audit service by hearers can be more efficient and effectual than other concern advisers. However, non-audit service besides will impair the objectiveness and independency of hearers.
Fear of loss of non-audit service from the entities audited, hearers will carry on improper audit procedure and fix unreasonable audit study under the imperativeness of the entities audited. For illustration, in the accounting dirt of Enron, audit company Arthur Andersen had to supply false audit study so as to profit from non-audit service for Enron. When there are tonss of non-audit services, it is possible for hearers non to keep sensible independency and cautiousness. And the populace will lose the trust in the credibleness of audit study in visible radiation of the stopping point relationship between hearers and entities audited ( Palmrose, 1986 ) .
Therefore, how to safeguard hearer independency from non-audit service is critical to hearers. Otherwise, the credibleness of independent audit and the public involvements will be destroyed by non-audit service.
In professional ethical codifications, the related issues are discussed. Harmonizing to Ethical Standard 5 revised in 2008, hearers with non-audit service for entities audited should identification and appraisal of menaces for audit independency and set up operable precautions. And they should pass on the above events with those charged with administration. All these behaviors and paperss should be recorded for of import cogent evidence. In Ethical Standard 5, non-audit services comprise any battle other than the audit of fiscal statements and the pursuant to those other functions which statute law or ordinance specify can be performed by the hearer of the entity. Non-audit service normally includes Internal audit services, information engineering services, rating services, actuarial rating services, revenue enhancement services, judicial proceeding support services, legal services, enlisting and wage services, corporate finance services, dealing related services and so on.
Although the independency from non-audit service is n’t discussed in Code of Ethics for Professional Accountants revised by IFAC, the conceptual model attack to independence can be applied to protect independency damage from non-audit service. For illustration, place menaces to independence, measure the significance of the menaces identified and use precautions when necessary.
The chief four accounting house in USA have ever stated that non-audit services do harm to the hearer independency. After the Enron dirt and Xerox finance rip offing happeningi??SOX 2002 requires that they would ne’er supply their clients with information techniques confer withing and internal control services. In add-on, SOX 2002 established the Public Company Accounting Oversight Board ( PCAOB ) , appointed & A ; overseen by the Securities Exchange Commission ( SEC ) . The PCAOB now has the duty for inadvertence of the hearers of public companies in the USA including set uping auditing and quality control criterions and executing reviews of quality controls at audit houses.
International Regulation of Mandatory Auditors Rotation
Except for the supervising over non-audit service, about regulative organisations focus on compulsory hearer rotary motion. In other word, audit term of office should be limited.
Advocates of compulsory rotary motion of hearers argue that it helps better the due independency of hearers. Mautz and Sharaf ( 1961 ) suggest that longer hearer term of office can ensue into a higher chance of set uping close relationship with the client so that the audit independency can be impaired. Davis et ali?Z ( 2002 ) reveal that the hearer term of office is positively related with the absolute value of discretional accumulations. Chi and Huang ( 2005 ) usage discretional accumulations to mensurate audit quality and see the term of office of both audit houses and their spouses. They find that in Taiwani??as hearer term of office increasesi??auditors become more familiar with the clients ‘ businessi?ZHowever, inordinate acquaintance may 1ead to a diminution of audit quality.
After the fiscal dirts of Enron and WorldCom, the US promulgated the Sarbanes-0xley Act of 2002 ( known as SOX ) . Section 203i??Chapter 2 of SOX requires the compulsory rotary motion of hearers. In Australia, the basic regulation is that the lead and reappraisal hearers must revolve after five consecutive old ages and besides may non scrutinize a peculiar audit client for more than five out of seven consecutive fiscal old ages. Canada, the UK and the SEC Rules require rotary motion after five consecutive old ages. The EU Recommendation requires rotary motion after seven old ages. However, the demands in Australia, Canada, the UK and the SEC merely apply to listed companies. There is a argument over whether the hearer prosecuting a house can be forced to replace on a regular footing.
International Regulation of Audit fee
When an hearer obtains a high proportion of gross from a peculiar client, this creates economic bonds between the hearer and client, and makes the hearer be financially reliant on the client. this can do the hearer to lose objectiveness ( DeAngelo 1981 ) . Some research suggests the same result but the mechanism by which the hearer loses objectiveness with fee dependance is said to be unconscious ( Kunda, 1990 ) . When fee dependance is low, as auditor term of office additions, audit quality additions with hearers ‘ term of office but is more likely. When fee dependance is high, as auditor term of office additions, audit quality decreases with hearers ‘ term of office.
AICPA point out it necessary that in differing with direction, hearers would no longer be put on the lining a watercourse of grosss that they believed would go on in ‘perpetuity, ‘ since the audit battle would no longer be perceived as lasting ” ( Commission on Public Trust and Private Enterprise 2005, p. 39 ) . Although other international regulative organisations ignore the issue, audit fee, which is related with audit independency, will be placed more accent in the hereafter.
To do hearers move for the public involvements, international regulative organisations make great attempts to better audit independency. In current international regulative environment, international regulative regulations, such as the SOA, province that some non-audit service for audited entities, which are easy to take to independence are explicitly prohibited when hearers executing an independent audit of a public company. Audited account houses are encouraged to split their concern units into the confer withing units and the audit units. Audit units provide confidence service. And confer withing units are independent of audit units and supply non-audit service. The compulsory rotary motion of hearers is adopted by many regulative organisations to better audit quality. Additions, some organisations, such as AICPA, even concentrate on the ordinance of audit fee.
The findings provide utile penetrations to the international regulative environment. However, whether the current international regulative environment for the auditing profession is robust plenty to guarantee audit quality has to be tested by tonss empirical probes.