The Importance Of Audit Independence For The Shareholders Accounting Essay

1. Introduction

As the development of the modern concern, audit is playing a more and more of import function to see the truth of the fiscal study and assist study users to do proper determinations. Consequently, it is really of import for hearers to stay independency in organic structure and head when carry oning an audit based on a populace limited company. To elaborate this subject clearly, the essay is divided into the undermentioned parts: First, it makes a literature reappraisal of audit independency and concluded the point of view into four classs ; secondly, it introduces the definition of audit independency in organic structure and head and stated the of import of both of them individually ; Finally, it analyzes why it is of import to stay audit independency from many angles such as stockholders, creditors, authorities, operators and other stakeholders.

2. Literature reappraisal

When it comes to the audit independency, many bookmans have conducted a systematic research in this subject. Some bookmans pointed out that hearer has two sorts of independence- organic structure and head, deficiency of the former 1 may agitate the populace ‘s assurance on independency and lead to involvement struggles, and deficiency of the latter one means hearers lose their professional moralss and this is really unsafe ( Carmichael & A ; Swieringa, 1968 ) . Salehi have emphasized that the basis for the auditing profession is audit independency. The hearer ‘s sentiment is fishy without independency and the 3rd parties think that there is no demand for external hearers without independency ( Salehi, 2009 ) .

Due to extremely publicized audit failures, the subject of hearer independency has gained increasing attending from faculty members, regulators, and practicians around the universe in recent old ages ( Hope & A ; Langli, 2008 ) . Under the background of many high profile companies fraud instances exposure such as Enron, Adelphia, WorldCom, the importance of audit independency to better corporate administration is acquiring more and more attending ( Rezaee. 2003 ) .

As the no-audit services has become a more and more of import moneymaking concern for CFA houses, audit independency is slightly influenced, which make it even more important to keep audit independency for hearers ( Gul, Tsui & A ; Dhaliwal, 2006 ) .

Besides, Bou-Raad G. emphasized the significance of audit importance from the value -added chance. Internal hearers are non merely a traditional audit for supervising but besides a valuable entree to helping directors to put to death the aims of the organisation. In other words, corporate direction benefits from audit quality ( Bou-Raad. 2000 ) .

From the literature above, the importance of audit independency can be categorized into four grounds: First, audit independency can keep the public assurance and avoid involvement struggles ; Second, audit independency can assist hearers to supply high quality fiscal study and avoid dirts like ‘Enron bomb ‘ ; Third, the development of no-audit services make it more hard but more of import to keep audit independency ; Lastly, audit independency can better the quality of audit and it can help directors to do scheme preparations.

3. The debut of audit independency in organic structure and head

When it comes to staying independency in organic structure, it can be besides called physical independency, external independency or surface independency. Hearers should take the function of independency hearers on forepart of the 3rd parties. And it is the direct grounds for the public judging the independency of hearers. Once report users think that hearers have some current or possible relationship that amendss the independency with the consignor such as employment, concern spouse, household or relations and so on, it will decidedly diminish the audit map as they likely do non depend on those studies so much ( Law, 2010 ) . Hearers should hold no specific relationships with entity, and they must n’t keep equity bets of the entity and should non be on the senior place of it. In order to avoid misinterpretation and heighten the trust, hearer must avoid or decrease this menace to a degree which is acceptable. Independence in head is difficult to better and the populace can merely deduce the independency of hearers from the organic structure like relationships with the entity and other stakeholders. Actually, even if hearers maintain independency in head, every bit long as the public think they take sides with the entity or any other parties, no affair how precise the audit consequence is it is useless.

As for staying independency in head, it demands that there is no interest between hearer and the consignor per se. In the whole auditing procedure, hearer should maintain an indifferent attitude that makes a professional determination and ne’er succumbs to any external force per unit area. It comes up with higher demand for hearers ‘ mentality. They are required to be impersonal, nonsubjective and fact-based.

Actually, those two constructs are different but integrative. They reflect both external and internal sides. Merely staying independency in organic structure and head can do certain the scrutinizing consequence persuasive. Besides, the map and value of carry oning audit can be realized.

4. The importance of staying audit independency

Stakeholders make economic system determinations by taking advantage of studies. Whether those studies are related and dependable are inquiries. Audited account can assist to work out this job. However, hearer fails to carry through the responsibility if they can non stay independency in the conducting procedure. On one manus, study users will doubt this sort of dependance if they thought hearer and consignor belong to the same party. On the other manus, when hearer can non maintain an indifferent mentality, the scrutinizing sentiment likely gets incorrect. For illustration, hearer fails to happen out the information is cooked and issues unqualified sentiment. This consequence is easy to misdirect related study users for determination devising. They may bear loss because of depending on this audit sentiment. As the state of affairs varies from Stakeholder to Stakeholder, the undermentioned analysis in the importance to stay independency in organic structure and head is based on different Stakeholders.

4.1 The importance of audit independency for the stockholders

Stockholders are the direct donee of companies and they will acquire more fillips if the companies operate successfully. Consequently, stockholders have high demand for audit independency. Actually, when the company is in hapless operation, commanding stockholders are non willing to public the truth, and so ache the involvement of minority stockholders. Controling stockholders do n’t hold the inducement to use high independency hearers, and this phenomenon is called Entrenchment Effect ( Fan & A ; Wong, 2002 ) .

As the stockholders right offprints from the direction right, proprietors do non affect into the day-to-day direction to the company. They employ staff to run their company and bask the net incomes. Normally, stockholders care much about the profitableness, efficiency, traveling concern, and solvency and so on. Those indexes reflect how good director operates the company. Besides, stockholders can measure directors ‘ public presentation harmonizing to the information. Generally talking, they obtain the information from the studies prepared by directors. However, the study may affect duplicity because it is director who makes those studies. It has the possibility that directors cook the study so as to cover up their errors, bad public presentation and other state of affairs where they fail to carry through their duty. At this clip, hearer ‘s work helps reply the inquiry that how much study users can depend on the study information. But if hearer is unable to maintain independency, it likely arouses the uncertainty to scrutinize sentiment from study users. Obviously, audit loses the value under this status. Without indifferent and nonsubjective audit sentiment, study users are unable to get utile information to cognize the company ‘s status and buttocks directors ‘ public presentation. Once stockholders lose control to the company, this concern mechanism will decidedly travel upset as directors likely make their ain benefits by taking advantage of stockholders ‘ resource and power and regardless of the restriction from ordinance and jurisprudence ( Agbejule, 2009 ) . In the terminal, the company likely goes to liquidation or bankruptcy.

4.2 The importance of audit independency for creditor

Presents, debtor-creditor relationshipA is really common and necessary. Debtors want to loan in order to use production or develop new market, and creditors want to obtain involvement utilizing their trim money. And what the creditors concern most is the debitor ‘s ability to pay for the debt. The debitor ‘s fiscal studies can offer some information such as some ratios which can uncover the debt paying ability. And if the company has a bad fiscal consequence, creditors can see naming in a loan in front of the expiry twenty-four hours to see their money is safe. However, those studies are made by the debitor. Therefore, creditors may raise the uncertainty whether there exists the possibility that debitor offer false information to victimize money or hide the fact that they have no ability to pay that money back. At this clip, hearer ‘s work can extinguish or relieve this uncertainty. However, audit ca n’t work out if hearer were unable to stay independency when carry oning the audit. Creditors are likely to do a incorrect determination due to the failed audit sentiment. When creditor lends money to unqualified debitor, it likely bears a batch of bad histories and toxic plus as effect ( Siddiqui, 2002 ) . Consequently, audit independency which can assist to supply true fiscal studies is really important to creditors.

4.3 The importance of audit independency to authorities

As a company operates within one state, it uses the substructure building and investing environment offered by the authorities. It should take on revenue enhancement duty. The fiscal statement provided by companies is the grounds for authorities to make up one’s mind whether levy or non and how many to impose. For illustration, concern revenue enhancement is based on the gross income of the company which can be found on the income statement. And the income revenue enhancement is based on the net income besides from income statement. If company cooks the fiscal studies in order to salvage revenue enhancement cost, the authorities will be suffered straight. Therefore, authorities will carry on audit in instance of revenue enhancement equivocation.

Furthermore, missing of audit independency would act upon authorities indirectly. If hearers provided bogus fiscal studies, the pubic will be suffered. They will hold less assurance on the truth of the operation of the company, and the stakeholders will experience betrayed. If their involvements are impaired, struggles would emerge, and it is bad for the stableness of the society. That is why the authorities published the 2002 Sarbanes-Oxley Act after the “ Enron Bomb ” .

4.4 The importance of audit independency for operator

Many people may misconstrue that hearer is enemy to operator mentioning to director in this essay and the being of audit is a rock in the manner. This thought is partial and shallow. The function of audit dramas is to increase the dependance to the information and look into whether the whole concern activities are in conformity with the ordinance. To some grade, it serves to obtain superior direction ( Shih, 2006 ) . Sometimes, hearers will come up with solutions to the bing direction jobs. For illustration, the internal control has leak which may incur state of affairs where amendss the whole benefits of company. Traveling inside informations, the design of ordinance may give a opportunity for peculation. Or auditor finds out some staff goes against ordinance. Cases like that should name directors ‘ attending for better direction. If hearer can non maintain independency when carry oning audit, it will present the menace to the company such as harm the company benefits. For illustration, the hearer is a brother to the teller. When this hearer conducts audit to hard currency, he ca n’t stay independency or his independency has been affected. He may hide the fact if the teller had some guilt and issues unqualified sentiment ( Fadzil, 2005 ) . Because of this sentiment, directors ca n’t detect this menace. It may hold a bad consequence on their on the job public presentation and company development.

4.5 The importance of audit independency for the other stakeholders

The being of a company has to bear many duties. Therefore, the stakeholders can ne’er be limited to the above reference. When a company becomes a listed company viz. a populace limited company, it has to carry through more responsibilities to the society and accept more supervising from the populace. It raises fund by stock portions. Its public investors sell or purchase the portions in the stock exchange, and their determination normally relies in the fiscal studies. However, those studies possibly can non reflect the fiscal place and income status. Audit sentiment is really of import in their determination devising procedure. If hearer could non stay independency, the audit sentiment will misdirect the users. Investors will lose money if they invested a loss company. For illustration, the prostration of Enron consequences from the accounting house Andersen failed to stay independency. In the terminal, the portion monetary value can non reflect the value of the company ( Abbott, 2000 ) . Stock market will travel incorrect and the economic system will fall apart.

5. Decisions

The most of import duty for hearers is to supply high quality fiscal study which can assist describe users to do right determinations. The genuineness and dependability of the fiscal study is really important because it straight decides the schemes of stakeholders. The truth of fiscal study which is besides the quality of audit is decided by two factors: professional competency of hearers and audit independency, and the latter is more of import. Audited account failures caused by deficiency of audit independency have led to many companies fraud instances. Audit independency is besides the demand of stockholders, creditors, authorities, operators and other stakeholders. All in all, it is truly of import for hearers to stay independency in organic structure and head when carry oning an audit.