Auditing is an important aspect in any business whether it is small, medium, or large scale. According to (1971) auditing is an evaluation and declaration of accounts and documents that are related with accounts by individuals that did not participate in the preparation. Auditing is a crucial task taken by internal or external auditors hired by the company because their assessment regarding the financial statement of an organisation must be fair and without prejudice, despite the fact that companies hire and pay them. In order to avoid issues in the company to arise with regards to auditing statements, the concept of audit independence enters.
This paper examines audit independence wherein it discusses the academic position and principles of ethics associated with it. Moreover, it gives definition on audit independence with regard to morality and ethics. A discussion on the ethical behaviour in auditing and the influence of religion on the behaviour will be given, as well as the academic grounds. Last but not the least; a discourse will be given on the impact of various views and cultures in the harmonisation of accounting worldwide.
Almost all individuals in the field of accounting and finance know auditing and how it works. However, not all of them know audit independence. According to (2005), the independence of the auditor is a crucial factor in the reliability and credibility of the declaration of the statement of accounts. Moreover, according to the Ramsay report () there are four functions of auditor independence in association of the efficiency of the capital market, and these are:
- It adds worth to the financial declarations.
- It adds value to the capital market through improving the credibility of the financial declarations.
- It improves the efficiency of the capital markets in designating very important resources through enhancing the decisions of users of the financial statements.
- It aids in lowering the cost of capital to those utilising financial statements through decreasing information risk.
According to (1992) the concept of audit independence is out of focus wherein the rules controlling it are complicated and demanding. The ethics that govern the audit independence, according to the (1994) are:
Independence- In auditing the financial statements of a company, there are two firms hired. The internal auditors which are employees hired by the company to audit accounts of the company. And external auditors which are companies that have various clients asking to audit their financial statements.
The internal auditors may partake in the audit engagement without diminishing the value of independence of the external auditors with respect to the company being audited. Moreover, as long as, the external auditors uses the work of the internal auditors similarly and adhere with the standards of auditing.
An external firm will be regarded as independent if the accountant or auditor detaches himself or herself from the client and does not engage in the audit engagement if he or she is associated with the client.
A joint business investment is answerable to control by the principal stockholders, members, directors, officers and clients, individually or as a group.
Independence can be regarded to be diminished in quality if the joint business investment is material to the net worth of the member.
Integrity and Objectivity- If a member from the external audit firm is considering taking the employment offer of the client, he or she must disengage himself or herself from the affirm engagement until the offer is refused or the company no longer seeks for the employment of the member. However, if the member was not able to disengage him or herself from the engagement willingly and the firm found out afterwards that he or she deemed taking or have already took the offer during the time wherein he or she participated in the engagement, the external firm must regard the additional process needed to assure that the member carried his or her task with integrity and in the most objective and unbiased manner.
According to the complicated interrelationship of issues related to the behaviour of auditors, what principles they must utilised and follow, and how to elevate a culture wherein the people can anticipate adherence with the norms can be easily classified with the ethical issue that emerge in association to auditing by identifying three scopes of activity which are the practice of auditors, the management and culture of auditing firms and the setting of auditing standards and laws.
Campbell discussed that on the first sphere, things may look comparatively straightforward at the degree of auditors associated in the practice of auditing. The standard practices in auditing will be carried out in a careful, diligent and punctual manner by the auditors in agreement with the instructions and the proper procedures and standards. The ethics involved in the field of auditing are integrity, independence, confidentiality, objectivity, competence and upholding to the standards. However, in the field of auditing there is a conflict between morality and self-interest. As far as the auditors are concerned, it is a profession with a definite career strategy with a main purpose of personal progress and acquisition of material things. The calculations of the benefits that will be gained by the auditors may be a conflict wherein their morality are going to be questioned, such as the equality and fairness to other firm members, the duty to the clients, commitment to the employers, and the care for some groups such as the union of the employees and shareholders, that depends on the results of the audit of the company. Yet, the auditors must still undertake the task and must take the interest of the client, and the public side by side in order to have a reliable auditing method.
Ethics according to (1985) is the study and examination of the human conduct that is based on moral principles, contemplative choices and the standards of being right or wrong. According to (1994) the ethical behaviour in auditing is not just a special use of the general idea of ethical conduct which was contrived by philosophers for men. Adams et al discussed the ethical conduct in auditing obtains its vindication from the general theory of ethics. The two most prevalent theories that is being used in the resolving the ethical crisis of auditors and these are utilitarianism and rule deontology.
Utilitarian Principle- According to Adams et al the principle of utilitarianism is based on the greatest good criterion wherein when the auditor or accountant is faced with an ethical dilemma, the inference of the action are examined in terms of what brings forth the biggest number of goods for the biggest number of individuals. Moreover, the focus of this theory is the outcomes of the action than abiding by the rules.
Rule Deontology- Adams et al discusses that it is based on a duty of an individual to the moral law. Therefore, the actions of the accountant or the auditor rather than the outcomes are being given emphasis on the process of ethical reasoning. Under deontological principle, an auditor or accountant is obligated morally to act with accordance to the necessity of the rule of conduct without concern for the impact of the actions.
Religion has played a huge role in the lives of people ever since the world begun. However, in terms of the professional practice religion plays a minimal role in the lives of people, especially in the case of accountants and auditors. It depends on the individual on how far the religion will influence their decisions in life and in work. Some of the auditors may have strong inclinations on the ethical behaviour based by the religion, while some won’t have. However, there are some cases wherein religion has a huge impact and influence on how auditors and accountants conduct their tasks. Like in the case of Islam, almost every people in this world know how loyal the Muslims are to their religion Islam and its teachings wherein it includes the proper ethics, behaviours, and morals. Therefore, it has a huge influence over Muslim accountants and auditors wherein they must adhere to the teachings of Islam. Another case wherein a religion will have a huge influence on how an auditor performs is his or her strong belief in the teachings of the religion; an individual with a greater belief to the teachings will follow it exactly than an individual who has lesser or no belief at all.
This world has various cultures and views with regard to accounting and auditing. However, there are plans of harmonising the standards of independence of the accountants’ world wide. According to the harmonisation of standards in accounting would be a huge step in strengthening the accounting profession and would even protect the interest of the public world wide. However, harmonisation of the standards of accounting and auditing would be a huge challenge for accountants and auditors in the world because the belief and culture of people varies from one location to another. The ethical principle of a group of accountants might be considered out of the norm by others and vice versa. On the other hand, Pendergast argued that the ethical standards evolved overtime, as the norms and values of society changes the rules of ethics also changes, in addition accountants all over the world have the same fundamental values, commitment, objectivity and integrity which is the basis of the accounting and auditing profession.
Although harmonisation is a good project because it outlines the basic principles and ethics and auditing firm, accountants, and auditors must have all over the world, aside from the fact that it synchronises the auditing firms and auditors world wide. However, the International Federation of Accountants will have to face more challenges especially when it comes to the different cultures and views of the people around the world. Clearly, the insights of different individuals from various racial backgrounds and beliefs will have a huge impact on the harmonisation.
How does culture affect the ethical behaviour of an accountant or an auditing firm? And why does it affect the ethical behaviours? A culture plays a key role in the ethical behaviour of a firm or an accountant, although the basic principles of accountants all over the world are the same, the depth of those principles differ from one culture to another. One cultural background will give more emphasis on integrity than on the other basis, the same thing with other cultures wherein it will favour objectivity more than the others. Aside from the basic principles, in some cultures they have other assumptions and principles beside the basic once that they deem more important. Clearly, the culture of the society has a huge impact on the ethical behaviour of a firm because the culture of the nation shapes the principles in life of an individual. The belief and the morality of a person are rooted in his cultural backgrounds therefore it has a huge influence over the ethical behaviour and beliefs of the people. To start the ambitious project of the International Federation of the Accountants (IFAC), the organisation issued the standards of independence. Pendergast discussed that the IFAC defines independence into two which are:
Independence of mind- which is the state of mind that allows the preparatory action of an opinion without being influenced by the impacts that causes diminish of the quality of professional judgment.
Independence in appearance- the avoidance of circumstances that are relevant in which a rational and informed third party which knows the important information will rationally judge a firm or the individual members on the integrity and objectivity of the firm.
The independence of a firm or an auditor occurs because the government, regulatory organisations and the non-profit organisations depends on the independence as a way in showing the integrity and objectivity of the organisation. However, there are also threats involved in independence according to Pendergast and these are, the self-interest threat which happens when a firm or a member could gain benefits such as financial with the client, the self-review threat occurs when a conclusion of the prior engagement must be re-examines in order to reach the judgment on the engagement or when a member of the team is a former client or employee, the advocacy threat occurs when a member of the firm becomes an advocate against the client’s opinion wherein it clouds the objectivity of that member, familiarity threat occurs when the client has a close relationship with one of the members of the firm and becomes to sympathise with the interest of the client, and the intimidation threat which happens when a member of the firm cannot act objectively because of threats from employees or officers of the client. In order to maintain the integrity of the auditing and accounting firms various business came up with safeguards in order to maintain the independence of the firms and these are grouped into three according to
- Safeguards that were developed by the legislation of the government, regulation and the accounting profession.
- Safeguards that were developed and retained within the clients of the firms.
- Safeguards within the system and methods of the accounting firms.
Auditing is not an easy task that is undertaken by firms because the conflict of morality and ethical behaviours always arise. Therefore independence from the client is one way of assuring the integrity and objectivity of the audit. However, there are still some threats that arise, and in order to counter those threats the government, as well as, the firms and non-government organisations created safeguards to ensure the independence and integrity of the auditing firms.
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