Auditor Fees And Auditor Independence – Potential Threats And Remedies

Different Potential Threats to Auditor Independence

Discuss about the Auditor Fees and Auditor Independence.

The organizations surviving in the economic structure of different countries requires to analyze their business process from time to time in order to maintain a clean and just management and production function. Auditing is one of the major tools for evaluating and inspecting the quality and process system to comply with the needs of the organization. Auditing can be applicable to an entire firm or can be to a specific department or production step.

This study is undertaken to find out the various potential threats to the independence of the auditors according to the various situations given in the study and to find out the remedies to these threats to safeguard the auditor’s interest (Leung et al.2015).

The following conditions determine the various potential threats to the following cases:

The auditor works for Green Pastures Ltd for a very long time and has a good knowledge about the client. From this situation, it is understood that the independent threat similar to this situation is the familiarity and complacency threat. The auditor has been working with these organizations for a very long time and thus there exists a familiarity between the organization and the audit firm. This familiarity withers away the sense of doubt and hesitation, which should exist within the auditor in order to find out the weaknesses of the firm (Koch, Weber and Wüstemann 2012). Auditor in this case develops a sense of overconfidence about their knowledge about the firm. The long-term relationship among the two parties creates a satisfaction among the auditors and thus leads to underestimation of all the caution signs within the firm. It is advisable to bring in fresh and new auditor into the firm, which will be helpful for a better and efficient scrutiny. Still familiarity has the positive effects as it creates a better understanding about the clients which creates a better working (Blay and Geiger2013).

The second situation refers to a person named Samuel Rose who is a part of an audit team, which audits the Saturn Ltd. After a few weeks of working with the client, he was offered a job by the above-mentioned organization. Samuel Rose was interested in the offer, as he had to join right after the completion of the present audit. This situation complies with the threat of management and employment. The auditor is different from the audit firm and this difference should be maintained. The threat becomes more complex when the present auditor of the firm is offered a job to perform a management role of the firm. In this situation, the Samuel Rose, the present auditor of the firm is employed to work for the organization. This creates a concern because the other member working in the audit team will be unwilling to criticize their former colleague. The second concern is that Samuel Rose being an ex employee of the audit team will have a good knowledge about their audit process and thus will be aware of their strengths and weaknesses. Samuel Rose will thus take advantage of this situation and try to give an advantage to the client.

Safeguards against Potential Threats

The third situation is about a major client named as Fresh Juices Ltd who wants the audit firm to act as a consultant to evaluate the entity’s quality control about their product. The problem the audit team uses up the directors feel is that the staff’s time by asking irrelevant questions. The independent threat related to this situation is the Economic bonding associated with Fresh Juices Ltd and the audit team. The income of the auditors depends on their clients as they earn a living by working for them. Thus the auditors always tries to keep their clients happy to maintain a healthy relation between them. The auditors also perform non- audit services like in this case surveying the staffs of the firm to compute the quality control of the firm. The auditors try and perform their task as mentioned to them to increase their income. This economic bond can act a threat to the independence of the auditors because these non-audit services performed by the auditors to earn lucrative incomes diminish their class of work in the audit services. The non- audit services performed by the auditors reduce the efficiency of their audit works (DeFond and Zhang 2014).

The fourth situation refers to a client named Excelsior Ltd. The financial director Susan James retired and Steve Price who is also a long time friend of the audit manager Geoff Holmes replaced him. Geoff Holmes was also the best man in Steve’s wedding. The situation suggests that these two people are very closely connected and thus the threat associated with this situation is Social Bonding. There exists a long term friendship between the audit manager and the financial director of the organization. Thus the objectivity from the auditors side decreases. The biasness is grounded on the psychology theory and takes place due to close relationships and their interests cannot be separated from each other. The audit manager will be biased and his work of audit will not give out the original result.

The last case concerned about My Super Ltd whose taxation work is rejected and has been referred to the Superannuation Complaints Tribunal and MSL. The threat concerned with this case is Litigation, which refers to the disputes between the taxation treatment of material amount, which led to the creation of a legal action where the organization has been asked to show its treatment to the concerned government body. The rejection of the taxation sheet will create a dispute between the auditors and the clients which can also be taken as far as the court (Porter, Simon and Hatherly 2014).

Assessment of Audit Independence

The application of a mandatory rotation policy about changing the auditor of a firm after a certain time span will eliminate the familiarity and complacency from the audit services. The appointment of a new auditor will give an efficient evaluation of the performance of the organization without any malpractice.

The second threat can be eliminated by implementing the remedy to modify the selection process for the appointment of the management employees and the auditors, which makes them more liable to the shareholders and the management. The shareholders need to be given more power within the organization to directly appoint new employees and external auditors (Dhaliwal et al. 2015).

The third situation can be controlled by limiting the non-audit services by the audit firms. A proper law needs to be passed to stop the non-audit services of the organization and thus increasing the efficiency of the audit services from the auditors providing a proper and just evaluation of the business process.

The fourth situation can be stopped is by introducing the mechanism of better disclosure where the investors and the shareholders should be provided with proper knowledge about the people appointed and their economic dependence. The investors need to know the relation between the management and the auditors and their effects (DeFond and Zhang 2014).

The process of market forces can reduce the last situation where there exists a lot of external auditors in the market and thus any client has the power to appoint any other auditor if there exists a dispute between the client and the auditors which can lead to any litigation. This situation can eliminate any discrepancy from the auditor’s side and they would work harder to exhibit higher audit standards (Koch, Weber and Wüstemann 2012).

Situation	Threat	Justification	Safeguard	Assessment of audit independence
Audit practices for Green Pastures Ltd working for a long time and having a long term relationship	Familiarity and Complacency	The auditor has been working for the firm for a very long time and so has a good knowledge about the audit process and the business process	Mandatory rotation rules	The audit independence can be maintained by appointing new auditor into the firm which will provide a new outlook towards the weaknesses of the firm and will properly scrutinize the working process to make the organization more efficient.
Samuel Rose an auditor auditing for Saturn Ltd has been offered job by Saturn Ltd	Management and employment	Samuel Rose has been working as an auditor and examining the process of Saturn Ltd, which led to the Saturn Ltd appointing him to the firm as he has good knowledge about the audit process.	Modifying the Selection Process	If the selection process is modified by giving some power to the shareholders to appoint their new employees and external auditors will lead to creation of just audit process and will increase efficiency
Fresh Juice Ltd to review its quality control of its product has asked to evaluate the quality control process.	The economic bond	Fresh Juice Ltd to review its quality control has asked the audit team to evaluate this process and thus asking them to perform a non-audit service for the organization	Limitation on the non-audit services.	If the non-audit services of the organization are eliminated he performance of the auditors will be much more better for the audit services creating independence to the auditors.
Steve Price was appointed as the new finance director after the retirement of Susan James. Mr. Price is also friend of the audit manager of the firm. Taxation sheet of material amount rejected by the tribunal	Social Bond Litigation	Having a close friendship between the auditor and finance director will create a sense of biasness among proceedings of the business and the work output will not be according the original proceedings of the business. A mistake in the tax sheet has led to its rejection in the Taxation office and thus has created a dispute between the auditors and the clients.	Better Disclosure Market Forces	The disclosure about the employment process of the organization will demonstrate a true working sense without any biasness in the business The availability of many external auditors in the market will create a competition for the auditors and thus increasing their standard of work and creating auditor independence.

Table 1: Independence of Auditors

(Source: Eilifsen et al. 2013)

Conclusion

The above study determines the various conditions, which arises in the normal economic market during the audit process and defines the various potential threats which affect the auditor independence and also the remedies which can be implemented to eliminate these threats and create a proper auditing practice.

Reference List

Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), pp.579-606.

Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. and Willekens, M., 2012. Audit reporting for going-concern uncertainty: A research synthesis. Auditing: A Journal of Practice & Theory, 32(sp1), pp.353-384.

Church, B.K., Jenkins, J.G., McCracken, S.A., Roush, P.B. and Stanley, J.D., 2014. Auditor independence in fact: Research, regulatory, and practice implications drawn from experimental and archival research. Accounting Horizons, 29(1), pp.217-238.

DeFond, M. and Zhang, J., 2014. A review of archival auditing research.Journal of Accounting and Economics, 58(2), pp.275-326.

Dhaliwal, D.S., Lamoreaux, P.T., Lennox, C.S. and Mauler, L.M., 2015. Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence during the Postâ€ÂSOX Period. Contemporary Accounting Research, 32(2), pp.575-607.

Dogui, K., Boiral, O. and Herasâ€ÂSaizarbitoria, I., 2014. Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Koch, C., Weber, M. and Wüstemann, J., 2012. Can auditors be independent? experimental evidence on the effects of client type. European Accounting Review, 21(4), pp.797-823.

Leung, P; Coram, P; Cooper, B; Richardson, P; Modern Auditing & Assurance Services 2015; 6th Ed; Wiley

Porter, B., Simon, J. and Hatherly, D., 2014. Principles of external auditing. John Wiley & Sons.