Discuss about the Factors Influencing the Independence of Auditors.
The first chapter provides the background information about the research problem, the statement of the issues, the aim and objectives of the study, the research questions used in developing the review and justification of the study.
The rise of scandals in various business organizations called for the need of audition to determine the usage of multiple funds in the business as to gain the trust of the stakeholders. The process always carried about by either internal or external financial expertise of recently have attracted by debates over independence since a good number of the audition process have been under various influence such as from the management(Bebchuk & Hamdani 2017,p.1298). Auditor independent is essential during the process to ensure that the quality of work is of utmost faith, the user’s financial report tend to be true.
However, several instances have been reported of the wrong descriptions given as a result of interference. These instances of false user financial reports made by either internal or external auditors since 2000 have sparked questions and opinions over the effectiveness and independence of the auditors.
The effectiveness of auditors is majorly determined by how many degrees can they operate without the work being influenced by any factor to give a predetermined financial report, an aspect that is not common with many financial auditors. According to the requirement and code of ethics, European Union’s Eighth Edition and the international federation of Accountants, every organization, should observe all rules and regulations to facilitate the objectivity of the auditing process. Therefore, maximum independence is required for proper judgment and production of an accurate financial report of the user irrespective of the status, relationship or any other factor.
The independence of the auditor dictate the ability to honestly and impartially provide an accurate financial report of the user, and this is very instrumental in every business as it renders reliability of the audition report, restoring the trust of stakeholders and even promote more financial investment in the company. As stated above, the independence of the auditors take place both internally and externally: where the internal happenings result from the stakeholders who are directly related to the business under financial investigation.
The domestic issues entail inadequate internal controls, weak and insufficient risk management. On the other hand, the external independence refers to individuals that have external interest from the audit results such as the audit committee and the public standards of accounting. The recent global debates on the financial audits reports of various multinational organizations have proven that most of the audit firms do not stand by their code of conduct as they get tossed by the resource owners to provide a biased report.
The primary task of the auditing is to provide a valid user ’s financial report that can be used by anybody determine the financial objectivity of any organization and can be used as clean bill of health. A clean bill of health is critical in attracting more investment and regaining trust among the stakeholders. However, in most cases, auditors fail to fulfill their primary role of providing an unbiased report as a result of some factors that might be originating within the organization or outside the organization. The influence financial report tends to break down the reputation of the auditor and the firms, hence places most of the auditors under investigation to determine reasons why they unable to operate as set codes of conduct since stakeholder confidence is based on the audit financial report.
Does the lack of independence for the auditors facilitate scandals?
The primary objective of the research is to identify factors that influence the auditor’s objectivity of providing correct user’s financial report and accurately to recognize the significant factors that affect the independence of the auditors.
It is essential to all stakeholders of the organization to get to know the end use of the financial resources pumped into an organization, to determine whether they are objectively utilized. That can only happen through auditing of the financial resources majorly by an external financial analyst to restore any lost faith and reputation of the organization(Doty 2012,p.1898). To perform such a task to utmost confidence, the auditors need a free environment without any influence on their objectivity to offer an accurate financial statement to the stakeholders. Therefore without independent of the business analyst, then the work is done will mean nothing to the concerned parties.
The chapter provides the theoretical foundation of the auditor’s independence through briefly explaining the dimensions. This part provides a brief explanation of the needs for auditor independence by all stakeholders and the factors that directly or indirectly affect the freedom of the auditors.
There are large pieces of literature that have been conducted on the independence of the audits as a result of the importance of the global multinational firms. This has resulted in different definitions of the independence of the auditors; however, there is a general reference that can be used for this study. According to Rusmanto (2016, p.8) auditor independence is the ability to withstand the pressure mounted by the owners of the resources during the process of the commercial audition, hence interfering with the integrity of the auditor. Likewise, (Johnson 2011, p.269) defines audit independency as the joint probability that a financial analyst will discover and report a breach in the users accounting system.
Both Rusanato and Johnson agrees that the independent of the audit lies on the free ability to identify and provide evidence of any financial mistreatment in an organization’s integrity of the auditor is analyzed majorly on two factors that are fact and appearance. Fact refers to the actual objective state of the relationship between the audit service provider and the client while the presentation relates to the subjective state of the existing relationship as perceived by the client and the third party (Rusmanto 2017, p.107). These dimensions of the auditors are always proven in both theory and practice and their existence determine the independence of the auditors. These constant influences on the auditor’s independence have resulted in numerous conflicts that have aloes impacted the quality of the audit process.
Alleyne et al (2013, p.38 emphasized that auditor independence is the corner stone of the auction profession and without it, the practice will be no use of value to the stakeholders. According to Chen (2016, p.302), the increased rate of the professional life and the changing business culture have shifted the regulations and the ethics of auditors to the fore. The need for processionals accountant into ethical practice in ether small business and large business is very paramount.
Different models such as that of Kohlberg stage model of development and moral cognition have been used to examine the auditor’s implicit reasoning in the resolution of independence conflict. The model indicates three stages that are: pre-conventional, the conventional, and post-conventional. Kohlberg found out that the relationship that exists between the auditors determined the moral cognition and the degree of the conflict resolution in a hypothetical situation. Additionally, Kohlberg found out that the uninfluenced judgments are majorly determined by penalty related factors that are less sensitive to the person or organization status.
According to Chen (2016, p.304), there are three dimensions of auditor independency theory; these are the reporting independence, programmed independent and investigative independence. Reporting independence dimension dictates that the auditor’s effectiveness is directly linked with experience and the loyalty exhibited between the client and the auditor. The reporting system is a code that is designed to bar this loyalty from interfering with the audition process through disclose of the auditor’s obligations.
The program independence dimensions dictate that the auditor’s work is always affected by the client management who many times has the intentions of modifying the rules and the audition process. Therefore, the independence of the auditor is of significant advantage (Alleyne et al 2013, p.38).The investigative independence requires the auditor who is always considered as the third party or the organization has to have all the access to every detail of the finance such as record, receipts, expenses among others. Additionally, the third party must have full cooperation from the management during the financial audit process to have the best result of the audit.
Jansen and Coetzee (2013, p.183) constitute concepts of independence with two different components: the practitioner’s independence and the professional independence concept. Jansen and Coetzee(2013,p.185) stated that the practitioner independence is a state of mind that equates the level of integrity an individual financial analyst, while on the other hand, the profession independent is the independence that results from the professional group to the public.
According to the American Institute of Certified Public Accountants (AIVPA) defines the code of profession independence as the CPAs capability to withstand and maintain the objective and impartial mind throughout the financial audit process. The codes require that the relationship between the audit and the clients to be of that of the third party. The objectivity as in the independence of the mind refers to the regard of all considerations that are relevant to the assigned task at hand not any other.
Auditor’s independence is of great significance in justification of the credibility of the firm through providing the true financial report of the affected firm (Dodaro 2013, p.417). Additionally, the independence of the auditor is essential to the stakeholders and the management received from the business analyst on the way forward in case of any malpractices or availability of any loophole that can lead to loss of money. Therefore, without the independence, then the work of the financial auditor is useless.
Size of the Audit Fees
It is imperative that quality of services depends on the amount of the price paid. Good quality product and service requires significant amount of fee as compared to the low-quality fee. Consequently, the size of the audit firm fees determines the quality of the financial statement. Small fees paid by clients always receive substandard financial statements, therefore substantial expenses offered by the client’s subject higher risk to the auditor of losing independence (Bigus 2011, p.289). Large audit firms tend to have the stronger financial background, advanced technology, and more expertise to perform any audit work without being influenced by the clients’ management.
The Code of Ethics for Professional Accountants states that client size, that is directly related to the amount of fee raises doubts on the independency of the auditing firms, and therefore, the auditing fee paid by the client should not exceed a certain amount (Peshori 2014, p.312). Excess payment may be misinterpreted as a need for an extra favor from the auditing firm, and in most cases will be a sign of corrupting the judgment of the auditor to provide a financial report contrary to the ideal truth.
The reputation or the status of the client can also interfere with the independency of the as some clients tend to have high profile that the auditors might not feel well in destroying, with that kind of impartiality, the auditor will therefore, provide a financial audit statement that will protect the reputation of the client or the business.
The literature review identifies several factors that contribute to the level of independence of auditors and how those factors affect the quality of the outcome (Muqattash 2017, pp.542). Among the stated factors include the audit firm’s tenure, the client’s financial status, the level of competition of the audit firm services, the amount of the audit service fee, the size and condition of the client and the audit committee among many others.
The Size of the Audit Firm
It is evidential that the size of the audit firm has a significant impact on the independence of the auditors. Large firms tend to have the ability to resist influence and pressure from the management of the affected organization (Rusmanto 2016, p.8). The notion is proven in almost all the previous studies that have concluded that the large firms have higher independency than small firms. Some of the contributing factors to this difference include the level of personalization. It is correct that most of the small firms have a personal relationship with the clients, hence tend to have their objective judgment more influenced by the management than in the large firms. However, it is not conclusive that the large firms are the most immune to control or the client’s influence.
The Level of Competition on the Audit service Firms
In every business, competition is a significant factor that determines the operating system of the organizations involved. Audit services markets are no exception as the level of completion also directly affects the independence of the auditors (Schelker 2013, p.290). It is evidential that audit firms under high completion environment tend to have a tendency of looking for clients, and therefore have difficulty in maintaining independence.
Audit Firm Tenure
In production and service requires a considerable amount of time to release the best quality, and therefore the audit firms tenure represents the period awarded by the client to provide the financial audit report (Chi 2011, p.271). A relationship that is extended between the client and the audit firm is an indication of the interest from both parties hence leads to lack of independence of the audit process. The long relationship between a client and auditor reduces the vigor and confidences thus leading to impaired judgment of the auditor. Consequently, the long relationship between the clients is also beneficial to the auditor who gains more experience on the clients operations hence increasing the ability to detect any irregularity within a short period.
The Audit Committees
During the financial audition process of a company, selected members of the company always offer assistance to the external auditor to have the best and ideal financial reports. Therefore, for that reason, substantive support tends to create a positive relationship between the audit committee and the auditor independence to have the best release (Vasile & Ghita 2016, p.113). On the other hand, unavailability of the audit committee might put the auditor into some significant constraints such as accessing major financial books that eventually affect the quality of service delivered. The US Congress on Subcommittee on Reports, Accounting and Management indicate that the close relation depicted by the period is of great danger and recommends that rotation of the auditors helps in maintain the independence.
Safeguards to Independence
Every auditor has the responsibility to remain independent taking into account of the practices, threats to independents and use of the safeguards to eliminate the available threats. To address the problems, accountants are on advice to follow the guiding principles: Always appear confident before the public to create public confidence. During the audit process, the auditor is reminded of the integrity, objectivity and professional skeptic that are necessary for the auditor independent. In case of threats to independent, apply the safeguards to eliminate them
Summary of the literature review
It is evidential that independency of an auditor is influenced by range number of factors that have interest in the financial audit report. Influence on the objectivity of the audit results into a malicious report that is incapable of regaining any lost trust and reconstructing the destroyed reputation. However, the independence remains great significant and will only depend on the objectivity and professionalism dimension of the auditor to release a high quality and accountability audit report.
This chapter explores the methodology used in collecting the information’s regarding the factors that are influencing the independence of the auditors. In specific, the section discusses the philosophy of the research, the design, the population selected, the selection method, the data collection method, operationalization of the research variable, ye measurements and the analytical tools used to understand the findings.
The research design refers to the strategy used to gather information, and for this study, the most applicable is descriptive survey design. The plan is most applicable because it entails multiple data collection techniques such as observation, interview, and questionnaires that act as a rich source of required information (Gramling, Nuhoglu & Wood 2013, p.587). Moreover, the design is cheaper and saves time as a lot of information is retrievable through a short period before the withdrawal of the participants. The descriptive research survey is intended to provide statistical information about various factors affecting the independence of auditors.
Target population refers to the common elements that create particular interest for a researcher and from which a sample will be selected. The research objective is to find out factors influencing the independency of the auditors, and therefore the research population will be auditors from multinational auditing firms.
According to Facco et al (2016, pp.619) sampling size refers to the subset of elements that are under study and must contain all the properties of the whole population. Sampling is the process of identifying the information from a portion of the larger element to provide specific information on the behalf of the whole population. The sample is significant to any study since a correct choice provides an accurate reflection of the whole population whereby inferences can be drawn. For good inferences, there must be a good sample size: it must be large enough and determined by the size of the population, availability of finance and time (Ivey 2016, p.190). For the purpose of this study, the sample size will be drawn from the field auditors and audit firms managers from the selected multinational audit firms. The main reason for restricting to that sample size is because that they are the primary participants that have the capability to provide first-hand information for the study.
There are various data collection instruments such as interview, observation, experimental among others. The choice of the instrument depends on the type of the research being conducted and for the purpose of this research, questionnaires will be mot applicable (Skinner,Madison & Humphries 2012, 21). The questionnaire data collection instrument chosen will enable me to collect the most satisfactory range of reliable information. The technique adopted is more comfortable to administer as each participant can pick and answer all the questions from office or home, hence making it possible to access large population for the study. Additionally, the technique is more confidential and enables me to keep a track record of the participants that will not return the questionnaire within the specified time frame; hence I will have the capability to make a follow-up.
First and foremost, the designed questionnaire will not require the identity of the participants, to maintain the privacy of the sources of the information. This strategy will encourage the targets respondent to provide utmost opinions about the questions with the assurance of protected identity (Lewon et al 2011, pp.325). The questionnaire will mostly contain simple items that can be completed within an hour since the problems will be in a simplified analysis with multiple choices. The simple inquiries are advantageous since will yield high response. The research questionnaire will be divided into majorly two sections; section A and B.
Section A will gather demographic information while section B will collect information on the factors that are affecting the independence of an auditor through answering various questions. The answers to the questions in section B will be measured through the use of (5) point Linkert Scale with aspects such as ‘strongly agree’ with a scale of 5 ,’Agree’ with a scale of 4, ‘Neutral ‘ with a scale of 3,’ Disagree’ with a scale of 2 and ‘strongly disagree ‘with a scale of 1.
The validity of the device
According to Kisely and Kendall (2011, p.365) validity refers to the degree to which data collection methodology presents the collected information. The validity of an instrument will be established through the mutual working relationship between the researcher and the selected field assistant to ensure that all the questionnaire have the capability to collect the information needed for the study and are administered to all the participants within the specified time frame.
Reliability of the instrument
According to Lub (2015,p9) the reliability of a research, instrument refers ability to evaluate the research instrument and the internal consistency of the measurement.For the purpose of this study, the safety of the tool will be tested through the use of the pilot study of 10 samples of respondents from an institution. The reliability, therefore, will be measured using Cronbach’s alpha with the help of the statistical package for social sciences (SPPS). Warens (2015, p129) explains Cronbach’s alpha as the measurement of how well a set of items can measure a single on-dimensional talent contracts.
Data Collection Procedure
The data collection procedure will commence immediately after the approval of the proposal by the course supervisor. I will after that collects a letter of introduction from the Department to facilitate my entry into various audit firms for data collection. Together with a selected field worker, I will administer a total of 100 questionnaires that will be later collected back from the respondents at the specified time frame at most one week. All follow up of unreturned surveys will be done by me.
Data analysis
The questionnaires will be consolidated and edited to ensure completeness, uniformity, consistency, and accuracy. Then the data will be analyzed through the use of both the inferential statistics and descriptive methods. The illustrative data analysis method entails frequency distribution, cross-tabulation, and measure of the central tendencies. The depressions such as mean and standard deviation will provide the characteristics of the collected information, and then the analyzed data will be represented into tables and frequency graphs for better observation of the outcome.
Ethical Issues
The most significant ethical issues that will be maintained throughout the research process will be confidentiality of the sources of the information. I will take time to have the attention of the respondents and explain to them the primary objective of researching administering the questionnaire. This will help me to avoid any misconceptions that might arise during the process such as the use of the information after that. Additionally, I will only administer the questionnaire to the willing participants, and there will be no forceful subject to participate.
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