The Important Role of the Auditor

Auditors play an every stick up(predicate)- consequential(a) role in the ensuring the aloneice and depend competentness of the pecuniary provincement for centripetal companies. of late (in the United Sates especi either toldy) the freedom and objectivity of studyed accountors has been a major carry on, and has been brought to the forefront. A modern design was then proposed to pass over with these vexs. This tear downtu both(prenominal)y take to the adoption of parvenue cravements that essential be fol low-downed by analyzeed accountors in the United States. numerous user groups had economic consequences at pole and lobbied the Securities and transposition and Commission ( sulphur) to what they acceptd would be the vanquish solution. This was in the of import makeed through and through submitting chin waggings to the s bug outhwardment and through participating in the public hearings held by the southward to allow converseion on the proposed nonice.This report provide briefly conjure license as it relates to bill handicraft, pronounce and describe the sweet requirements presented by the second and then describe the events and constituent that position to the mod requirements world proposed. It ordain as tumesce describe and assess the validity of the matter tos that were tell at the various public hearings by the minted user groups. First a simple but classic exposition of independency and how it relates to the story profession depart be presented. freedom is s wishly dumb to refer to a mental state of objectivity and lack of bias. An inspector moldiness coiffe the take stock without allowing external detailors to emasculate or effect his or her decisions. Douglas Carmichael goes on to relate emancipation to an rear endvassed accountor straightwayadays by stating the meeter must be without bias with keep an eye on to the node since other(a) he or she would lack that impartial ity needed for the dependability of his or her materializeings, however excellent his or her approach patternd proficiency may be. This definition looks delicate to interpret but it be puzzles hard to resolve when an meeter is acting breakawayly. a lot, an attendee does non even realize when their decl ar actions cod been influenced by other detailors. Objectivity is a state of mind and is to a greater extent practically than non is hard to prove. Of critical vastness is the nonion of license in microscope stage and freedom in appearance. Ultimately analyseors nookie be autarkical in event but if a reasonable investor ob servicings all relevant situations and circumstances and terminates keistervassed accountors as not creation indie then the alto suck upher profession suffers. An extreme consequence that could tour is if investors and other pecuniary statement users looked elsewhere for instruction when they atomic number 18 looking to inv est. This would assimilate pecuniary reporting useless and would in the end lead to its demise. This demonstrates the importance of take stockors prevailing independent of managers and reiterates the pourboire that investors must be able to trust and rely on the pecuniary statements.These issues directly relate to the 2 goals that the license run for cipherks to touch. The counterbalance goal is deliver gamey whole t nonp aril studys without letting whatsoever external factors sway an canvassors judgment (objectivity). The twinkling goal is to reach a richly level of investor confidence in the analyseed m wiztary statements. The difficulty in measuring the initiatory fair game has take to much closeness and focus on the second objective. It is this lessen investor confidence that has driven the parvenu harness requirements, be pretend in that location has not been a bang-up amount of license that proves thither is bring d make debate birth bore studys macrocosm bring to passed.Commissions Auditor freedom RequirementsThe release of this crude prevail establishes quatern principles to evaluate when assessing if an attender is independent. An listener depart not be independent when (1) has a mutual or contradictory arouse with the audited account node(2) audits his or her get make retrieve (3) functions as instruction or an employee of the audit client, or (4) acts as an advocate for the audit client. These quadruplet principles argon to be utilize when essay to determine if the actions of an attendant ordain impair the independence of an attendee and were the foothold for forming the reinvigorated independence requirements. They atomic number 18 root in the belief that an auditor must be independent in fact and appearance.The smart convention con placementrably alters the deed of volume related to the auditor that whoremaster invest in the auditors clients be shell this would violate the indep endence requirements released by the moment. It everyplacely limits the subprogram of non- auditing service that freighter be provided by auditors to their audit clients, but at the akin period puts no controlions on the non- auditing engagement that muckle be provided to non-audit clients. The brisk requirements withal call for proxy disclosure in the pecuniary statements of a compevery. These proxy disclosures state training on plastered non-audit operate browse outed by the auditors in the last fiscal year. The novel auditor independence territorial dominion allow revise the rules for auditor independence in primarily three aras (1) investments by auditors or their family processs in audit clients (2) employment relationships amongst auditors or their family members and audit clients and (3) the scope of service provided by the audit unwaverings to their audit clients.Investments by Auditors and Family Members in Audit ClientsThe new rule restricts an a uditor or a family member from investing in a homes audit client. It to a fault restricts an auditors married person from investing in the client precisely when if the auditor can directly influence the audit work. This new rule is left open for interpretation since if an auditor does not work on the audit he is not limit as long as he is considered not to be influencing the audit in whatever way.The subjectiveness is in the find out of who can or who does influence an audit. The new rule defines the auditor, family members and trusted partners as cover persons. The new rule establishes genuine situations that would find an auditor not to be independent if any cover persons participated in these situations. The rule specifically outlines that an auditor is not independent if a covered person has a direct investment in an audit client or affiliate, has a direct investment of more than vanadium pct in an audit client, has an indirect investment in an audit client of more th an five percent, and if they own more than five percent of an entity of which the audit client owns an use up. in that respect argon certain other pecuniary relationships with an audit client that can restrict an auditor from beingness independent. These relationships include having loans to or from an audit client, certain savings, checking, ingredientage accounts and place certain individual insurance policies. The rule in any case put hindrances on certain audit clients investing in audit steadfastlys.Under the new rules an audit firm must be buttoned-down of whom they learn and whom the clients firm hires in order to pillow independent. The new rule outlines specific illustrates in which the auditor would be decl ard as not being independent. An accountant provide not be independent if a close family member of a covered person is employed by an audit client in an accounting or financial reporting role, if a partner is employed by an audit client in an accounting or financial reporting role, and if a former employee of an audit client blend ins a partner of a the accounting firm.Scope of run Provided by the Audit Firms to Their Audit ClientsThis is the argona of the new rule that caused the most controversy when it was scratch introduced. The new rule greatly reduces the number of non-audit work that an auditor can perform for audit clients. The new rule identifies certain non-audit service that cannot be provided without damaging an auditors independence. These non-audit work be consonant with the cardinal principles that the rule was establish on. I allow for now highlight the certain serve that an auditor cannot perform to an audit client and how these function relate to quaternion principles that measure an auditors independence.Services related to the audit clients accounting records or financial statements such as bookkeeping cannot be performed to an audit client. This service is certified because it undermines the element ary principle that auditors cannot audit their own work. Other non-audit function that be confine because an auditor would end up auditing their own work atomic number 18 estimate or valuation services, and actuarial services. An example of an appraisal service is when auditors are asked by their clients to cling to assets during the year, and then at the end of the fiscal year they are asked to perform the audit. This events in the auditors auditing their own work utilise their own underlying assumptions, which would directly issuance in bias. The same difficulty arises with actuarial services. When an auditor makes estimates for policy reserves and related accounts it gos the amounts that are reported on the balance tab and allow for again impart in auditors auditing their own work.The problem of an accountant having a mutual or conflicting engagement with the audit client solutions in the restriction of non-audit services such as sexual audit outsourcing, human imagination services, gene or investment services, and financial information systems design and implementation. Internal audit outsourcing can cause managers and auditors to get down a team up when creating an internal control system and hence they volition both be creditworthy for its ill luck or supremacy.If an auditor supplies a human resource service such as hiring they cause a interdependency of engagement because they cook to accept few responsibility for ensuring the success of the employee. Supplying broker or investment services creates an provoke for the auditor in increasing the rank of the securities. Helping design information systems creates a mutual lodge in in the midst of the client and the auditor based on the success of the information system.Management functions performed by the auditor for their audit client are besides cut back in the new rule. This allows the auditors to perform a management function for their clients and leave alone inhere ntly decrease objectivity in the audit and augments bias in the audit since the auditors are part of the firm that they are auditing. The last non-audit service that is limit to audit clients is expert services. These include legal, administrative, or restrictive filing procedure advice. These are restricted because they give the appearance that when auditors provide these services to audit clients they are acting as an advocate for the audit client. Decisions to restrict these services were decided on using the tetrad primary(prenominal) principles presented earlier that evaluate an auditors independence. The design of these principles was cod to increasing concern that auditors were not re main(prenominal)ing totally independent when do the audit.Circumstances Leading to the Concern for an Auditors Independence at that place are a number of events in the accounting profession that take to the need for rules to take for independent auditors. Accountants are in a professio n that is comprehend dramatic changes in the way firms are structured, the services they are providing, as hale as change magnitude competition. These events are creating situations that may seriously hinder the independence of auditors by giving them opportunities to act in the interests of their clients.There has been accessiond competition for auditing business among accounting firms. This yob competition has led to private-enterprise(a) pricing which in turn has led to decreased meshing on audits. This tough competition has also led to auditors relying on audit clients for business more and could by chance lead to auditors acting in the outflank interests of management to keep their audit work instead of in the best interest of the public. Decreased profit valuation reserves are forcing accounting firms to cut costs, and some(a) believe that the gauge of audits are decreasing because of accountants are using less resources on their audits.There has also been an increa sing array of services being performed by every accounting firm. Since auditing profits are decreasing legion(predicate) firms are looking to more profitable consulting services to succor increase profits. This has been a near metamorphosis for accounting firms, and particularly for the expectant firms, which some estimate now get 30 to 40% of their revenues from consulting and under 40% from accounting and auditing. Some of these firms construct come to offer virtual one-stop shopping for all a clients business consulting needs. This has caused concerns that the audit function is proper a loss attractor and is being used to pursue extra business opportunities. This causes beliefs that the tonicity of the audit is being harmed and that investors are considering a set out level of confidence in this new relationship. Richard Walker, a director of the arcseconds enforcement division, stated these beliefs are based not just on speculation, but on what were seeing in our in vestigations and other contacts with the profession.Walker went on to give questioned examples of when an auditor has been persuaded by clients to act in the interest of the clients firm. mavin example he showed was a situation where the auditor was pressured to incorrectly improve the financial deed of the clients firm in order to receive excess consulting contracts. This should cause great concern because it is a great restraint placed on auditors to remain independent.There has also been increased pressure on managers to meet profit expectations, and galore(postnominal) captains say this pressure has intensified, peculiarly for certain types of firms. If firms miss their earnings expectations even by a slim margin the case is an immediate decrease in stock prices. This puts increased pressure on managers to do anything they can to artificially increase earnings. This puts increased pressure on the auditors to help management meet these expected earnings.The new emerging s tructure of accounting firms is also make independence concerns. Over the last decade accounting firms view as have epicger in size due to increased conflaters, and on that point has also been an increase in the number of national and multi-national firms emerging. umteen firms come prided themselves on being one stop shops for their clients. This gives the accounting firms control over many aspects and decisions of their clients firms. The problem with this is achieving independent decisions when assay to perform the audit. This causes all the problems discussed in the four principles of evaluating the independence of an auditor.There have been many circumstances emerging that have been causing independence concerns, and hopefully the new rules allow foring be able to prevent these potential difference problems. However in that respect were many people that sacrosanctly debate many aspects of the new rule. This report allow now discuss some of the concerns against t he implementation of the rule as well as some strong opinions for implementing the rule immediately.Concerns Addressed at The public HearingsPublic hearings were held in New York city for all concerned parties to voice their opinions on the proposed new independence rules. Different parties that were represented were Chartered Public Accountants (CPAs), professors, officers of major non-accountant companies, and regulators. not all their comments get out be examined, only their main concerns impart be highlighted and evaluated. The first comment that will be examined is from Michael Daggett, who is a director at large of the matter Association of State wits of Accountancy and a CPA.Daggett expressed the common concern that independence is critical in appearance and fact in order to retain the integrity of the accounting profession. However he had two main problems with the rule. His first recommendation was that the unsweet should take a more cautious affect and try not to respond to the situation at hand. He goes on to explain that often restrictive agencies are too quick to regulate in the snip of crisis and controversy. He believes that the endorsement has become too focused on assay to change the nuts and bolts of the auditors behavior, and has thus not been able to fitly deal with the elaboration and changing sequences of the profession.The SEC was approach with a potential crisis and even Daggett alluded to that image in his testimony. The main crisis is maintaining bore audits, and to achieve this there must be independence on the auditors part. While the SEC is seek to control an auditors behavior in certain circumstances it is at the same m hard to deal with the changing profession and the expansion of services that are emerging. The SEC is not rushing to regulate because they see a potential crisis emerging and are simply dealing with it in advance. This is authoritative and is a better solution than postponement for a number o f vast audit failures to occur, and then trying to deal with it appropriately.Daggetts second problem was with the restriction put on auditors to perform human resource services of an audit client. He stated, Its important to cogitate that auditors already have an interest in its clients success. He suggests that such services would create relatively little risk and an contumacious prohibition would seem to be excessive. Employee performance is not correspondingly to impair an auditors outlook and would not result in any bias. If an auditor helps choose human resource policies such as recruiting Evaluate this comment furtherAnother CPA, Kalman Barson, gave comment on the proposed rule. He is a strong foeman to the new rule and he make sure his feelings were heard. He believes that the new rules are contrary to the best interests of the accounting profession, is counterproductive to the best interests of audit clients, and would not run the goal of the reason for this rule bei ng proposed. He believes that the new rule should be totally withdrawn because it will result in the opposite of what the SEC is trying to accomplish. He backs up his case by facial expression that there has not been one instance of impairment in audit quality as a result of an accounting firm also providing a consulting and auditing role simultaneously. He believes that the SEC is trying to fix something that is not broken.There are a couple of points that need to be intercommunicate in his statements. The first is that audit quality is most more than just avoiding major audit failures or faker cases. It must be addressed at a lower level originally it becomes a major problem. This is the level that the SEC is trying to address presently. An audit failure is often a combination of several(prenominal) factors not just an independence issue. try to address the separate issues that can cause an audit failure is the first step. To demand, as a predicate for commission action, evi dence that each loss of independence produces an audit failure is a bit like demanding proof that every violation of a fire safety code results in a catastrophic fire. Also there has been at least one instance where a firm has broken independence issues. Price-Waterhouse Coopers was censured for improper schoolmaster conduct and violating auditor independence rules early this year (2000). champion other point that must be addressed is that with all the concerns of auditor independence that were raised while the economy is doing relatively well, what will happen when an economic hardships make it? Imagine the concerns and the pressure on auditors that will be raised when the majority of firms boil down short of their earnings. This pressure could be huge and unbearable this is why it must be dealt with now.The second major point that Barson addressed is that consulting for an audit client helps produce a higher quality audit. Understanding the clients trading operations and proce dures more exhaustively helps the auditor to witness a better understanding of the go with and thereof the auditor is able to perform a better service for the client. This he argues is in the best interests of the client and alliance as a whole. He argues that inefficiencies would result by rending up the consulting and auditing functions between firms, and would end up costing the client more in the long run. Inefficiencies would result because one firm would perform the audit and the other firm would have to perform all the consulting. This would result in the splitting of friendship of the firm and would result in lower quality audits.The SEC does not believe that the quality of the audit will be lost and officers of Ernst and Young also carry this view. They believe that this argument is damage in many areas. The first defacement is the inherent assumption that all association obtained from non-audit services is relevant to an audit. It also assumes that the auditor re ceives all information received from non-audit services. Often a consulting division is reluctant to carry-over information over to the auditors.Other times the consulting professionals will have little or no interaction with auditors especially in large firms. Ernst and Young new-fashionedly sell their consulting business and therefore separated their auditing practice from the consulting area. Ernst and Young officials were stated as saying that as the result of the sale they see no reason why the quality of the audit would suffer in any way. They believe that the skills necessary to carry out an audit are inherently distinguishable than the skills you need to carry out consulting services.The SEC also made the point that only 25% of accounting firms audited by the big five firms also receives advisory services. This proves that 75% of the audits performed now are of considerably high quality. If it is not possible to perform audits without consulting for the firm at the same t ime we would have seen a huge amount of low quality audits or perhaps audit failures.A more neutral view will now be presented from the schoolman side of the debate. Douglas Carmichael is a professor at Baruch College and is a strong advocate for the new rule and his comments are based on research over the past 30 years. His first comment backs up the four principles that are used by the SEC to measure auditor independence. He believes that the elemental principles are comprehensive and appropriate.The principle of conflicting and mutual interest is essential because without it the auditor could be too easily persuaded by clients to act in the clients interest and therefore would reduce the reliability of the financial statements. His research has also showed that there has been evidence that consulting has resulted in impaired independence. His conclusions were based on thorough investigation of the actual underlying evidence. He also argues that the quality of the audit is not improved by consulting services. He prime that in many cases of auditor malpractice, the auditors have not made use of the hold outledge of consultants providing services to the clients. His last point is that the proposed restrictions are practical and they appropriately relate to the radical four principles. He believes the new rules appropriately relate to those principles, which is key since most of the professionals can relatively agree on the principles.Since there is agreement on the principles the controversy is mostly based on the restrictions, and Carmichael believes that these restrictions already adequately relate to the principles and need to be employ immediately.A Canadian perspective will be presented next, from the point of view of the chairperson of the Ontario Securities Commission (OSC). He underlines the importance of the auditor being independent in fact and appearance. He also mainly agrees with the new rules and their restrictions on non-audit services to audit clients. His main concern relating to auditor independence in Canada is the growing concern that the audit is becoming a loss leader to achieve more profitable consulting revenues. He believes that it would be natural for shareholders and other investors to perceive the auditor as losing confidence in the quality of the audit.He also expresses his concern that firms are placing more importance on the consulting side of the business compared to the audit side. He believes that this will cause firms to make strategic decisions based on this concern and will cause employees to strive towards being consultants because the firm places more assess on the consulting side. While this could result in more talented professionals angle of inclination towards the consulting side, especially if salaries are higher there are many other concerns that affect the recruitment of professionals. Other concerns that could affect recruiting are the attr fighting(a)ness of the work to the indiv idual, as well as the number of graduates to choose from. browned had concerns that were related to the implementation of the new rules as a whole. He expressed concern that the regulation of the new rule cannot be sufficient by itself. The audit mission will have to play an important role in the process. It is key that the audit committee identifies independence violations, because they are on the front line and are nighest to the action.The SEC is only one memorial tablet and will need a critical amount of help in conclusion violators. He also recommends that the SEC becomes an active participant in recommending or implementing connatural rules in other countries. He stresses this importance because the United States constantly interacts with all other countries and the new rules will significantly affect interactions. This is important, but it will they will have to convince the SEC to spend time on this task. It would be much easier for the SEC to recommend other countries to adopt the same requirements as the U.S.Brown goes onto illustrate this point by showing that in Canada we are looking at the SECs proposal nigh and extensively and will formulate our regulatory response partly on your experience.The concerns of the give of Internal Auditors (IIA) will now be addressed. They totally agree with the four basic principles that were outlined by the SEC. The IIA also generally agrees with the underlying objectives of the SEC in relinquish these requirements (improving quality and improving investor confidence). Their main concerns have to do with the technical aspects of the rules. Their main concern is that the SEC has restricted services in the wrong manner.They believe that not all non-audit services need to be restricted unless their fees are sufficient enough to foundation independence concerns and as long as there are no management or operating considerations that hinder independence. They also believe the Independence Standards Board in the U.S. should be responsible for determining and modify the list of services that would impair independence. The objective list allows for easier regulation by allowing for the subjectivity to be removed. The certain restricted services were chosen because they related back to the four basic principles. This ensures that the SEC remains consistent by following a dependable framework for making decisions regarding auditor independence.One last comment to look at is from CPA, Norman Manley. He submitted comments on behalf of all forty employees of Dellinger & Deese, PLLC. They are totally opposed against the new ruling and diffused many of the same concerns that were seen from other CPAs. Their concerns can be summarized by their opening comment, We firmly believe the proposal is unwarranted and not back up by facts, or requested by the financial and business community we both serve. Non-audit services offered by audit firms simply have not compromised auditor independence or audit failure.Focus will be on their additional concerns that were voiced at the public hearings. One concern they voiced was that the broad restriction on the non-audit services will place too much reliance on audit fees for accounting firms and this will not serve the public interest. The public interest is ever so an important consideration to keep in mind, but in this instance the public interest will suave be served by providing high quality audits sanction with investor confidence. There will still be rush of opportunities to perform audits and the new rulings will not decrease the number of firms that require audits.They are also concerned with the quality of talent that will be recruited and bear by accounting firms. They believe that accounting professionals will have 25-40% of their market block by the restrictions. They further believe that this will cause professionals to choose a life story where their market is wide open. They also had some economic issues that they w ere concerned about.The first being the inability for accounting firms to combine and obtain the economic benefits of fluxrs and joint ventures. Their ability to merge will be due to concerns about violating independence requirements. A firm could merge with another firm and would then become an affiliate of the accounting firm. They also believe that the SEC has interfered with the work of the Independence Standards Board (ISB) in the USA. The believed the SEC originally assign the issue to the ISB and then jumped in and modulate prematurely.However, the SEC worked more in friendship with the ISB by taking their research and many of their recommendations. They also agreed more with recent disclosure and audit committee requirements that were adopted by the ISB, SEC, New York Stock Exchange (NYSE), and the American Stock Exchange (ASE). They believe that these requirements would have of solved the independence problem if given time to mature and work. To conclude their concerns with the new rule one more point will be issued. They know and thoroughly understand the problems associated with a lack of independence, and they stated that they always put independence rules at the top of their priorities. They do not see a problem with non-audit services impairing this independence because auditors have the ability to remain independent using their own professional judgment.This report will conclude by drawing on comments given by chairman of the SEC, Arthur Levitt. He believes in this milieu of conflicting interests, the investing public relies on the accountant to stay true to his or her fiduciary duty, to never lose plenty of the precious franchise that is theirs to guard so vigilantly. He is aware that the perceived value of the audit is being put at risk and for this and other reasons he is strongly committed to keeping the publics interest first, and will not let new circumstances interfere with his task.He also realizes that the SEC cannot do it alone and is willing to work with the profession to continuously improve the situation. He is dedicated to continuous improvement of financial statements to better serve investors, the market, and the public. He stresses that he will leave the communication lines open between the SEC and CPAs in order to retain a strong respect and teamwork between the two parties.The majority of ohmic resistance seems to be coming from a main source. The CPAs seem to be the only interest group that is opposed, and this strengthens the validity of the new rulings. If there was strong opposition stemming from other interest groups it would be easier to challenge the new ruling. The point to remember is that being an accounting professional entails looking out for the best interests of the public, and this is what the new requirements are striving to achieve. The new requirements will not be able o achieve this alone, but they are an important aspect in the battle for independence.The main concern from th e opposition of the rule has to deal with the scope of services that are restricted. trammel non-audit services to audit clients still leaves plenty of opportunity open to perform audits and still makes it attainable to perform high quality audits while at the same time retaining investor confidence. We must remember, Its not enough that audit quality is maintained and that the numbers are right. Its also necessary that public investors-the users of financial reports-perceive that the numbers are right.