Essay About Auditor Independence                      Independence And Biggest Threat

The Biggest Threat to Auditor Independence
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The Biggest Threat to Auditor Independence                      Independence is a fundamental requirement of auditing standards for auditors to obtains reasonable assurance in planning and performing audit process in order to strengthen the credibility of financial statements. However, in the real world’s accounting practice, threats to independence of judgment are unavoidable. A variety of threats caused by a board relationship and environment are able to jeopardize the independence of auditor’s judgment. In my opinion, the biggest threat is the conflicts of interest between the auditor self-interest and the obligations to provide professional audit services in an integrity and objective manner.                 Self-interest threat to independence emerges when the auditor act in their own self-interest in rendering services for clients. The threat could be financial or other interests of auditors or their family members. The presence of these interests impairs the independence and objectiveness of auditors that probably would influence the outcome of the audit. The financial benefits are regarded as a greatest threat to auditor independence. As a private professional, auditor receives service fee from their clients so that they have an inherent incentive to keep a good relationship with their clients in a long term. If the major source of income for an auditor significantly relies on one particular client or group of clients, the independence of auditor is threatened because auditor are less likely to raise issues with their clients in case of business loss with clients. Therefore, the fact that auditor hired and compensated by their client induces a major conflict of interest. On the other hand, Provision non-audit service, which includes the consulting service, creates potential conflict of interest because fee from non-audit service is rapidly growing faster than fee from audit service. A well-known case is the scandal of Enron and its accounting firm. The Enron financial scandals happened in 2002 indicates a critical weakness of an auditing system. The general public highly concerns about the problem of compromise auditor independence due to the considerable awards of provision non-auditor services.                The Conceptual Framework for Auditor Independence as auditor independence safeguards provides guidance for auditor to make appropriate decision to keep their independence in appearance and in mind. When the self-interest threat occurs, auditor should apply the safeguards to eliminate the independence risk associate with the self-interest threat and document the safeguards in the audit report. When conducting an engagement, auditor should take three steps to deal with independence threats: identifying the threat, evaluating the threat, and applying safeguards to address the threats. For example, when auditor conducts a service for a particular client or group of clients who are main clients for their business, auditor should review the related safeguards to evaluate the threats to independence, then decides to whether accept certain assignments or not. If it is necessary, auditor should resign from certain assignments. Auditor should also reduce provision non-audit service for the particular clients. The amount of recurring fees charged should be in accordance with relevant auditing standards. In addition, in the case of conducting a non-auditing service for publicly trade firms, the outside accounting firms should identify the types of non-auditing services. Do not engage the services that perform the management functions or make management decision. Duty of service conducted by different team should be segregated. The team who conducts the non-audit services should never be involved in management functions.