auditor independnece

Auditors play an important role in the ensuring the integrity and reliability of the financial statement for public companies. Recently (in the United Sates especially) the independence and objectivity of auditors has been a major concern, and has been brought to the forefront. A new rule was then proposed to deal with these concerns. This eventually led to the adoption of new requirements that must be followed by auditors in the United States. Many user groups had economic consequences at stake and lobbied the Securities and Exchange and Commission (SEC) to what they believed would be the best solution. This was mostly performed through submitting comments to the SEC and through participating in the public hearings held by the SEC to allow discussion on the proposed rule.

This report will briefly describe independence as it relates to accounting profession, identify and describe the new requirements presented by the SEC and then describe the events and circumstances that led to the new requirements being proposed. It will also describe and assess the validity of the concerns that were stated at the various public hearings by the affected user groups. First a simple but important definition of independence and

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Auditor Independence

“Independence is generally understood to refer to a mental state of objectivity and lack of bias. They are totally opposed against the new ruling and voiced many of the same concerns that were seen from other CPA’s. He expressed concern that the regulation of the new rule cannot be sufficient by itself. It’s also necessary that public investors—the users of financial reports—perceive that the numbers are right. 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. Brown goes on!

to illustrate this point by showing that in Canada we are looking at the SEC’s proposal closely and extensively and “ will formulate our regulatory response partly on your experience. It is key that the audit committee identifies independence violations, because they are on the front line and are closest to the action. The creation of these principles was due to increasing concern that auditors were not remaining totally independent when performing the audit. Other times the consulting professionals will have little or no interaction with auditors especially in large firms. If firms miss their earnings expectations even by a slim margin the result is an immediate decrease in stock prices. The last non-audit service that is restricted to audit clients is expert services.

One last comment to look at is from once again a CPA, Norman Manley. Ernst and Young recently sold their consulting business and therefore separated their auditing practice from the consulting area.

Approximate Word count = 5349
Approximate Pages = 21 (250 words per page double spaced)

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