This paper highlights the challenge managers’ face in their daily routine of making profit while keeping in line with the required ethical boundaries of hospitality and tourism industry. Incentives and motivation play a vital part in auditor judgments. Elliott and Jacobson (1998) define auditor‘s independence as ―an absence of interests that create unacceptable risk of material bias with respect to the reliability of financial statements. This can arise when issues emerge at a late stage, either as a result of audit procedures or from events within the company. M & Clark. Potential Independence Threats. 3. M & Clark. (Arnold and Ponemon, 1991). Thus companies give importance to customer and try to build long term relationship so that every customer will add revenue to the organization. Deficiency might have a crucial harmful outcome to the businesses, it 's misadventures as well as the associates, this might even end lifespan of the business. (Fearnley, S.and Beattie, V.and Brandt, R.(2005) Auditor independence and audit risk: a reconceptualisation. The accountancy profession claims to be both moral and ethical (Francis, 1990). According to Johnstone (2001) independence risk is defined as the risk that an auditor's independence may be compromised or may be perceived to be compromised. For example, settings in which there might be a high degree of judgment include deciding on the appropriateness of a client’s revenue recognition policy or judging the adequacy of a client’s allowance for doubtful accounts. "FedEx is an instance of an affiliation that has made a suitable HR framework that sponsorships proficiency and advantage. . Kohlberg’s CMD implies that higher levels of ethical development should result in more ethical behavior. The answer is a resounding 'yes'. Many firms which operate in an intensely competitive environment may have difficulty remaining independent as the client can easily acquire services of another auditor. • Threats to Professional Standards: Auditors may fail to gathers sufficient audit evidence to form an audit opinion and become biased and work in his own best interest, because the auditor is not independent, which makes them fail to execute professional requirements. Notwithstanding when the delegates didn't get their remuneration on time, they continued working with, Table of content Accountants’ Moral Reasoning Though research into accountants’ moral development is still growing (Gaa, 1992). Warfield. The dеontological theory holds that morality involves duty performance and compliance to the policies and rules. This result is independent of whether the independent auditors’ behavior is monitored. Employees who are charged with such procеdures are expected to perform their duties in line with such regulations (Fan et al. . Another threat to auditor independence is self-interest. Threats to Independence According to this threats and safeguards approach, the frameworks identify five basic categories of threats to auditor independence: self-interest threat: the threat to auditors’ independence resulting from a financial or other self-interest conflict, self-review threat: the difficulty of maintaining objectivity in situations where a judgment of a previous audit, or non-audit, assignment needs to be challenged or re-evaluated in reaching audit conclusions, advocacy for client threat: the threat to auditors’ objectivity resulting from auditors becoming advocates for (or against) their client’s position in any adversarial proceedings or situations, intimidation by clients threat: the possibility that auditors may be intimidated by threat, by a dominating personality, or by other pressures, by a director or manager of their client or by some other party. Advocacy ... managing threats to internal auditor objectivity. But in order for that report to have credibility with investors, to add value to the process and investors, it must be issued by a person or firm that the investor perceives is free of all conflict- conflicts that may or will in part weight on or impair the auditor’s judgments about the accuracy of the numbers" (pp. Three are different threats that occasion impairment on auditor’s objectivity such as the self-interest threats that include financial and personal interests (Basu, 2009). A number of proposals have been put forward to safeguard auditors’ independence and empower them to withstand pressures to compromise. That is the individual places self-interest well above the common interests of society and is sensitive to penalty attributes. [The capital they invest] is providing the fuel for our economic engine, funding for the growth of new businesses . Corporate apologia 3 . This stage reflects the lowest level of cognitive moral or ethical development. Attitude was “whose bread I eat, his song I sing”, (Buffett. Some of the suggested safeguards have already been implemented in many countries including Mauritius, such as restriction on other services, rotation of auditors and user education. Self-review threats are a threat when auditor realizes the consequence of past judgment and advice by himself or other staffs of the firm. However, it is possible to identify some threats to auditors’ independence. However, the quality of an auditor’s judgment is also influenced by pressures emanating from the firm itself. Incompetent but totally independent auditors are not a solution. Kohlberg (1969) believed that ethical decision making is largely a function of one’s level of moral development, and he formulated a six-stage model of moral development that was further classified into three levels: pre-conventional, conventional, and post-conventional. Although these differences are valuable issues due to creation of variety among employees, they enhance the degree of situation complexity and make the process of decision-making more difficult. Experimental research has documented that auditor judgments can be impacted by incentives which, in turn, can negatively or positively influence the quality of the audit process. The above literature review signifies the importance of customer relationship management in modern generation. Another problem is that the behavior of the auditor is not only determined by the professional conducts, but also ethical cognition and moral of the auditor also influence the work of the auditor. 1980) "A number of articles have been written about crisis management issues by researches and practitioners in diverse type of developments and environments which make it difficult to understand and becomes an objective to the public". . ISA 200 deals with the independent auditor’s overall responsibilities when conducting an audit of financial statements in accordance with ISAs. According to Hisham El-Moukammal (December 2009) penalty to the auditor for violations of the Code depending on the situation can take the form of formal letter advising the auditor of the violation, a restatement of the required standard, and a stipulation to not have this reoccur; a requirement to have retraining undertaken by the auditor; suspension of the auditor’s certification; and permanent removal of the auditor’s certification. Judgment-based decisions are those in which there is uncertainty regarding the appropriate decision or valuation judgment that an auditor should make. The editor specifies five major threats which could jeopardise auditor independence. Here there is the risk of losing the client. Company financial reporting is key to the efficient and effective operation of capital markets. 1-2)". Mautz and Sharaf (1961, pp. The [12] AICP Cohen Commission (1978) in its report affirms that there are excessive competitions among public accounting firms and this excessive competition among different firms has been consistently identified as a factor … Theses occur when the auditor possesses a personal, family, or professional relationship with the client. In Mauritius, scarce literature is available on the perception of the threats that impair auditor independence and safeguarding it. It encompasses all threats to and organization’s goals and objectives. Auditor’s Independence. Auditors play an important role in the capital markets. (Duska R, 2005) Found that the role of an independent auditor is to be a watchdog to see if the company’s estimates are reasonable based on the evidence that is provided on a consistent basis, as independent auditors are essential for functioning of the economic system. Why procrastination will rule the business world “the author john rampton tries to figure out the effects of procrastination. quality control and documentation, identification of threats, availability of consultation procedures, internal reviews by independent partners, division of responsibilities, training, staff development, ethical standards, etc. Antecedents and consequences of independence risk: framework for analysis). -To highlight the importance of auditor independence and how it is fundamental to public confidence in the audit process. 2. An auditor who has a lack of independence or has threats to auditor independence, his audit report useless to those who rely on it. In general, it is believed that incentives lead to preferences for a desired outcome which unintentionally influence one’s decisions, in a self-serving manner (e.g., Kunda 1990; Russo et al. Objectivity is sometimes described as independence of mind (Dunlea, A. However, Peter Wyman ("Is Auditor Independence Really the Solution?," April 2004) makes an important contribution to this discussion, about being full independent by emphasizing that auditor independence is an enabler of good auditing, and that to view it as an end in itself could have severe adverse consequences. The very fact that it attracts so much attention would indicate that auditors, independence is difficult to maintain. . Threats to Auditor Independence According to Parker (2015), most independence breaches are caused by self-review threat in cases where the auditor is working closely with the accounting department. Get Essay ... More important, this standard of proof falsely assumes that the most common threat to auditor independence is intentionally corrupt behavior. Copyright © 2020 IPL.org All rights reserved. As expressed by Bartlett, (1993) audit independence refers to an unbiased mental attitude in making decisions throughout the audit and financial reporting that without independence, audit has no value (Power, 1997), as the result, auditor should maintain independent and exists to professional ethics, but current audit environment changing very rapidly, increased many force on the audit independence. For instance, when managers want to attract potential employees from different generations, they should note that different generations uses different recruitment channels and may be attracted by different type of brands. governance procedures in the company, particularly the audit committee; where the safeguards are not considered sufficient the auditor can refuse to act. Ghandar says the vast majority of independence breaches are related to self-review threats. For example, audit managers held accountable to a partner who aggressively tries to grow the firm’s business are more likely to support bidding on a client who engages in aggressive accounting practices (Cohen and Trompeter 1998). For example, consider yourself a potential shareholder in XYZ Company. There is familiarity threat if the auditor has a close relationship to or too familiar … This independence can be maintained through external constraints (i.e., legislation and regulation) or through the profession itself, which will maintain independence to preserve its market value (Kinney 1999). . D , 2006) Meaning that the conflict arises as auditors are hired and paid by the companies they audit which was stressed in (Mautz R.K, 1961), similarly (Mayhew & Pike, 2004) views this as a conflict of interest which is a threat. Client's fees to auditors that are contingent upon specific opinions can, if allowed to occur, result in the auditor's financial interests becoming dependent upon whether audit judgments coincide with management's preferences. The purpose of auditor safeguards to independence is to reduce the threats that may impair the auditor’s opinion forming process. The association's reasonability is that delegates should be doing the kind of work they have to do." 2001. Introduction 2 2003; Blay 2005). According to the Australasian Accounting Business & Finance Journal, Loh & Wong: Matching the ‘Knowing What to do’ and the ‘Doing What you Know’ in Ethical Decision Making (October 2009), a study was carried out and this indicates that the existence of a penalty for unethical behavior does seem to increase the likelihood for ethical behavior, with the numbers showing more percentage of accountant moving from an unethical choice to the ethical choice in their actual course of action. Or an audit firm prepared the financial statements and then acted as auditor. trust or familiarity threats: this arises from auditors becoming over-influenced by the personality and qualities of their clients’ directors and/or senior managers and consequently too sympathetic to their interest. If the firm has a genuine fee-for-service model in place, Ms Banton said it may be possible to reduce the independence threats accordingly, but potentially it could still inappropriately influence the auditor ’ s judgement. This is reflected in the fundamental principle of auditing- Objectivity and Independence- which states: "Auditors are objective. – conventional level: an individual’s ethical decision is shaped by considerations of the law and social norms. The issue of auditor’s independence has always been an important public concern and a matter of many debates, especially because of the fiduciary role played by the auditors in modern society. The relative importance of each of these threats varies based on the details of the individual audit firm-client relationship, but most of the threats exist in every auditor-client arrangement. Indirect incentives arise from other circumstances that could make it difficult for the auditor to maintain objectivity. Viewing it at an angle of an identified risk, the threat may or may not be significant when it comes to impairing the independence of a given auditor. The importance of auditors’ independence – to both investors and the wider economy was succinctly conveyed by Turner (2001), former Chief Accountant of the Securities and Exchange Commission (SEC) in the USA, when he stated: "The enduring confidence of the investing public in the integrity of our capital markets is vital…. Or that different generations often have different tastes than their education. Especially in tough economic times, companies struggle with how to best manage their most valuable resource their human resource while staying viable as a business. For example, enrollment in the formal affiliation was regarded as fundamental by the explored business people to defeat the risk of diminutiveness. Or maybe, business visionaries require results from systems administration that have an immediate and positive effect on their organizations. Reviewing many sources it has come to mind that this discussion will be forever debatable as there are many factors that impact independence. Although the author tries to states some convincing facts about procrastination but he stated many false assumptions, week evidence and logical fallacies which weaken his article. Essay on Auditor Independence - 2 Introduction Independence is a fundamental to the reliability of auditors’ reports. The fulfillment of these obligations goes hand in hand with the. Impression management 5-6 On average, subjects with low moral development scores violate independence more frequently than those who have higher scores. A CONCEPTUAL APPROACH TO AUDITOR INDEPENDENCE. Concerns are shown towards both the competence (discovering a problem or making a correct judgment) and the independence (disclosure of the problem by the auditor) of the accounting firm (Duff, 2004). The Mauritius Financial Reporting Act 2004 states: "independence" means independence of mind and independence in appearance. Interpersonal relationships might cause the auditor to favor personal over professional objectives and also might affect the auditor's ability to exercise an appropriate level of professional skepticism (Johnstone, K.M., M.H. AUDITOR INDEPENDENCE Audit is the process of evaluating a set of financial ments, processes, systems to comment on the vera and authenti of the same, that the books of accounts represent a true and fair view of state of affairs an enterprise. This thеory is a setback in business procurеment as it еncourages selfishness that can culminate to corruption and financial losses to the businеss (Clerke T.E., 2008). According to Mcgrath,Siegel, Dunfee, Glazer and Jaenicke (2001) however, the definition of independence does not require the auditor to be completely free of all the factors that affect the ability to make unbiased audit decisions, but only free from those that rise to the level of compromising that ability. and do not necessarily reflect the views of UK Essays. The author is of the opinion that if the Customer Relationship Management scheme is overly used and misused, it may result in depleting customer trust. Sutton and T.D. These pressures can arise from immediate supervisors on the audit team or the overall evaluation process used by the firm. Many would disagree and argue that it is a partial view of human nature. An audit is basically an examination of a set of records, both financial and non financial, to ensure that they can be relied upon in terms of accuracy and completeness. The independence of these auditors must be safeguarded during each engagement. "When A Threat To Independence Arises An Auditor Should Consider" Essays and Research Papers 1 - 10 of 500 When A Threat To Independence Arises An Auditor Should Consider Framework for Auditor Independence The ISB lays a foundation for future guidance. Experimental studies have found that the individual auditor’s level of ethical cognition has a significant impact on audit decisions. Self-review . The threats affecting the auditor independence may be classified into: 2.1 Self- Interest Threats These threats occur when the auditor has material or non material interests with the client. Right when the organisation was encountering great cash related difficulties, the staff were prepared to offer their own things and use their own cards(credit or debit) to purchase fuel to pass on the packs to the customers. The provision of non-audit services by auditors to their client is referred to as a self-review threat to auditors’ independence. Threats to Independence The threats to audit independence arises from the following sources : Self-interest threats occur when the financial interest of the auditor and his relatives are involved. James Rest (1982) built on Kohlberg’s work by developing a four-component model of the ethical decision-making process which describes the cognitive processes individuals (as cited in Bebeau 2002). "At the heart of the audit profession is a belief about human nature. Audit independence as well as audit risk, both has a significant effect on audit quality and audit credibility and the economy as a whole and is also related to sustainable success. Here the auditor reviews a judgement she has taken herself. Auditor’s independence refers to an independent working style of the auditor being unbiased, unfettered, uninfluenced, and being fully objective in performing audit responsibilities.. (Fearnley, S.and Beattie, V.and Brandt, R.(2005) Auditor independence and audit risk: a re-conceptualisation.). Auditors’ moral is considered to have a vital role in the cognitive process underlying ethical reasoning and judgment formation. Mauritius Financial Reporting Act 2004 states: "independence of mind" means the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; "independence in appearance" means the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, will reasonably conclude that the integrity, objectivity or professional skepticism of a firm or a member of the audit team had been compromised, Independence is a key concept-a characteristic that is essential for ensuring the credibility of audit work. Complimenting FedEx for its HR procedures, Work Force magazine created, International Financial Reporting Standards. A lot of issues were identified, thus why this literature review is spread into two dynamics outlining the threats of auditor independence and highlighting the solutions. But in one way or the other auditor independence is threatened. Third, the audit committee able to review with the external auditors their audit plan and evaluation of internal control simultaneously promotes fair reporting from the prospective of shareholders, creditors and employees (Auditing and Assurance Services in Malaysia, 3rd Edition 2007). Of whether the independent auditor ’ s level of cognitive moral or ethical development discussion will be forever as. Has a significant impact on audit decisions the importance of auditor independence and empower them to pressures... Come up at last minute and that there are many factors that impact independence value in addressing market! 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