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. Specifically, it sets out the overall objectives of the independent auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives. Or that different generations often have different tastes than their education. It must be noted that even thought we make a distinction between the two types of auditor independence (in fact and in appearance), when considering the threats and safeguards to auditor independence these two components are not considered separately. 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). Intimidation threat is one of five independence threats that are explicitly referenced in the IFAC’s independence framework. Introduction 2 Talking about a threat to independence, Rusmanto (2017) refers to any possible circumstance that may end up impairing the professional judgment of an auditor. 2003; Blay 2005). Direct incentives involve actual or potential monetary benefit, for examples investments in the client might cause an auditor's financial interests to align with the interests of management, possibly to the detriment of the interests of other investors or creditors. Auditors play an important role in the capital markets. . M & Clark. 2.2 Independence of mind and independence in appearance. Customer Relationship Management has gained importance globally and much needed for any business to survive. Self-review threats are a threat when auditor realizes the consequence of past judgment and advice by himself or other staffs of the firm. Safeguarding independence is a key component requirement of the regulatory framework which supports capital markets. 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. However, the quality of an auditor’s judgment is also influenced by pressures emanating from the firm itself. auditor independence. 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). Where little or no judgment is required in certain circumstances is unlikely that incentives to compromise independence will result in reduced audit quality. •To critically evaluate Codes of Ethics issued by IFAC and APB, and suggest further ways in which auditor independence could be strengthened. & Maclochlainn, N. p.19). 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. Many Organization have faced or will face the decision to downsizing their work force. When he stated that from the negative effects of passive procrastination is stress, anxiety and not doing your task in your full ability with disorganization. The results show that: 1. 3. The purpose of auditor safeguards to independence is to reduce the threats that may impair the auditor’s opinion forming process. A study by the Society for Human Resource Management that was conducted in 2004 shows that 58 percent of human resource professionals have confirmed the conflict between employees as a result of generational differences (Westerman & Yamamura, 2007). 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. 1999). - To determine the actions taken in Mauritius to ensure confidence in auditors’ work to the public by manipulating audit quality, audit failure, earning management, the audit process as a whole. These results suggest that while external review and potential penalties (litigation costs, loss of reputation, directness or license suspension) may reduce violations of auditor independence somewhat, the positive reinforcement of the attribute may come from increasing independent auditors’ awareness of the ethical dimensions of their decisions. The provision of non-audit services by auditors to their client is referred to as a self-review threat to auditors’ independence. As such, it relieves the Board from detailed involvement in the review of result of audit activities. Attitude was “whose bread I eat, his song I sing”, (Buffett. 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. [But] the willingness of investors to continue to invest … cannot be taken for granted. However, there are several countervailing incentives in place, such as concerns for regulatory enforcement, potential litigation costs, and potential reputation losses, promoting high audit quality (e.g., Nelson 2009). This issue results in a lack of confidence on part of the public. Advocacy Here the auditor reviews a judgement she has taken herself. This can arise when issues emerge at a late stage, either as a result of audit procedures or from events within the company. These incentives also arise when auditors audit their own work, including financial statements they prepared, valuations they recommended for financial statement items such as in-process research and development, outsourced internal audit services they did, and management decisions they advised on. Incompetent but totally independent auditors are not a solution. It is the report of the independent auditor that provides investors with the critical assurance that the numbers in the financial statements have been subjected to an impartial, unbiased and rigorous examination by a skilled professional. For example, consider yourself a potential shareholder in XYZ Company. But a more drastic step would be to require rotation of audit firms at regular intervals (say every five years). 3,Implication . Notwithstanding when the delegates didn't get their remuneration on time, they continued working with, Table of content ... managing threats to internal auditor objectivity. The existence of a penalty is more likely to affect the decision to increase the likelihood to behave ethically than unethically (whether the choice is ‘ideal’ or ‘actual’). Employees who are charged with such procеdures are expected to perform their duties in line with such regulations (Fan et al. 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. The aim of this study is to provide data viewed from a local perspective by taking into account the Mauritian’s framework, as well as institutions, which provides the training to equip people with the required professional and ethical conducts required as an auditor, so as to safeguard auditor independence. 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…. Public trust begins, and ends, with the integrity of the numbers the public uses to form the basis for making their investment decisions. According to Myring and Bloom (2003), these safeguards are the controls, which mitigate against the effects of threats, and provide greater incentives to the auditors to make appropriate independent decisions. . 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. The Mauritius Financial Reporting Act 2004 states: "independence" means independence of mind and independence in appearance. Here the individual develops the courage to follow through with his/her moral action. Safeguards are identified and classified by the Financial Reporting Council, the Mauritius Institute of Professional Accountants and the National Committee on Corporate Governance to strengthen auditor independence. 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. In this industry; business ethics and standards normally differ in relation to the environment and time the services are being offered (Joseph Weiss, 2008, Pg, 78).This creates about of challenges the mangers have to deal with to keep in line with the required ethical principles as they try to make profit. 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. A blanket prohibition o… While a lion's share of the studies recognized both financial and social thought processes of entrepreneurial systems administration (Jack, 2005; Lockett et al., 2013; Shaw, 2006), high managerial boundaries and need of assets constrained business people to shape business systems with those gatherings with whom they can increase direct financial advantages. If users of financial statements are to believe and rely on the auditor’s opinion, it is essential that the auditor is, and is perceived to be, independent of the entity and its management. It. The International Federation of Accountants (IFAC) (2012) reveals five threats to auditor independence: self-interest, self-review, advocacy, familiarity, and intimidation. A research conducted by Haim Falk, Bernadette Lynn, Stuart mestelman and Mohamed Shehata (1999)(Auditor independence, self-interested behavior and ethics) indicates that independence judgments are significantly influenced by factors relating to penalty. Employment downsizing has become a fact of working life as companies struggle to cut costs and adapt to changing market demands. Experimental studies have found that the individual auditor’s level of ethical cognition has a significant impact on audit decisions. The fulfillment of these obligations goes hand in hand with the. . Literature Review: The Threats Of Auditor Independence, Auditor independence has come into discussion over the decade for numerous reasons. 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. Reference 7 The quality of auditor judgments has been found to be adversely impacted by the perceived risk of client loss (e.g., Farmer et al. . 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. Here there is the risk of losing the client. governance procedures in the company, particularly the audit committee; where the safeguards are not considered sufficient the auditor can refuse to act. The literature shows that there are several situations that can potentially threaten auditor independence. Despite the increasing amount of attention paid to Supply Chain Management(SCM) by many companies across the globe, failures in effectively implementing SCM practices still exist. Sutton and T.D. Auditor’s independence refers to an independent working style of the auditor being unbiased, unfettered, uninfluenced, and being fully objective in performing audit responsibilities.. Reviewing many sources it has come to mind that this discussion will be forever debatable as there are many factors that impact independence. (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. Warfield. Ghandar says the vast majority of independence breaches are related to self-review threats. 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. This is reflected in the fundamental principle of auditing- Objectivity and Independence- which states: "Auditors are objective. . The Importance of External Auditor’s Independence According to Gillespie, Lewis and Hamilton (2004:221) an audit is: “a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.” 1998; Jenkins and Haynes 2003; Kadous et al. Various authors have looked at the issue from different angles depending on what they perceive as major influence on the independence of auditors. 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. Antecedents and consequences of independence risk: framework for analysis). (Falk H, Lynn B, Mestelman S, Shehata M, 1999) Having complete auditor independence is difficult as the way the environment is, This research enables us to investigate the relationship between independence and audit risk as well as ethical cognition and auditor independence and the role of the regulatory framework in influencing individual auditors as well as safeguard the trust of the public. 2001. Why procrastination will rule the business world “the author john rampton tries to figure out the effects of procrastination. 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. Huimin and Rayan (2011) believes that hotel managers or senior officials in the hospitality and tourism industry have a broader interests than just making profits only. It is an attitude of mind characterized by integrity and an objective. auditing standards, prohibitions, disclosure requirements, ethical guidelines, oversight and enforcement, etc; safeguards within the firm which can be firm-wide or engagement specific, e.g. Kohlberg’s CMD implies that higher levels of ethical development should result in more ethical behavior. For example, managers will try to influence auditors into omitting or modifying conclusions that they regard as damaging or into ignoring high-risk areas of the operation. 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). Human being will speak the truth unless there is sufficient to be gained by being dishonest’. The report classifies this as political pressure, something that the authors describe as 'extensive and pe… In addition the audit process is seen to be unobservable to third parties, while audit risk is fundamental to the audit process as auditors cannot and do not attempt to check all transactions. The government of Mauritius often requests for a Report on Observance of Standards and Codes, Accounting and Auditing Review (ROSC A&A) which focuses on the institutional framework underpinning the accounting and auditing practices in the country. Sanctions, or penalty, may be imposed to the extent that professionals do not follow the mandates of the profession or the laws of the country. This result is independent of whether the independent auditors’ behavior is monitored. 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). •To recognize that previous academic studies have influenced profession in the preparation of ethical guidance. Threat to auditor independence is the risk that set limits on the auditor preventing him from acting fully with professional behavior. On average, subjects with low moral development scores violate independence more frequently than those who have higher scores. It is relatively attractive as a mechanism as it is a very visible indication of independence. 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. Corporate apologia 3 At the same time, they are hesitant to create solid business ties as communist legacies have made negative states of mind and suspiciousness by business visionaries towards any formal affiliation. In large firms, this threat can be addressed by separating the accounting and auditing work between two distinct teams or partners that operate independently of each other. Or maybe, business visionaries require results from systems administration that have an immediate and positive effect on their organizations. 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. Mautz and Sharaf (1961, pp. 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. 2000). This stage reflect the highest order of ethical development. Finally, research also finds auditors’ perceived goals of the audit (Sweeney and McGarry 2011) and perceptions of how the audit firm values them (Herrbach 2001) influences auditors’ judgments. "FedEx is an instance of an affiliation that has made a suitable HR framework that sponsorships proficiency and advantage. According to IBS (Independence Standards Board, 2000) the threats to auditor’s independence are the sources of possible bias that may compromise, an auditor’s ability to make unbiased audit performance. . Warfield. Therefore the auditor may not act with objectivity and independence. In almost all countries auditing, as a profession, is becoming very demanding. Indirect incentives arise from other circumstances that could make it difficult for the auditor to maintain objectivity. Literature Review: The Threats Of Auditor Independence 1590 Words7 Pages Auditor independence has come into discussion over the decade for numerous reasons. Familiarity Threat. 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. Businesses have specific regulations that are laid down for specific processes like procurement. So, recognizing the difference between interests and incentives of different generations and related business results can be considered as an important component in the development of effective recruitment tools, training methods, processes, employment and employee benefits packages (Leschinsky & Michael, 2004). These pressures can arise from immediate supervisors on the audit team or the overall evaluation process used by the firm. Ponemon & Gabhart (1990) found that the independence judgments of auditors with low DIT P scores were significantly influenced by penalty factors, such as the threat of legal liability, whereas auditors with high P scores ranked this as the least important consideration. An auditor who has a lack of independence or has threats to auditor independence, his audit report useless to those who rely on it. 2. Alternatively, auditors may become too trusting of management representations and, thus, insufficiently rigorous in their audit testing. 523 to the judgment that financial statements are dependable. 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. 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