What Are Generally Thought To Be The Principal Threats To Auditor Independence?

942 words - 4 pages

Introduction'Auditor independence is one of the most important issues in accounting practices today. Independence increases the effectiveness of audit by providing assurance that the auditor will plan and execute the audit objectively.' (Myring and Rloom, 2003, p31). The role of the auditor is to confirm the reliability of the statements produced by managers, and go behind the data to find out the evidences. So, the independence of the auditor is critical to the value of auditing. But, since the accountancy practices do exist in a real commercial world, the auditor would be influenced by a wide range of threats.According to Glynn, Perrin and Murphy (1998), there are four main threats to the auditor's independence, namely, fee income, personal relationship, financial involvement, conflicting interests. The purpose of this essay is briefly to identify John and Michael's point of view on these threats and illustrate their impact on auditor's independence.The fee incomeThe first threat is called 'fee income' .This is the most common threat to auditor. It could conclude into two parts: 'audit fees' and 'fees for other work'.In the first place, 'audit fees' (Glynn, Perrin and Murphy, 1998, p122), is paid by the company for carrying out the audit practice. In theory, the main shareholders should decide the amount of the audit fee as well as the auditors but actually it usually hand over the power to the directors. Thus, the influences from directors of the company become a great threat to the auditor. In audit, the manager's role is just like an examinee, if he has too much influence on the examiner, the result will obviously not reliable. So, keep the auditor's independence far away from the director's influences is a key issue to get a reliable audit result.Except audit fees, the other important income to the auditor is 'fees for other works' (Glynn, Perrin and Murphy, 1998, p122). Since most auditing companies are privately owned, the key target is to make profit. Actually the auditing process is quite costly, if the commercial companies live only on the auditing service which is obviously not enough to cover its operation. 'So except providing audit services modern accountancy practices frequently provide a range of other professional services to their client companies. The other services include taxation advice, management consultancy advice and specialist financial investigation services. This part of income even larger than the audit fees, and unlike the audit fee income, it is purely discretionary.' (Glynn, Perrin and Murphy, 1998, p122). In order to keep or attract the client in the increasingly competitive market, some auditors even quote very low audit fees which called "lowballing". Such malignant competences not only break into the marketing rule but also force the auditor more incline to the client. For example, what's the role of "ARTHUR ANDERSEN, LLP" in the affair of "Enron"? ANDERSEN is one of the so-called 'Big Five" accounting firms...

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