Organizations allow seeking the best outward picture in order to attract investors and maintain consumer trust even when their company is suffering economic downturns. Therefore, organizations that undergo such economic downturns exploit the independence of external auditors to maintain their outward image. However, auditors ought to consider their activities as independent entities through following of their legitimate ethical codes. Additionally, the auditors ought to consider the ethical implication of their activities on the ethics of the involved parties. Auditors have to uphold their ethics in conducting auditing services to all firms despite the firm’s influence on the audit results. There are different ethical issues that dictate the operation of auditors, especially if auditors offer independent audits without clients’ influence on the audit results (ICAEW, 2013). On the same, some problems may arise if auditors offer audit reports that are not reflecting the real company’s figures through cheating, in which case the auditors are influenced into accepting the client’s terms.
Legally, auditors are bound to report their audit findings to the regulators in case a company engages in any fraudulent activities (AICPA, 2013). However, cases occur in which some auditors partake in such fraudulent activities thus shielding the firm from any financial consequences from investors, partnerships and stakeholders. According to the capital market’s provisions, firm financial reporting is vital to the resourceful and effectual performance of the investment markets. In order to prevent such fraudulent activities in a company, financial reporting audits are introduced as the quality control measures. This implies that audits are critical elements within the capital markets and operation of firms. Therefore, the quality of financial reporting is built through auditor’s independence thus preventing interference of the firm’s clients with the operation of auditors (AICPA, 2013).
Independence serves as the guiding principle when undertaking an auditing profession and numerous concerns are developed on the best strategies for safeguarding auditor’s independence while undertaking audit services (ICAEW, 2013). Consequently, the code of ethics have become the only way that auditors can refer on their independence where auditors are obliged to follow the code provisions. The code is meant to ensure that auditors uphold their conduct in their profession and undertake their auditing activities within standard ethical provisions to prevent interference from clients or any other forces within the firm (AICPA, 2013). Nevertheless, despite the best objectives for auditors with regard to their service delivery, professional ethics or failure to abide to professional ethics, have generated controversies due to the client interference on the functionality of professional auditors. Consequently, the services of independent auditors have come under considerable scrutiny due to the increasing cases of client interference on the auditor’s financial reporting. This is because the regulators may not always assess the performance of all independent auditors due to time limitations and complexities involved. The actuality that auditor’s independence has generated numerous debates points out that auditor’s independence may offer considerable difficulties for those within the auditing industry who seek to uphold their independence.
Frequently, most auditors seek their self-interest on auditing activities instead of pursuing professional ethics expected from independent auditors. More often auditors certify financial reports offered to them through the finance department and consider figures fair despite the discrepancies within the financial reporting within these firms. Auditors employ their reassuring auditor language for such financial reports even if dramatic figures exist within financial reports. The collapse of various firms that have previously been in operation demonstrates the incompetency and poor credibility that rocks the auditing service providers and their independence (Bakshi, 2004). This is despite the financial reports demonstrating positive gains for the firms after audit as auditors present manipulated financial data from the management of such firms. These occurrences have raised considerable concerns on the ethical standards of independent auditors and failures that occur in maintaining professional conduct in their operation. Nevertheless, auditing is reflected on as a profession the principal objective for professional performance is service motive. Society grants professions special rights as professional skills are considered service skills that are meant to work towards benefiting the society (Bakshi, 2004). Therefore, these provisions authorize auditor independence to be the guiding principle behind the professional conduct of auditors.
IFAC guidelines assert that an individual’s service to the public ought to be free from personal interest or interest of others and should reflect integrity and objectivity. This brings out the concept of independence for the operation of auditors, and professional conduct. Further, individuals pursuing a certain profession and offering services bear the obligations and responsibilities to individuals who depend on their services (ICAEW, 2013). A fundamental requirement for these individuals is the approval and adherence towards professional ethical standards, which regulate the relations existing between various parties involved in the service line.
Entrepreneurs, creditors, workers, as well as other shareholders within the government and business units depend on the services of auditors in delivering the required judgment regarding the firms. They utilize financial reports in making the most appropriate decisions regarding investment and offering various services, for instance credit authorizing. Additionally, financial reports may be utilized in financial management and financial advice on the business activities and taxation issues (Bakshi, 2004). This implies that the auditor’s provisions on the credibility of financial reports are indispensable for execution of the firm tasks. Furthermore, their take-on of financial reports may influence the country’s economic systems through tax systems and other activities that relate to the company returns.
Therefore, auditors can hang on their advantageous positions through continued quality service that reflects their credibility and objectivity in undertaking auditing services. The auditors have the obligation of proving their professionalism through provision of top performance within the set ethical requirements. However, most auditors consider self-interest as the motivator within their profession instead of upholding their ethical standards (ICAEW, 2013). They often optimize their long-term economic value, which improves their earning potential in exchange of their faulty professional certification of financial reports. Nevertheless, auditors fail to recognize the value in gaining a reputation through ethical conduct within their profession. The reputation and command of respect for different auditors varies despite similar qualifications and certification firms (Bakshi, 2004). The auditor’s reputation is gauged on the public perception on the various audits conducted, with the quality and autonomy of these audits. Consequently, increased reputation and independence of auditors may improve the auditor’s earnings through repeated services from different firms and referrals. This implies that auditors who concentrate on self-interest over ethical conduct only gain short-term returns for their flawed services while destroying their long-term reputation in their profession.
Unethical conduct can direct to reduced public trust and auditor’s confidence and clients fail to consider auditors with poor reputation since they disregard the auditor’s credibility and competency. Clients consider the auditor’s report to be valueless since they carry no value or worth in their reporting. Unethical conduct may result into additional disciplinary action from the associate audit regulator, which may amount into loss of future proceeds or additional costs in regaining credibility. Unethical conduct can cause the profession to lose its public image and confidence, which might impact on the various auditing firms conducting audit services. In such cases, the audit firms with the best reputation and public confidence gain from their ethical conduct in undertaking audits while those with poor reputation lose customers due to their flawed services (Bakshi, 2004). This means that auditors and audit firms ought to uphold ethical conduct for better business prospects.
Other than monetary consequences, ethical consequences may arise at personal levels in which wrongful actions may lead to mental strain. The unethical auditors may endure remorse for their unethical conduct. It may also lead to lack of personal respect since these individuals lose their credibility in the best capacity to perform ethically. Unethical auditors may undergo the slippery slope, which brings out the argument that in case an individual takes on a different approach in his/her professional conduct he/she is bound to move further than his/her wishes could allow. This implies that unethical auditors will always take on the unethical path that offers them short-term returns similar to the first time that they undertake the unethical conduct.
There are many threats towards independence of the auditors, and these threats undermine an individual’s ability to undertake audits independently without outside interference. The current failures emphasize on the need of auditors to reinforce the independence mechanism within their profession. Auditors may be exposed to certain influencing factors that negatively affect their independence and they may comprise of financial association with clients or their activities, selection of auditors as board members or officials within the firm and bearing certain relations with the clients whose firm is being audited. These are some of the threats to auditor’s independence and partiality of the auditors may be reflected on through poor scrutiny of the financial reports and doctoring of financial reports.
Restrictions exist with regard to the auditor’s independence since directors bear the power to negotiate auditors’ earnings and revoke their services to the firms. Therefore, directors may pressure auditors to accept their financial reports where failure to approve their financial reports may make the auditors lose their positions within the firm. In case the audit firms provide additional services to the firm, for instance, consultancy services, they have to approve the firm’s financial reports to obtain favors on undertaking extra services for the firm (Bakshi, 2004). Failure to approve the firm’s financial reporting may make the directors consider other cooperating audit firms for the provision of additional services. Instances in which auditors depend upon a single client for a sizeable amount of income may undermine their independence. This is because the loss of such clients may lead to economic insecurity, and even the functioning of the audit firm. Therefore, such audit firms have to maintain their relations with the client through financially related favors such as approval of flawed financial reports. Long association with the client may undermine auditor’s independence, considering that the auditor and the client have developed relations other than the professional association. This way, the client may manipulate the relations to influence the auditor into approving flawed financial reports. The increased competition among auditing firms provides the directors with options, especially if an auditing firm fails to cooperate on financial reporting. In order to maintain operation with the firm, auditing firms may opt to approve flawed financial reports over losing the auditing opportunity.
In response to the interference of clients with the auditors’ independence, various measures exist to safeguard the auditor’s independence. Certain countries have provided limits on the amount of income that audit firms gain from provision of audit services to single clients. Additionally, audit firms are restricted from providing additional services to their clients, which removes bias on audit firms conducting favors to gain on consultancy services from the same firms. Certain provisions require that audit firms’ fees on additional services should not exceed the fees on audit services within the same firm. Providing a rotational cycle for auditors offering services to certain clients may preserve the auditor’s independence as they are aware of their replacement after certain periods with the firm (Bakshi, 2004). The awareness may serve as a limiting factor towards undertaking unauthorized auditing activities. In safeguarding an unfair auditor removal, directors may be obliged to serve the auditors with special notice and after receipt of these notifications the outgoing auditors may demand the member notification on the same. Peer review of the firms’ financial reports may be conducted through independent bodies of professional auditors although this may necessitate additional cost. Audit committee may take important roles in upholding the auditor’s independence through provision of a platform for the company management and audit firm to reduce the client’s interference while safeguarding auditor’s independence.
Operation of auditors is faced by numerous ethical issues that relate to the auditor’s independence. Auditor’s independence is influenced by many factors that relate to the controversies in provisions for any firm undertaking the audit services. The controversies relate to the role of directors in managing the auditor’s activities, which include offering additional services within the firm. Additionally, the level of self-interest among auditors may influence their capacity to take up ethical choices within their profession. Therefore, self-interest coupled with roles of directors contributes to unethical behavior prevalent among auditors and their subsequent audit firms. However, other ways that can influence the auditor’s independence exist and these include close relations with clients among other conflicting elements. Consequently, unethical conduct may lead to various consequences for auditors and their audit firms thus ruining their reputation. Conversely, ethical conduct can generate considerable long-term benefits for auditors and audit firms including good reputation. Several strategies have been established to safeguard the auditor’s independence. However, some still have loopholes, which can be exploited in breaching into auditor’s independence causing unethical conduct within the profession.