Auditors are required to be independent. This is the reason behind legislation that seeks to curb the service offerings that audit firms can have. All the major audit firms have various divisions, each with its own partners. In some cases, the division has an independent legal status. A good example is having ABC certified Public Accountants and ABC Limited all trading under one brand name.
Proposed legislation in the EU seeks to do away with this model. Under the proposals, we expect the audit firms to spin off their non audit divisions and thus operate solely as audit practitioners.
Proponents argue that audit firms cant be independent as long as they provide (lucrative)non audit services since there is a conflict of interest.
Opponents argue that many talented individuals will leave the profession.
My perspective is that auditors cannot be independent. I am not saying that auditors are unethical.....far from it. There are two types of biases: overt and covert. Overt bias will be where individuals conciously take a certain position. This can be easily identified and corrective action taken. Covert biases are however more subtle and thus harder to detect.For example, one may have an unconcious bias against a certain person/group and will tend to discriminate for/against them unknowingly. You probably have had of "gut feelings". Well, your gut is not always right, and this is due to unconcious bias that you may have.
Auditors will interact with their clients and unconciously develop relationships which will impair their judgement. This will happen whether the firm is a pure audit firm or is offering other services.
Auditors are human beings.....we interact with others, develop a liking or dislike for them. This has an impact on our judgements about whatever representations the person provides us with.
In scientific tests conducted by harvard professors, it was discovered that auditors were prone to agreeing with their client's positions and were not as sceptical as other auditors who were not the auditors of their client.
So, is disclosure the way out? Not by a long shot. Even though I know that my doctor gets more money when he/she performs an operation, I trust that his/her advice recommending an operation is unbiased. This trust is not logical. The doctor has an incentive to increase their monetary reward. I believe accountants and auditors will face the same challenges.
Auditors will always suffer from impaired independence due to unconcious bias. The sooner we accept that, the earlier we can think of alternative ways of overcoming the bias.
This very interesting and lucidly analysed post has been posted over a year ago but happened to see it just today. I appreciate the author for inputs on such a sensitive topic.
ReplyDeleteThe question of Independence of an auditor still appears to be a myth. The fundamental question is understanding the role of the auditor to whom he owes his allegiance to? is it the Society or the client?
I personally feel that it is necessary that audit firms carrying on the attest functions should never take up any consulting work either for any client. An auditor is supposed to be a judge of financial statements and if he indulged in consulting and also audit it amounts to the Judge playing the dual role of the Judge and the Defense lawyer?
Auditors of Companies should be appointed by some authority and the fee should be paid by them only. As long as the client is given the liberty to appoint and fix the remuneration, in the present day world it is impossible to even think of independence.
Another fact that I would like to mention about the overt bias you mentioned is that, auditors even if they do not want to toe the line of the client are forced to sign the dotted line for the fear of loosing the client to the competitor.
I have posted a few blogs but more to and Indian context at cvrspost@blogspot.in