Auditing and Its Environment

Auditors are independent when their functioning is not affected by the vested interests of parties, other than shareholders, in the financial statements. Management is one of such parties that can directly influence the independence of auditors especially when auditors are advocating causes than auditing. Whether an auditor is actually independent when he appears to be independent is a matter that only the auditor knows. In fact, it is necessary for auditors to not only act independently but be seen to be independent. This is because independence in appearance reduces the opportunity for an auditor to act otherwise than independently. The atmosphere is so polluted that comments like ‘the concept of auditor independence should be scrapped’ are not uncommon. An all-round cleansing effort is required to save the independence of auditors, otherwise, those tarnishing the image of independence will be the worst sufferers themselves.Sarbanes-Oxley Act of 20021 in the US (followed by similar legislation in other countries) is an effort in this direction. The Act establishes a five-member Public Company Accounting Oversight Board with general oversight by SEC basically toa) oversee the audit of public companies, b) establish audit standards and rules. and c) to inspect, investigate and enforce compliance on the part of registered public accounting firms and those associated with the firm.Remunerative non-audit services are the root cause that sometimes deprives the independence of the auditor. The Panel on Audit Effectiveness2 (established by Public Oversight Board in the US) has recommended that non- audit services that exceed a threshold amount need to be approved by audit committees considering the under mentioned guidelines in respect to auditor’s independence:He has further stated “among the reason for the trend towards favoring small auditors are that the Big Four have aggressively hiked their fees.