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Impact of Auditor’s Independence and Objectivity on Audit Quality

One of the main ways that shareholders, investors, and other stakeholders become

informed on the real status of a company or organization is through an auditing report that is

supposed to give a critical assessment on the financial situation and goings-on of the subject

entity (Thibodeau and Freier 25). Admittedly, an audit quality which is the extent to which an

examination of an audit system whether internally or externally done achieves the goals of being

independent, ethical, and transparent must be enhanced (Ojala et al.804). With cases such as

those of British Telecoms (BT) and Tesco presenting an existent threat of write-offs as high as

£530 million (Fino), more has to be done to ensure audit quality. In the end, the primary

responsibility lies with the auditing firms and their clients towards ensuring that a high level of

professional skepticism, ethical consideration, and independence are assured in an auditing

process.

LITERATURE REVIEW

Notably, the critical role that auditors play towards ensuring a fair and ethical playground in the

business and arguably other sectors of the world cannot be underestimated. Indeed, one of the

leading roles of an auditor is to provide an unbiased view of a company or organization's

accounts, something which is vital in the case where the entity in question is owned by
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shareholders (Hussey 191). The International Standard on Auditing (ISA) is an international

body that provides an umbrella framework that connects all the independent auditors worldwide

(International Standard of Auditing 200 72). One of the primary considerations about to the ISA

regulations is independence and professional skepticism. Indeed, an auditor should not be

influenced by external factors and considering the magnitude of risks that poor financial records

pose, ISA provides that an auditor should act independently from these which include

intimidation and self-interests (International Standard of Auditing 200 73). It goes father to assert

that in the event that an auditor cannot assure independence, ISA proposes that they withdraw

from the agreement as stated by law (International Standard of Auditing 200 74). On professional

skepticism, ISA posits that all auditors must carry a questioning mind because no company is

perfect and that financial misstatements may occur either from error or purposeful courses

(International Standard of Auditing 200 72). This is essential as it helps to evaluate contradictory

statements and in the end assure independence.

Over the recent past, auditing corridors have not been short of controversy. It is becoming

evident that more has to be done about enhancing the independence of auditors and therefore

improve the confidence of stakeholders (Ojala et al. 805). One of the notable cases where auditor

independence was compromised is in British Telecoms (BT) and Tesco's case. BT, a British

telecommunications, and IT services company met its downturn after the UK Financial

Reporting Council (URC) launched a probe into PwC's books which were their auditors (Fino).

This was in light of a whistleblower’s revelation of accounting irregularities on BT’s Italian

division (Fino). BT had a £530 million pound write-down after the incident, something that

prompted them to choose KPMG as their new auditor in 2017 (Hall). Tesco, a supermarket

group, was also on the receiving end of criticism after it emerged that PwC had been
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compromised towards producing a credible auditing report (Hall). It is, however, important to

note that Tesco confessed to having a £263 million black hole in its accounts, it is this confession

led URC to pull out of the case (Hall).

For sure, there are many factors that affect audit quality including lack of professional

skepticism, ethical considerations, and regulatory constraints. Audit quality can be described as

the extent to which an examination of an audit system whether internally or externally done

achieves the goals of being free from bias, ethical and transparent (Ojala et al. 804). The need for

professional skepticism and ethical considerations have proved to be the most important when it

comes to ensuring audit quality (ACCA). Professional skepticism which is maintaining a

questioning mind when auditing and ethical considerations which entail being able to judge what

is right and wrong are for sure the essential determinants when it comes to assuring quality audits

(Thibodeau and Freier 50). In light of curbing threats associated with auditing, the Engagement

Quality Control Review (EQCR) is used. EQCR is a systematic evaluation of overall conclusions

and recommendations that are presented in the engagement report (Accountancy South Africa

2010). For one, Tesco and BT, for example, should have included an EQCR report. If this was

done well and according to the EQCR rules, both companies may have been able to identify the

setbacks earlier. In the end, the EQCR helps to ascertain that quality is adhered to in an audit

process.

POTENTIAL THREATS TO INDEPENDENCE AND OBJECTIVITY

Self-Interest Threat. It is crucial to note that apart from the obvious quality undertaking of

financial reports that a company or organization seeks in an auditing firm, the relationship

between the two is also a business relationship. In this respect, an auditing firm looks forward to

making a profit while the company in question looks forward to getting quality and arguably
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unbiased view of the financial reports and statements (Campbell and Houghton 152). The threat

of self-interest distorts auditor independence and objectivity as the auditor is pushed by the need

to protect their business interests (Campbell and Houghton 152). This comes in where the auditor

does not want to give an independent opinion which may generate conflicts with their client in a

bid to avoid losing the client (Campbell and Houghton 154). This, of course, threatens

professional skepticism which is why in 2016, URC rolled out a rule that companies must have

an open tender for an auditing firm every ten years and should change the firm after every twenty

years (Fino).

Familiarity Threat. One of the most notable threats with regards to doing any business is the

familiarity threat. It is inevitable that in any case where a supplier-buyer relationship is

influenced by familiarity which may involve a blood relationship or close connection between

the two partners, independent thinking is minimal (International Standard Auditing 200 79). This

is mainly due to the prospect that the involved parties will act on the need to protect their

relationship. According to Hussey, the push to maintain a cordial friendship between an auditor

and their client can cloud the ability of the auditor to be professionally aware of the actual errors

that may appear in financial reports and statements (195). Although regulators are introducing

tighter guidelines towards curbing this, the effects are still visible. This is why auditing

companies are required to comply by the ethics in auditing as stated in the ISA 200 conceptual

framework where in any case that an auditor notices that they cannot provide an independent

auditing, then they can withdraw as per the law (International Standard Auditing 74).

Intimidation Threat. The best way to deal with any threat pertaining to an auditing process is to

maintain a high level of professional skepticism, something that many auditors tend to overlook.

Despite the existing regulations that work towards reducing intimidation as a key factor in
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compromising auditor independence and objectivity, some cases are thriving on the same. This

concept occurs where a company or organization under audit threatens to let’s say end their

relationship with the auditor (Nawaiseh and Alnawaiseh 143). This, of course, may be scary for

the auditor especially if the company in question is their primary partner (Nawaiseh and

Alnawaiseh 143). In light of reducing the intimidation threat on auditing, many regulators such

as the URC require that a company uses open tendering when selecting an auditor. Also, many

firms are also resorting to Continuous Auditing Technologies (CA) which are inherently harder

to compromise (Ojala et al. 814). In the end, the primary responsibility lies with the two

engaging parties to end the vice.

CONCLUSION

In conclusion, it is clear that the auditing industry all over the world has a long way to go when it

comes to ensuring that auditing processes are independent, objectified and therefore work for the

common good of the relevant parties. Notably, auditor independence is crucial, and a lack of

autonomy in the field can lead to a myriad of losses such as that of BT who had a write-off of

£530 million after URC discovered that their division in Italy was questionable. It is, however,

important to note that the main threats towards ensuring independent and objectified auditing

including intimidation, self-interest, and familiarity risks and they can be curbed if all involved

parties maintain high levels of professional skepticism, ethical considerations and strict

adherence to the existing regulations such as that of ISA 200.

Works Cited

Ojala, Hannu. "Audit Quality and Decision-Making in Small Companies." Managerial and

Auditing Journal, vol. 29, no. 9, 2014, 800-817.

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International Standard on Auditing 200. Overall Objectives of the Independent Auditor and the

Conduct of an Audit in Accordance with International Standards on Auditing. 15 Dec. 2009,

www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf. Accessed 13 May

2018.

Thibodeau, Jay, and Freier, Deborah. Auditing and Accounting Cases: Investigating Issues of

Fraud and Professional Ethics. Mc-Graw Hill, 2013.

Fino, Jessica. FRC opens Investigation into PwC's BT Audit. Economia, 29 Jun. 2017,

https://economia.icaew.com/en/news/june-2017/frc-opens-investigation-into-pwcs-bt-audit.

Accessed 13 May 2018.

Hall, Kat. UK regulator probes PwC over BT's Italian Accountancy Scandal. The Register, 29

Jun. 2017,

www.theregister.co.uk/2017/06/29/finance_regulator_probes_pwc_over_bt_italy_audit.

Accessed 13 May 2018.

ACCA. Professional Skepticism. www.accaglobal.com/gb/en/student/exam-support-

resources/professional-exams-study-resources/p7/technical-articles/scepticism.html. Accessed 13

May 2018.

Hussey, Roger. “The Familiarity Threat and Auditor Independence.” Corporate Governance: An

International Review, vol. 7, no. 2, 1999, pp. 190-197.

Accountancy South Africa. Engagement Quality Control Review – Pain or Gain? 1 Feb. 2010,

www.accountancysa.org.za/engagement-quality-control-review-pain-or-gain. Accessed 13 May

2018.
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Campbell, Tom, and Houghton, Keith. Ethics and Auditing. ANU E Press, 2010.

Nawaiseh, Musa, A. and Alnawaiseh, Mahmoud. The Effects of the Threats on the Auditor’s

Independence. International Business Research, vol. 8, no. 8, 2015, pp. 141-149.