Introduction

1. ACT 4193AUDITOR INDEPENDENCEGROUP MEMBERS:SHERENA KAM MEI KUEN 110999CHEAH SOOI KEE 111001SIAU CHIEW SOO 111025

2. Introduction • Independence • is a fundamental principle that guides all professional accountants in all aspects of their day-to-day work. • Independence of mind • – permits to give opinion and is not influences by others. • Independence in appearance • – appear in a good image and reputation, avoid any circumstances that third party may thought that auditor was not performing well.

3. Goal • to support user reliance on the financial reporting process • to enhance capital market efficiency. • Safeguards such as prohibiting auditor from having any direct financial investment any Auditees and mandatory rotation of lead engagement are needed to maintain auditor independence. • Three steps in determine auditor independence (a) Identify threats to the auditor’s independence and consider their significance (b) Evaluate the effectiveness of potential safeguards including restrictions (c) Determine an acceptable level of independence risk

4. During the 19th century, the concept of auditor independence was based on British. At that time, as long as auditors maintained their primary loyalty to investors, the scope of professional accounting services could be reasonably broad. • As Enron failure, Sarbanes-Oxley Act created a new concept of auditor independence in which an auditor should not be advocates for their clients and management should not be able to influence the audit fee and the scope of the audit.

5. Issue 1Can Auditor Independence be improved through mandatory rotation?

6. The desirability of rotation depends on the characteristics of the audit market structure and to what extent the client dominates an auditors’ client portfolio defined in terms of total fees. • The supporters of auditor rotation stated that: (a) If audit markets are sufficiently thin, mandatory rotation is desirable because in thin markets, auditors are concerned about holding on to their client base and this make them more susceptible. (b) If audit market is sufficiently developed, mandatory rotation could lead to additional unnecessary costs because the reputation effected associated with potential loss of future business is sufficiently strong.

7. The opponents of auditor rotation argued that it is costly to implement the mandatory rotation and also claimed that the quality of audits will fall due to the time it takes to become familiar with a complex and geographically widespread business. • In 1992, AICPA issued a report concluding that mandatory rotation was unnecessary because regulatory changes and recent professional initiatives have served to improve the auditing and financial reporting processes.

8. KPMG disagreed to auditor rotation because mandatory rotation may increase the risk of audit failure in the early years of appointment and impose an increased cost burden on business. • But there’s no evidence that the first-period audit failure is higher than the average audit failure rate. Some auditors are slow to invest in client-specific understanding and therefore have early failure. • Furthermore, minimum learning period about client’s business is about two years. Therefore even with no collusion, rotation would increase this cost. In contrast, non-rotation may lead to long-term collusive situation where inaccurate reporting would persist over a long period of time.

9. Issue 2 Does the Provision of Non-Audit Services Impair Auditor Independence?

10. Non-audit Services (NAS) • services beyond the audit like management advisory, taxation, due diligence, etc. • has long been assumed to pose a threat to auditor independence. • tended to be focus heavily in the wake of the Enron and other corporate scandals.

11. According to Craswell, 1992 and Barkness and Simnett, 1994, the share of revenue from other non-audit services has been increasing, but the evidence of its effect on auditor independence is not convincing. • Further, performance of non-audit services for audit clients does not result in incentives for auditors to compromise their objectivity (Davis, 1993). • However, Simunic, 1984 and Palmrose, 1986 raised adverse opinion on above findings.

12. Views Of MIA & MICPA on NAS Prohibition on audit firms from doing NAS would lead to: • narrow-based audit practice • lower quality • lower reward profession Conversely, providing NAS would lead to: • profitability • higher quality audit • increased overall knowledge of the client’s business

13. However, there are potential forces that threats auditor independence that MIA and MICPA have not taken care of. The main forces of NAS are: • non-audit service fees make auditors financially dependent on their client and hence less willing to stand up to management pressure for fear of losing their business. • the consulting nature of many non-audit services put auditor in managerial roles, potentially threatening their objectivity about the transactions they audit.

14. In summary, • there is no evidence indicates that the provision of non-audit services impair auditor independence. • however, it is vital for auditors to keep independent in both fact and appearance in order to achieve the goal of independence.

15. Issue 3 Mandatory Auditor Assignment; can it improve auditor independence

16. Mandatory auditor assignment • appointment of auditors by regulators for companies • companies are not allowed to select auditors themselves • compulsory for both parties to complete the engagement

17. Background & Prior studies • was practiced in Korea back in 1989 • introduced to improve auditor independence • Han (1998) reported :- • the percentage of firms that received other than unqualified opinion from auditors decreased from 35% to a mere 5% in 1995 after the system was abolished. • Park (1996) and Kim, Min and Yi (2002) :- • companies with assigned auditors report smaller amounts of discretionary accruals.

18. Benefits • improve auditor independence • assignment of auditors are for a fixed periodburden themselves of negotiating a new engagement every year • there is a mandatory rotation of auditors • auditors could charge higher audit fee • audit quality of the auditors improve

19. Conclusion • Recently, many media has commented on the issue of Enron and other corporate scandals are heavily focused on the issue of auditor independence. • Auditor independence and the role auditors play in corporate financial reporting have to be viewed in the right perspective. • However, auditors should not only consider their own attitude and beliefs but also consider their own situation that might lead others to question their independence.

20. THANK YOU !HAPPY CHINESE NEW YEAR TO ALL!