Why is it important for the external auditor to be independent?
Why is it important for external auditor to be independent?
Throughout the years, banks, shareholders, possible investors and creditors always relied on the financial statements produced by a company. Since the management of a company is producing these documents it has been assumed that the managers may act dishonestly so that their performance looks better. To monitor the company’s performance better the directors along with the shareholders employ external auditors to check all these financial statements for both intentional and unintentional errors. Therefore, external auditors have no motivation to produce dishonest reports, hence they are regarded as being truly independent. But can they actually be independent when their current and probably future fees are determined by the board of directors and knowing that a negative report may reduce or completely cease their future income flow? What if there is built-up loyalty or some personal relationships between the auditors and the audited company? What is the primal role of external auditors?
Before proceeding further, it is important to note that an audit has any value to the financial statements’ readers, so long as the auditor is both technically competent (qualified enough to uncover significant errors) and truthful (All mistakes are corrected and presented to the public).For all the further contemplation, auditors are assumed technically competent.
First of all, the primal role of an audit body is monitoring and examining financial statements. It is to serve to all financial statements readers as a reassurance on the truthfulness and reliability of these documents. Hence the external auditor has to act in an independent honest fashion. But even if he is economically independent, why should the auditor act honestly? Independence is an attitude of mind, it is the person’s independent viewpoint that protects him from being influenced and pressured by his clients. There are two groups of auditors,
Throughout the years, banks, shareholders, possible investors and creditors always relied on the financial statements produced by a company. Since the management of a company is producing these documents it has been assumed that the managers may act dishonestly so that their performance looks better. To monitor the company’s performance better the directors along with the shareholders employ external auditors to check all these financial statements for both intentional and unintentional errors. Therefore, external auditors have no motivation to produce dishonest reports, hence they are regarded as being truly independent. But can they actually be independent when their current and probably future fees are determined by the board of directors and knowing that a negative report may reduce or completely cease their future income flow? What if there is built-up loyalty or some personal relationships between the auditors and the audited company? What is the primal role of external auditors?
Before proceeding further, it is important to note that an audit has any value to the financial statements’ readers, so long as the auditor is both technically competent (qualified enough to uncover significant errors) and truthful (All mistakes are corrected and presented to the public).For all the further contemplation, auditors are assumed technically competent.
First of all, the primal role of an audit body is monitoring and examining financial statements. It is to serve to all financial statements readers as a reassurance on the truthfulness and reliability of these documents. Hence the external auditor has to act in an independent honest fashion. But even if he is economically independent, why should the auditor act honestly? Independence is an attitude of mind, it is the person’s independent viewpoint that protects him from being influenced and pressured by his clients. There are two groups of auditors,
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