The Importance of External Auditor’s Independence
The Importance of External Auditor’s Independence
According to Gillespie, Lewis and Hamilton (2004:221) an audit is:
“a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.”
According to Wikipedia (2011a), auditor independence refers to “an attitude of mind characterized by integrity and an objective approach to the audit process”. Independent auditing has been an important part of the corporate monitoring system since the mid-1930s, when it became a legislation requirement after the Great Depression. This was caused by reckless spending by corporations in the late 1920s (Kim, Nofsinger, Mohr, 2010a). However in recent times it has become even more important after a number of firms have become bankrupt due to fictitious accounting methods, the most infamous one being the Enron scandal of 2001. This has led to the new legislation that has emphasised the importance of external auditors to be independent from the corporations they audit.
Although it is not a legal requirement for a public company to be audited internally, many corporations tend to have their own internal audits. These can be very beneficial to the corporation as they check for accuracy in “financial record keeping”, “implement improvements” and can be used to “detect fraud” at an early stage. Internal auditors can actually “enhance a corporation’s accounting and internal control efficiency” (Kim, Nofsinger, Mohr, 2010b). However arguments are still being poised as to whether this is a necessary exercise as internal auditors may not be entirely independent of their employer. However WorldCom showed the importance of internal auditors. The company’s chief financial officer and their controller (at that time) were said to have claimed $3.8 billion in regular expenses as capital investment (Tran, 2002). Their internal auditors are said to have
According to Gillespie, Lewis and Hamilton (2004:221) an audit is:
“a scrutiny of the accounts by a qualified auditor who carries out checks on the figures so as to establish whether the accounts show a true and fair view of the results and the financial position of the entity.”
According to Wikipedia (2011a), auditor independence refers to “an attitude of mind characterized by integrity and an objective approach to the audit process”. Independent auditing has been an important part of the corporate monitoring system since the mid-1930s, when it became a legislation requirement after the Great Depression. This was caused by reckless spending by corporations in the late 1920s (Kim, Nofsinger, Mohr, 2010a). However in recent times it has become even more important after a number of firms have become bankrupt due to fictitious accounting methods, the most infamous one being the Enron scandal of 2001. This has led to the new legislation that has emphasised the importance of external auditors to be independent from the corporations they audit.
Although it is not a legal requirement for a public company to be audited internally, many corporations tend to have their own internal audits. These can be very beneficial to the corporation as they check for accuracy in “financial record keeping”, “implement improvements” and can be used to “detect fraud” at an early stage. Internal auditors can actually “enhance a corporation’s accounting and internal control efficiency” (Kim, Nofsinger, Mohr, 2010b). However arguments are still being poised as to whether this is a necessary exercise as internal auditors may not be entirely independent of their employer. However WorldCom showed the importance of internal auditors. The company’s chief financial officer and their controller (at that time) were said to have claimed $3.8 billion in regular expenses as capital investment (Tran, 2002). Their internal auditors are said to have